UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2022

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from         to        

 

Commission File No. 001-38615

 

TATTOOED CHEF, INC. 

 

(Exact name of registrant as specified in its charter)

 

Delaware   82-5457906
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

6305 Alondra Blvd., Paramount, CA 90723

 

(Address of Principal Executive Offices, including zip code)

 

(562) 602-0822

 

(Registrant’s telephone number, including area code)

 

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common stock, par value $0.0001 per share   TTCF   The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer Accelerated filer
  Non-accelerated filer Smaller reporting company
      Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No

 

As of August 3, 2022, there were 82,459,803 shares of common stock, par value $0.0001, issued and outstanding.

 

 

 

 

 

 

TATTOOED CHEF, INC.

Quarterly Report on Form 10-Q

For the Quarter Ended June 30, 2022

 

TABLE OF CONTENTS

 

    Page
PART I – FINANCIAL INFORMATION 1 
     
Item 1. Financial Statements 1
     
  Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 (unaudited) 1
     
  Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited) 2
 
  Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021(unaudited) 3
     
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (unaudited) 4
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 34
     
Item 4. Control and Procedures 36
     
PART II – OTHER INFORMATION 37
     
Item 1. Legal Proceedings 37
     
Item 1A. Risk Factors 37
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
     
Item 3. Defaults Upon Senior Securities 37
     
Item 4. Mine Safety Disclosures 37
     
Item 5. Other Information 37
     
Item 6. Exhibits 38
     
SIGNATURES 39 

 

i

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

TATTOOED CHEF, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except for share information)

 

   June 30,   December 31, 
   2022   2021 
ASSETS        
CURRENT ASSETS        
Cash  $27,729   $92,351 
Accounts receivable, net   32,316    25,117 
Inventory   62,622    54,562 
Prepaid expenses and other current assets   10,824    7,027 
TOTAL CURRENT ASSETS   133,491    179,057 
           
Property, plant and equipment, net   57,687    46,476 
Operating lease right-of-use asset, net   16,883    8,039 
Finance lease right-of-use asset, net   5,554    5,639 
Intangible assets, net   96    151 
Deferred income taxes, net   259    266 
Goodwill   26,705    26,924 
Other assets   175    649 
TOTAL ASSETS  $240,850   $267,201 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
CURRENT LIABILITIES          
Accounts payable  $30,579   $28,334 
Accrued expenses   6,525    3,767 
Line of credit   1,510    1,200 
Notes payable, current portion   5,028    5,019 
Forward contract derivative liability   2,988    1,804 
Operating lease liabilities, current portion   2,190    1,523 
Other current liabilities   386    122 
TOTAL CURRENT LIABILITIES   49,206    41,769 
           
Warrant liability   146    814 
Operating lease liabilities, net of current portion   14,910    6,599 
Notes payable, net of current portion   1,432    716 
TOTAL LIABILITIES   65,694    49,898 
           
COMMITMENTS AND CONTINGENCIES (See Note 18)   
 
    
 
 
           
STOCKHOLDERS’ EQUITY          
Preferred stock - $0.0001 par value; 10,000,000 shares authorized, none issued and outstanding at June 30, 2022 and December 31, 2021   
-
    
-
 
Common stock- $0.0001 par value; 1,000,000,000 shares authorized; 82,459,803 shares and 82,237,813 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively   8    8 
Additional paid in capital   245,064    242,362 
Accumulated other comprehensive loss   (1,814)   (953)
Accumulated deficit   (68,102)   (24,114)
TOTAL STOCKHOLDERS’ EQUITY   175,156    217,303 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $240,850   $267,201 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

1

 

 

TATTOOED CHEF, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS (unaudited)

(in thousands, except for share and per share information)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2022   2021   2022   2021 
NET REVENUE  $58,110   $50,270   $130,174   $102,739 
COST OF GOODS SOLD   57,370    41,953    121,284    87,242 
GROSS PROFIT   740    8,317    8,890    15,497 
OPERATING EXPENSES   24,346    16,419    49,139    30,615 
LOSS FROM OPERATIONS   (23,606)   (8,102)   (40,249)   (15,118)
Interest expense   (42)   (94)   (83)   (114)
Other (expense) income   (2,334)   733    (2,945)   (1,948)
LOSS BEFORE INCOME TAX EXPENSE   (25,982)   (7,463)   (43,277)   (17,180)
INCOME TAX EXPENSE   (455)   (50,009)   (711)   (48,534)
NET LOSS  $(26,437)  $(57,472)  $(43,988)  $(65,714)
                     
NET LOSS PER SHARE                    
Basic  $(0.32)  $(0.70)  $(0.53)  $(0.81)
Diluted  $(0.32)  $(0.70)  $(0.53)  $(0.81)
                     
WEIGHTED AVERAGE COMMON SHARES                    
Basic   82,284,005    81,981,428    82,261,079    81,121,795 
Diluted   82,284,005    81,981,428    82,261,079    81,258,427 
                     
OTHER COMPREHENSIVE LOSS, NET OF TAX                    
Foreign currency translation adjustments   (431)   (210)   (861)   (101)
COMPREHENSIVE LOSS  $(26,868)  $(57,682)  $(44,849)  $(65,815)

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

2

 

 

TATTOOED CHEF, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

(in thousands, except for share information)

 

   Common Stock   Additional Paid-In   Accumulated Comprehensive    Accumulated     
   Shares   Amount   Capital   Loss   Deficit   Total 
Balance as of January 1, 2022   82,237,813   $    8   $242,362   $(953)  $(24,114)  $217,303 
Foreign currency translation adjustment   -    -    
 
    (430)   -    (430)
Stock-based compensation   -    -    1,287    -    -    1,287 
Issuance of restricted stock awards   203,828    -    -    -    -    - 
Net loss   -    -    -    -    (17,551)   (17,551)
Balance as of March 31, 2022   82,441,641   $8   $243,649   $(1,383)  $(41,665)  $200,609 
Foreign currency translation adjustment   -    -    -    (431)   -    (431)
Stock-based compensation   -    -    1,415    -    -    1,415 
Issuance of restricted stock awards   18,162    -    -    -    -    - 
Net loss   -    -    -    -    (26,437)   (26,437)
Balance as of June 30, 2022   82,459,803   $8   $245,064   $(1,814)  $(68,102)  $175,156 

 

   Common Stock   Treasury   Additional Paid-In  

Accumulated Comprehensive

Income

   Retained Earnings     
   Shares   Amount  

Shares

   Capital   (Loss)   (Deficit)   Total 
Balance as of January 1, 2021   71,551,067   $    7    (81,087)  $168,448   $ 1   $63,598   $232,054 
Foreign currency translation adjustment   -    
-
    
-
    -    109    -    109 
Distribution   -    
-
    -    
-
    -    (308)   (308)
Stock-based compensation   -    
-
    -    3,185    
-
    -    3,185 
Forfeiture of stock-based awards   (95,084)   
-
    
-
    
-
    
-
    
-
    - 
Cancellation of treasury shares   (81,087)   
-
    81,087    
-
    
-
    
-
    - 
Exercise of warrants   10,025,303    1    -    63,361    
-
    -    63,362 
Net loss   -    
-
    -    
-
    -    (8,242)   (8,242)
Balance as of March 31, 2021   81,400,199   $8    -   $234,994   $110   $55,048   $290,160 
Foreign currency translation adjustment   -    
-
    
-
    -    (210)   -    (210)
Stock-based compensation   -    
-
    -    582    
-
    -    582 
Non-employee stock-based compensation   835,000    
-
    -    181    
-
    -    181 
Forfeiture of stock-based awards   (300,000)   -    -    (445)   -    -    (445)
Exercise of warrants   3,469    -    -    71    -    -    71 
Net loss   -    -    -    -    -    (57,472)   (57,472)
Balance as of June 30, 2021   81,938,668   $8    -   $235,383   $(100)  $(2,424)  $232,867 

  

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

3

 

 

TATTOOED CHEF, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

 

   Six Months Ended 
   June 30, 
   2022   2021 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net loss  $(43,988)  $(65,714)
Adjustments to reconcile net loss to net cash from operating activities:          
Depreciation and amortization   3,043    1,462 
Bad debt expense   117    311 
Accretion of debt financing costs   
-
    3 
Unrealized foreign currency losses   626    
-
 
Revaluation of warrant liability   (668)   51 
Unrealized forward contract loss   1,184    1,074 
Non-cash lease cost   138    44 
Stock compensation expense   2,702    3,502 
Deferred taxes, net   (14)   47,549 
Changes in operating assets and liabilities:          
Accounts receivable   (7,088)   (2,320)
Inventory   (8,703)   (8,415)
Prepaid expenses and other assets   (3,471)   (3,613)
Accounts payable   2,930    (664)
Accrued expenses   2,839    1,922 
Other current liabilities   289    436 
Net cash used in operating activities   (50,064)   (24,372)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchases of property, plant and equipment   (15,568)   (10,140)
Acquisition of subsidiaries, net of cash acquired   (42)   (33,918)
Net cash used in investing activities   (15,610)   (44,058)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Net borrowings in Credit Facility   31    2,093 
Borrowings on Line of Credit   702    
-
 
Repayments on Line of Credit   (314)   
-
 
Repayments of notes payable to related parties   -    (42)
Borrowings of notes payable   1,109    1,168 
Repayments of notes payable   (267)   (140)
Proceeds from the exercise of warrants   -    73,957 
Payment of distributions   -    (308)
Net cash provided by financing activities   1,261    76,728 
           
NET (DECREASE) INCREASE IN CASH   (64,413)   8,298 
EFFECT OF EXCHANGE RATE ON CASH   (209)   305 
CASH AT BEGINNING OF PERIOD  $92,351   $131,579 
CASH AT END OF PERIOD  $27,729   $140,182 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Cash paid for:          
Interest  $88   $100 
Income taxes  $165   $249 
Noncash investing and financing activities:          
Capital expenditures included in accounts payable  $1,415   $776 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

4

 

 

TATTOOED CHEF, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. THE COMPANY

 

Tattooed Chef, Inc. was originally incorporated in Delaware on May 4, 2018 under the name of Forum Merger II Corporation (“Forum”), as a special purpose acquisition company for the purpose of effecting a merger, capital stock exchange, asset acquisitions, stock purchase, reorganization or similar business combination with one or more business.

 

On October 15, 2020 (the “Closing Date”), Forum consummated the transactions contemplated within the Agreement and Plan of Merger dated June 11, 2020 as amended on August 10, 2020 (the “Merger Agreement”), by and among Forum, Myjojo, Inc., a Delaware corporation (“Myjojo”), Sprout Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Forum (“Merger Sub”), and Salvatore Galletti, in his capacity as the holder representative. The transactions contemplated by the Merger Agreement are referred to herein as the “Transaction”.

 

Upon the consummation of the Transaction, Merger Sub merged with and into Myjojo (the “Merger”), with Myjojo surviving the merger in accordance with the Delaware General Corporation Law. Immediately upon the completion of the Transaction, Myjojo became a direct wholly owned subsidiary of Forum. In connection with the closing of the Transaction (the “Closing”), Forum changed its name to Tattooed Chef, Inc. (“Tattooed Chef”). Tattooed Chef’s common stock began trading on the Nasdaq under the symbol “TTCF” on October 16, 2020.

 

Tattooed Chef and its subsidiaries (collectively, the “Company”) are principally engaged in the manufacturing and sale of plant-based foods including, but not limited to, ready-to-cook bowls, zucchini spirals, riced cauliflower, acai and smoothie bowls, cauliflower crust pizza, wood-fired plant based pizzas, handheld burritos, tortillas, chips, bars and quesadillas primarily in the United States and Italy.

 

Ittella Properties LLC (“Ittella Properties”), the Company’s variable interest entity (“VIE”), owns a building located on Alondra Blvd., Paramount, California (“Alondra Building”), which is leased by Ittella International for 10 years from August 1, 2015 through August 1, 2025. Ittella Properties is wholly owned by Salvatore Galletti. The construction and acquisition of the Alondra building by Ittella Properties were funded by a loan agreement with unconditional guarantees by Ittella International and terms providing that 100% of the Alondra building must be leased to Ittella International throughout the term of the loan agreement. Accordingly, Ittella Properties is determined to be a consolidated VIE.

 

On May 14, 2021, the Company acquired New Mexico Food Distributors, Inc. (“NMFD”) and Karsten Tortilla Factory, LLC (“Karsten”) in an all-cash transaction for approximately $34.1 million (collectively, the “NMFD Transaction”). NMFD and Karsten were privately held companies based in Albuquerque, New Mexico. NMFD produces and sells frozen and ready-to-eat Mexican food products to retail and food service customers through its network of distributors in the United States. NMFD processes its products in two leased facilities located in New Mexico. See Note 8 Business Combinations.

 

On September 28, 2021, Tattooed Chef formed BCI Acquisition, Inc. (“BCI”). On December 21, 2021, BCI acquired substantially all of the assets, and assumed certain specified liabilities, from Belmont Confections, Inc. (“Belmont”) for an aggregate purchase price of approximately $16.7 million. Belmont was a privately held company based in Youngstown, Ohio, and specialized in the development and manufacturing of private label nutritional bars. See Note 8 Business Combinations.

 

5

 

 

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Consolidation. The condensed consolidated financial statements include the accounts of Tattooed Chef and its subsidiaries in which Tattooed Chef has a controlling interest directly or indirectly, and variable interest entities for which the Company is the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation.

 

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Regulation S-X of the Securities and Exchange Commission (“SEC”). Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a complete presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.

 

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on March 16, 2022, which contains the audited financial statements and notes thereto. The financial information as of December 31, 2021 included in the accompanying unaudited condensed consolidated financial statements is derived from the audited financial statements presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The interim results for the three and six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or for any future interim periods.

 

The Transaction was accounted for as a reverse recapitalization in accordance with GAAP (the “Reverse Recapitalization”). Under this method, Forum was treated as the “acquired” company (“Accounting Acquiree”) and Myjojo, the accounting acquirer, was assumed to have issued 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. The consolidated assets, liabilities and results of operations prior to the Reverse Recapitalization are those of Myjojo. The shares and corresponding capital amounts and earnings per share available for common stockholders, prior to the Reverse Recapitalization, have been retroactively restated.

 

Use of Estimates. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

 

Significant Accounting Policies. There have been no material changes to the Company’s significant accounting policies from its Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

 

Sales and Marketing Expenses. The Company expenses costs associated with sales and marketing as incurred. Sales and marketing expenses were $12.3 million and $8.2 million for the three months ended June 30, 2022 and 2021, respectively, and $24.9 million and $14.8 million for the six months ended June 30, 2022 and 2021, respectively. Sales and marketing expenses are included in operating expenses in the condensed consolidated statements of operations and comprehensive loss.

 

Leases. In April 2022, the Company commenced one operating lease for a facility in Vernon, California, for 10 years with option to extend two additional five years. Approximately $9.5 million of operating lease ROU asset and $9.4 million of operating lease liabilities were recognized on the Company’s consolidated balance sheet upon the commencement date.

 

Concentrations Risk. The Company grants credit, generally without collateral, to customers primarily in the United States. Consequently, the Company is subject to potential credit risk related to changes in business and economic factors in this geographical area.

 

No single external suppliers accounted for more than 10% of the Company’s cost of goods sold during the periods ended June 30, 2022 and 2021. As such, the Company is not subject to significant concentration risk on suppliers.

 

6

 

 

Four customers accounted for 68% of the Company’s revenue during the three months ended June 30, 2022. Three customers accounted for more than 78% of the Company’s revenue during the three months ended June 30, 2021.

 

Customer  2022   2021 
Customer A   32%   37%
Customer B   11%   12%
Customer C   13%   29%
Customer D   12%   * 

 

 

*Customer accounted for less than 10% of revenue in the period.

 

Three customers accounted for 61% of the Company’s revenue during the six months ended June 30, 2022. Three customers accounted for more than 84% of the Company’s revenue during the six months ended June 30, 2021.

 

Customer  2022   2021 
Customer A   34%   38%
Customer B   *    11%
Customer C   17%   35%
Customer D   10%   * 

 

 

*Customer accounted for less than 10% of revenue in the period.

 

Three customers accounting for more than 10% of the Company’s accounts receivable as of June 30, 2022 and December 31, 2021 were:

 

   June 30,   December 31, 
Customer  2022   2021 
Customer A   17%   13%
Customer C   31%   38%
Customer D   12%   12%

 

COVID-19 Pandemic. The novel coronavirus (“COVID-19”), which was categorized by the World Health Organization as a pandemic in March 2020, continues to significantly impact the United States and the rest of the world and has altered the Company’s business environment and overall working conditions. Despite partial remote working conditions, the Company’s business activities have continued to operate with minimal interruptions.

 

However, the pandemic may adversely affect the Company’s suppliers and could impair its ability to obtain raw material inventory in the quantities or of a quality the Company desires. The Company currently sources a material amount of its raw materials from Italy. Though the Company is not dependent on any single Italian grower for its supply of a certain crop, events (including COVID-19) generally affecting these growers could adversely affect the Company’s business.

 

The Company has experienced and is experiencing varying levels of inflation resulting in part from increased shipping and transportation costs, increased raw material and labor costs caused by the COVID-19 pandemic and general global economic conditions. The inflationary impact on the Company’s cost structure has been considered in its product pricing adjustment, which will be beginning in the fourth quarter of 2022, despite a continued focus on reducing manufacturing costs where possible.

 

The rapid development and fluidity of this situation precludes any prediction as to the ultimate material adverse impact on the financial statements and presents material uncertainty and risk with respect to our business, operations, financial condition and liquidity.

 

Russia-Ukraine Conflict. Although the Company does not have direct exposure to Russia and Ukraine, the Company is monitoring the geopolitical situation following Russia’s invasion of Ukraine. The Company may experience shortages in materials and increased costs for transportation, energy, and raw materials due in part to the negative impact of the Russia-Ukraine military conflict on the global economy. To date, the conflict between Russia and Ukraine has not had a material negative impact on the Company’s business, financial condition, or results of operations. However, the full impact of the conflict on the Company’s business operations and financial performance remains uncertain and will depend largely on the nature and duration of uncertain and unpredictable events, such as the severity and duration of further military action and its impact on regional and global economic conditions.

 

7

 

 

3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

Recently issued and adopted accounting pronouncements

 

In August 2020, Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for convertible instruments. ASU 2020-06 removes certain accounting models that separate the embedded conversion features from the host contract for convertible instruments, requiring bifurcation only if the convertible debt feature qualifies as a derivative under ASC 815 or for convertible debt issued at a substantial premium. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company adopted the new standard on January 1, 2022. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Amendments include removal of certain exceptions to the general principles of Topic 740, Income Taxes, and simplification in several other areas. ASU 2019-12 is effective for annual reporting periods beginning after December 15, 2020, and interim periods therein. The Company adopted the new standard on January 1, 2021. One of the amendments eliminates a limitation on the amount of income tax benefit that can be recognized in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal – Use Software (ASC Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 became effective for fiscal years beginning after December 15, 2020 and interim periods therein. Early adoption of ASU 2018-15 was permitted, including adoption in any interim period. The Company adopted this standard on January 1, 2021. The adoption of the new standard did not have a material impact on the Company’s condensed consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, which modifies the measurement of expected credit losses of certain financial instruments. The Company will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The Company adopted the new standard on January 1, 2022. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02” or “ASC 842”). The FASB has subsequently issued several related ASUs that clarified the implementation guidance for certain aspects of ASU 2016-02, which were effective upon the adoption of ASU 2016-02. The purpose of ASU 2016-02 is to provide financial statement users a better understanding of the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted ASU 2016-02 as of January 1, 2021, using the effective date transition method to recognize the cumulative effect of initially applying Topic 842, if any, as an adjustment to retained earnings. The adoption of ASU 2016-12 resulted in an increase of $4.2 million and $4.2 million to total assets and total liabilities from the recording of operating lease right-of-use (“ROU”) assets and operating lease liabilities, respectively, and did not have any impact on the Company’s retained earnings as of January 1, 2021. Finance leases were not impacted by the adoption of ASC 842. The adoption did not materially impact the Company’s condensed consolidated statements of operations or cash flows.

 

Recently issued but not yet adopted accounting pronouncements

 

In October 2021, the FASB issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805) (“ASU 2021-08”). ASU 2021-08 requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. At the acquisition date, the acquirer applies the revenue model as if it had originated the acquired contracts. ASU 2021-08 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. Adoption of ASU 2021-08 should be applied prospectively. Early adoption is also permitted, including adoption in an interim period. If early adopted, the amendments are applied retrospectively to all business combinations for which the acquisition date occurred during the fiscal year of adoption. The Company is currently evaluating the impact of ASU 2021-08 on its condensed consolidated financial statements.

 

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4. REVENUE RECOGNITION

 

Nature of Revenues

 

Substantially all of the Company’s revenue from contracts with customers consists of the sale of plant-based foods and is recognized at a point in time in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods.

 

The Company disaggregates revenue based on the type of products sold to its customers – private label, Tattooed Chef and other. Other revenues primarily consist of burritos, enchiladas and quesadillas and other products by NMFD, acquired by the Company on May 2021 (see Note 8 Business Combinations), to its restaurant customers on an as-needed basis. All sales are recorded within revenue on the accompanying condensed consolidated statements of operations and comprehensive loss. The Company does not have any contract assets or contract liabilities as of June 30, 2022 and December 31, 2021.

 

Revenue streams for the three months ended June 30, 2022 and 2021 were as follows:

 

   2022   2021 
Revenue Streams (in thousands)  Revenue   % Total   Revenue   % Total 
Tattooed Chef  $33,918    58%  32,798    65%
Private Label   20,972    36%   17,136    34%
Other revenues   3,220    6%   336    1%
Total  $58,110        $50,270      

 

Revenue streams for the six months ended June 30, 2022 and 2021 were as follows:

 

   2022   2021 
Revenue Streams (in thousands)  Revenue   % Total   Revenue   % Total 
Tattooed Chef  $77,373    60%  68,640    67%
Private Label   46,096    35%   33,448    32%
Other revenues   6,705    5%   651    1%
Total  $130,174        $102,739      

 

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Significant Judgments

 

Generally, the Company’s contracts with customers comprise of a written quote and customer purchase order which are governed by the Company’s trade terms and conditions. In certain instances, it may be further supplemented by separate pricing agreements. All products are sold on a standalone basis; therefore, when more than one product is included in a purchase order, the Company has observable evidence of stand-alone selling price. Contracts do not contain a significant financing component as payment terms on invoiced amounts are typically between 7 to 45 days, based on the Company’s credit assessment of individual customers, as well as industry expectations. Product returns are not material. The contracts with customers do not include any additional performance obligations related to warranties and material rights.

 

From time to time, the Company may offer incentives to its customers considered to be variable consideration including discounts and demonstration costs. Customer incentives considered to be variable consideration are recorded as a reduction to revenue as part of the transaction price based on the agreement at the time of the transaction. Customer incentives are allocated entirely to the single performance obligation of transferring product to the customer.

 

5. ACCOUNTS RECEIVABLE, NET

 

The Company evaluates the creditworthiness of its customers regularly and, based on its analysis, the Company has recognized an allowance for doubtful receivables of $0.1 million as of June 30, 2022 and $0.0 million as of December 31, 2021. The Company writes off accounts receivable whenever they become uncollectible, and any payments subsequently received on such receivables are recorded as bad debt recoveries in the period the payment is received. Credit losses from continuing operations have consistently been within management’s expectations.

 

In 2021, the Company began offering new promotional programs on sales of Tattooed Chef branded products to some new and existing customers. These programs constitute variable considerations and will reduce the transaction price on sales. In addition, the Company estimates variable considerations expected to reduce the related accounts receivables. In developing the estimate, the Company uses either the expected value or most likely amount method to determine the variable consideration. As a result, an allowance for promotional programs of $1.2 million and $4.1 million is recorded and presented as a reduction of accounts receivable as of June 30, 2022 and December 31, 2021, respectively.

 

Additionally, the Company maintains product demonstration accruals with some of its customers. The product demonstration accruals represent variable consideration and are recorded as a reduction of revenue. The Company’s obligations to the customers are included within accrued expenses on the condensed consolidated balance sheets. The balances outstanding for product demonstration were $1.4 million and $1.5 million as of June 30, 2022 and December 31, 2021, respectively (see Note 12 Accrued Expenses).

  

6. INVENTORY

 

Inventory consists of the following as of (in thousands):        
         
   June 30,   December 31, 
   2022   2021 
Raw materials  $27,699   $22,724 
Work-in-process   7,083    5,545 
Finished goods   23,240    22,756 
Packaging   4,600    3,537 
Total inventory  $62,622   $54,562 

 

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7. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consists of the following as of (in thousands):        
         
   June 30,   December 31, 
   2022   2021 
Land  $680   $738 
Buildings   4,822    4,766 
Leasehold improvements   5,299    5,336 
Machinery and equipment   34,344    33,975 
Computer equipment   541    549 
Furniture and fixtures   182    169 
Construction in progress   21,312    7,986 
    67,180    53,519 
Less: accumulated depreciation   (9,493)   (7,043)
Property, plant and equipment, net  $57,687   $46,476 

 

The Company recorded depreciation expense for the three months ended June 30, 2022 and 2021 of $1.5 million and $0.9 million, respectively.

 

The Company recorded depreciation expense for the six months ended June 30, 2022 and 2021 of $3.0 million and $1.4 million, respectively.

 

8. BUSINESS COMBINATIONS

 

New Mexico Food Distributors, Inc. (NMFD) and Karsten Acquisition

 

On May 14, 2021, the Company entered into a stock purchase agreement to acquire all outstanding stock of NMFD, a distributor and manufacturer of frozen and ready-to-eat Mexican food products for a total purchase price of $28.9 million. In addition, the Company entered into a membership interests purchase agreement to acquire all of the membership interest of Karsten for a total purchase price of $5.2 million (together, the “NMFD Transaction”). The primary reason for the purchase of NMFD and Karsten was to expand the Company’s manufacturing capacity to develop more ambient and refrigerated products. The NMFD Transaction met the definition of an acquisition of a business in accordance with ASC 805, Business Combinations, and is accounted for under the acquisition method of accounting. The contribution of revenue from NMFD and Karsten was $4.3 million for each of the three and six months ended June 30, 2021. During the three and six months ended June 30, 2021, the contribution of net operating results from NMFD and Karsten were not material.

 

Though the purchase agreements for each of NMFD and Karsten were executed as legally separate transactions, each was entered into contemporaneously and in contemplation of the other and involved the same group of sellers. As such, the transactions noted above were accounted for on a combined basis and were viewed to represent a single integrated event.

 

Under the acquisition method of accounting, the assets acquired, and liabilities assumed, by the Company in connection with the NMFD Transaction were initially recorded at their respective fair values. The Company made an election under Section 338(h)(10) to treat the NMFD Transaction as an asset acquisition for income tax purposes, which allows for any goodwill recognized to be tax deductible and amortized over a 15-year statutory life. The excess of the purchase price over the fair value of assets acquired and liabilities assumed of approximately $18.0 million was recorded as goodwill.

 

Transaction costs of $0.5 million were incurred in relation to the acquisition and were recorded to operating expense within the condensed consolidated statement of operations for the three months and the six months ended June 30, 2021.

 

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The following table summarizes the fair value of assets acquired and liabilities assumed in the NMFD Transaction as of the date of acquisition (in thousands):

 

   Amount 
Purchase consideration, net of cash acquired  $33,988 
Assets acquired and liabilities assumed     
Accounts receivable   3,567 
Inventory   2,270 
Prepaid expenses and other current assets   122 
Operating lease, ROU asset   207 
Property, plant and equipment   9,819 
Finance lease, ROU assets *   5,749 
Other noncurrent assets   29 
Intangible assets – tradenames   220 
Accounts payable   (2,834)
Accrued expenses   (78)
Operating lease liability   (207)
Note payable *   (2,917)
Goodwill   18,041 
Total assets acquired and liabilities assumed  $33,988 

 

 

*In December 2015 (prior to the NMFD Transaction), NMFD and Karsten entered into an agreement to purchase an industrial revenue bond (“IRB”) issued by Bernalillo County, New Mexico (“Bernalillo”) to be used to finance the costs of the construction, renovation and equipment of the manufacturing plant used by NMFD and Karsten and, concurrently, assigned ownership of the manufacturing plant including building and land (“Property”) to Bernalillo as consideration for the purchase of the IRB, as well as entered into a lease agreement to lease the Property from Bernalillo (“Lease”). The Lease provides NMFD the option to purchase the Property for $1 following the payoff of the Lease. The sale of the Property to Bernalillo and concurrent leaseback of the Property in December 2015 did not meet the sale-leaseback accounting requirements as a result of NMFD’s and Karsten’s continuous involvement with the Property and thus, the IRB was not recorded as a sale but as a financing obligation, with the Property remaining on NMFD’s financial statements. The Lease and the IRB have the same counterparty, therefore a right of offset exists so long as NMFD continues to make rent payments under the terms of the Lease.

 

On May 14, 2021, the balance of the IRB asset and the lease obligation to Bernalillo was each $2.9 million. Upon the acquisition of NMFD and Karsten, the Company received all rights and assumed obligations related to the IRB, the Property and the Lease. Under business combination accounting literature and prior to the adoption of ASC 842, the transaction involving the IRB and the Lease should not be reassessed and, therefore, the failed sale-leaseback accounting should be reflected in the Company’s purchase accounting. There were no changes to the right of offset as a result of the acquisition and, thus, the lease obligation was offset against the IRB asset and was presented net on the Company’s consolidated balance sheet with no impact to the consolidated operations of income or consolidated cash flow statements. The leased assets were accounted for as a right of use (“ROU”) asset under ASC 842 and the fair value of the ROU asset was determined to be $5.7 million and as such was presented on the consolidated balance sheet as an ROU asset of $5.7 million. In connection with the NMFD Transaction in May 2021, the Company assumed a note payable in the amount of $2.9 million (see Note 14 Indebtedness). The Company recognized the entire balance as a current liability due to noncompliance with certain financing covenants.

 

In June 2022, the Company paid the sellers a post-closing adjustment of approximately $42,000, which resulted in a corresponding increase in the total purchase consideration. This purchase consideration change has no impact on condensed consolidated statement of operations and only increased the balance of goodwill by the same amount.

 

The excess of purchase consideration over the fair value of the assets acquired and liabilities assumed was recorded as goodwill, which was primarily attributable to the assembled workforce and expanded market opportunities. Goodwill was assigned to the Company’s single reporting unit.

 

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Belmont Acquisition

 

On September 28, 2021, Tattooed Chef formed BCI as a wholly-owned subsidiary. On December 21, 2021, BCI acquired substantially all of the assets, and assumed certain specified liabilities, from Belmont for an aggregate purchase price of $16.7 million (“Belmont Acquisition”). Belmont was a privately held company based in Youngstown, Ohio, and specialized in the development and manufacturing of private label nutritional bars. The primary reason for the purchase of Belmont’s assets and assumption of liabilities was to expand the Company’s manufacturing capacity into a nutritional bars and other ambient products. Approximately $4.0 million of the purchase price was paid by issuing 241,546 shares of Tattooed Chef’s common stock to Belmont’s sole shareholder. The number of shares payable at closing was determined based on the average closing price of the Company’s common stock over the three days preceding the closing date of the acquisition (December 21, 2021). The closing price of Tattooed Chef’s common stock was $16.9 per share at the acquisition date.

 

Under the acquisition method of accounting, the assets acquired and liabilities assumed by the Company in connection with the Belmont Acquisition were initially recorded at their respective fair values. The excess of the purchase price over the fair value of assets acquired and liabilities assumed of approximately $8.7 million was recorded as goodwill, which was primarily attributable to the assembled workforce and expanded market opportunities. The recognized goodwill is tax deductible and amortized over a 15-year statutory life. Goodwill was assigned to the Company’s single reporting unit. The fair value assigned to the assets acquired and liabilities assumed are based on management’s estimates and assumptions, which are preliminary, are based on provisional amounts and may be subject to change as additional information is received. The Company expects to finalize the valuation of these assets not later than one year from the acquisition date.

 

In relation to the acquisition, transaction costs of $0.2 million incurred by the Company were recorded to operating expense within the consolidated statement of operations for the year ended December 31, 2021. An immaterial amount of seller’s transaction costs were paid by the Company and included in the purchase price consideration. The following table summarizes the preliminary fair value of assets acquired and liabilities assumed in the Belmont Acquisition as of the date of acquisition (in thousands):

 

   Amount 
Cash consideration  $12,739 
Equity consideration – common stock   4,000 
Total purchase consideration  $16,739 
Assets acquired and liabilities assumed     
Accounts receivable  $1,630 
Inventory   4,130 
Prepaid expenses and other current assets   38 
Operating lease ROU asset   870 
Property, plant and equipment   6,477 
Accounts payable   (3,477)
Accrued expenses   (723)
Operating lease liability   (870)
Goodwill   8,664 
Total assets acquired and liabilities assumed  $16,739 

 

On May 11, 2022, the Company received an escrow joint release letter to receive a refund of $0.3 million from the escrow agent in relation to the acquisition purchase price adjustment. With this refund of payments, total purchase consideration decreased by $0.3 million. This purchase consideration change has no impact on the income statement line items and only decreased the balance of goodwill by the same amount.

 

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The unaudited pro forma financial information in the table below summarizes the combined results of operations for the Company and all 2021 acquisitions as if both the NMFD Transaction and the Belmont Acquisition had occurred as of January 1, 2021. There were no acquisitions during the three and six months ended June 30, 2022. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisitions had occurred on the dates indicated.

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
(in thousands, except per share amounts)  2022   2021   2022   2021 
Net revenue  $58,110   $62,729   $130,174   $131,703 
Net loss   (26,437)   (53,935)   (43,988)   (62,433)
Net loss per share                    
Basic  $(0.32)  $(0.66)  $(0.53)  $(0.77)
Diluted  $(0.32)  $(0.66)  $(0.53)  $(0.77)

 

9. INTANGIBLE ASSETS, NET AND GOODWILL

 

Intangible assets consist of the following as of (in thousands):        
         
   June 30,   December 31, 
   2022   2021 
Amortizable tradenames  220   $220 
Less: accumulated amortization   (124)   (69)
Intangible assets, net  96   $151 

 

The estimated useful lives of the identifiable definite-lived intangible assets, acquired in the NMFD Transaction (see Note 8 Business Combinations) in May 2021, were determined to be two years.

 

The Company recorded insignificant amortization expense for the three and six months ended June 30, 2022.

 

Estimated future amortization expense for the definite-lived intangible assets is as follows (in thousands):     
      
Six months ending December 31, 2022  $55 
2023   41 
Total  $96 

 

The following table sets forth the change in the carrying amount of goodwill for the six months ended June 30, 2022 (in thousands):        

 

Balance as of January 1, 2022  $26,924 
Measurement period adjustment (change in consideration) (see Note 8 Business Combinations)   (219)
Balance as of June 30, 2022  $26,705 

 

Goodwill is tested annually on September 30. No goodwill impairment was recorded during the three and six months ended June 30, 2022.

 

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10. DERIVATIVE INSTRUMENTS

 

The Company enters into foreign currency exchange forward contracts to reduce the short-term effects of foreign currency fluctuations on assets and liabilities such as foreign currency inventory purchases, receivables and payables. The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. The Company’s derivatives expose the Company to credit risk to the extent that the counterparties may be unable to meet the terms of the arrangement. The Company does, however, seek to mitigate such risks by limiting its counterparties to major financial institutions. Management does not expect material losses as a result of defaults by counterparties.

 

Starting in February 2020, the Company entered into a trading facility for derivative forward contracts. Under this facility, the Company has 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 in US dollars. During the six months ended June 30, 2022 and 2021, the Company entered into foreign currency exchange forward contracts to purchase 19.9 million Euros and 36.4 million Euros, respectively. The notional amounts of these derivatives were $22.3 million and $44.2 million for the six-month period ended June 30, 2022 and 2021, respectively.

 

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, of which are denominated in currencies other than the functional currency of the reporting entity.

 

The fair values of the Company’s derivative instruments classified as Level 2 financial instruments (see Note 11 Fair Value Measurements) and the line items within the accompanying condensed consolidated balance sheets to which they were recorded are summarized as follows (in thousands):

 

   Balance Sheet Line Item  As of
June 30,
2022
   As of
December 31,
2021
 
Derivatives not designated as hedging instruments:           
Foreign currency derivatives  Forward contract derivative liability  2,988   $1,804 
Total     2,988   $1,804 

 

The effect on the accompanying condensed consolidated statements of operations and comprehensive loss of derivative instruments not designated as hedges is summarized as follows (in thousands):

 

      Three Months Ended 
      June 30, 
   Line Item in Statements of Operations  2022   2021 
Derivatives not designated as hedging instruments:           
Foreign currency derivatives  Other income (expense)  (2,049)  $1,023 
Total     (2,049)  $1,023 

 

      Six Months Ended 
      June 30, 
   Line Item in Statements of Operations  2022   2021 
Derivatives not designated as hedging instruments:           
Foreign currency derivatives  Other income (expense)  (3,072)  $(1,978)
Total     (3,072)  $(1,978)

 

Unrealized and realized losses on forward currency derivatives for the three and six months ended June 30, 2022 were $2.0 million and $3.1 million, respectively. Unrealized and realized (gains) loss on forward currency derivatives for the three and six months ended June 30, 2021 were $(1.0) million and $2.0 million, respectively. The Company has notional amounts of $41.5 million and $43.5 million on outstanding derivatives as of June 30, 2022 and December 31, 2021, respectively.

 

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11. FAIR VALUE MEASUREMENTS

 

The carrying amounts of cash, accounts receivables, accounts payable and certain notes payable approximate fair value because of the short maturity and/or variable rates generally associated with these instruments. Long-term debt as of June 30, 2022 and December 31, 2021 approximates its fair value as the interest rates are indexed to market rates (Level 2 “inputs”). The Company categorizes the inputs to the fair value measurements into three levels based on the lowest level input that is significant to the fair value measurement in its entirety.

 

Warrant Liabilities

 

In connection with Forum’s IPO and issuance of Private Placement Units in August 2018, Forum issued Units consisting of common stock with attached Public Warrants and Private Placement Warrants (together, the “Warrants”). All Public Warrants were exercised during 2020 and 2021.

 

Each Private Placement Warrant entitled or entitles the holder to purchase one share of the Company’s common stock at an exercise price of $11.50.

 

The Private Placement Warrants are accounted for as liabilities in accordance with ASC 815-40 and are presented within warrant liabilities on the condensed consolidated balance sheets. The warrant liabilities are measured at fair value at inception (“initial measurement”), which is at the Closing Date, and on a recurring basis (“subsequent remeasurement”), with changes in fair value presented within change in fair value of warrant liabilities in the condensed consolidated statements of operations and comprehensive loss.

 

Initial Measurement

 

The value of the Private Placement Warrants was initially measured at fair value on October 15, 2020, the Closing Date.

 

Subsequent Measurement

 

At each reporting period or upon exercise of the Warrants, the Company remeasures the Private Placement Warrants at their fair values with the change in fair value reported to current operations within the condensed consolidated statements of operations and comprehensive loss. During the three and six months ended June 30, 2022, no Private Placement Warrants were settled.

 

For the three and six months ended June 30, 2022, change in the fair value of the warrant liabilities charged to current operations amounted to a gain of $0.5 million and a gain of $0.7 million, respectively.

 

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Fair Value Measurement

 

The fair value of the Private Placement Warrants was determined to be $1.26 per Warrant as of June 30, 2022 using Monte Carlo simulations and using Level 3 inputs. Inherent in a Monte Carlo simulation are assumptions related to expected stock-price volatility, expected life, risk-free interest rate and dividend yield. The Company estimates the volatility of its common stock warrants based on implied volatility from its traded warrants and historical volatility of select peers’ common stock with similar expected term of the Warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield on the grant date with a maturity similar to the expected remaining term of the warrants. The expected term of the Warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company estimated to remain at zero.

 

The following table provides quantitative information regarding the inputs to the fair value measurement of the Private Placement Warrants as of each measurement date:

 

   June 30,   December 31, 
Input  2022   2021 
Risk-free interest rate   2.99%   1.08%
Expected term (years)   3.30    3.79 
Expected volatility   50.00%   45.00%
Exercise price  11.50   $11.50 
Fair value per Unit  1.26   $7.07 

 

As of June 30, 2022, the fair value of the Private Placement Warrants was determined to be $1.26 per warrant, or an aggregate value of $0.1 million for 115,160 outstanding warrants.

 

On December 31, 2021, the fair value of the Private Placement Warrants was determined to be $7.07 per warrant, or an aggregate value of $0.8 million for 115,160 outstanding warrants.

 

The following table presents the changes in the fair value of private placement warrant liabilities (in thousands):    
   Six Months Ended 
   June 30,
2022
 
Fair value as of December 31, 2021  $814 
Exercise of Private Placement Warrants   
-
 
Change in fair value(1)   (668)
Fair value as of June 30, 2022  $146 

 

 

   Six Months Ended
June 30,
2021
 
     
Fair value as of December 31, 2020  $5,184 
Exercise of Private Placement Warrants   (3,020)
Change in fair value(1)   51 
Fair value as of June 30, 2021  $2,215 

 

 

(1)Changes in fair value are recognized in change in fair value of warrant liabilities in the condensed consolidated statements of operations and comprehensive loss.

 

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Derivative Instruments

 

Derivative contracts are valued using quoted market prices and significant other observable inputs. The Company uses derivative instruments to minimize its exposure to fluctuations in foreign currency exchange rates. The Company’s derivative instruments primarily include foreign currency forward contracts related to certain intercompany loans and intercompany trading balances. The fair values for the majority of the Company’s foreign currency derivative contracts are evaluated by comparing the contract rate to a published forward price of the underlying market rates, which is based on market rates of comparable transactions. The valuation approach is classified within Level 2 of the fair value hierarchy. See Note 10 Derivative Instruments.

 

Business Combination

 

Business combinations are accounted for using the acquisition method of accounting. The Company recognizes the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. Fair value determinations are based on a variety of valuation techniques based on the facts and circumstances surrounding the transaction and the nature of the assets. In determining the fair value of the assets acquired and liabilities assumed in a material acquisition, the Company may utilize from the assistance of 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. Fair value of property plant and equipment were determined by a cost approach to calculate the replacement or reproduction cost. Fair value of inventories was based on replacement cost to estimate the value of raw materials and the comparative sales method to estimate the value of work in process and finished goods. 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. See Note 8 Business Combinations.

 

12. ACCRUED EXPENSES

 

The following table provides additional information related to the Company’s accrued expenses as of (in thousands):

 

   June 30,   December 31, 
   2022   2021 
Accrued product demonstration  1,377   $1,471 
Accrued payroll   3,312    1,600 
Accrued commission   1,065    607 
Other accrued expenses   771    89 
Total  6,525   $3,767 

 

13. INCOME TAXES

 

The following table presents the provision for income taxes and the effective tax rate for the periods ended June 30, 2022 and 2021 (in thousands):

 

   Three months ended   Six months ended 
   June 30,   June 30, 
   2022   2021   2022   2021 
Income tax expense  $455   $50,009   $711   $48,534 
Effective tax rate   (2)%   (670)%   (2)%   (283)%

 

18

 

 

The income tax expense for the three and six months ended June 30, 2022 was primarily attributable to foreign income tax expenses for the Company’s activities in Italy as well as state minimum taxes.

 

The income tax expense for the three and six months ended June 30, 2021 was primarily attributable to the Company’s establishment of a full valuation allowance on its deferred tax assets, and foreign income tax expenses on the Company’s foreign income in Italy.

 

The Company also believes that quarterly effective tax rates will vary from the fiscal 2022 effective tax rate as a result of recognizing the income tax effects of items that the Company cannot anticipate such as the changes in tax laws, tax amounts associated with foreign earnings at rates different from the United States federal statutory rate, and changes in valuation allowance. The Company’s foreign earnings on Italian operations are subject to foreign taxes applicable to its income derived in Italy.

 

As of June 30, 2022 and December 31, 2021, the Company had no open tax examinations by any taxing jurisdiction in which it operates. The taxing authorities of the most significant jurisdictions are the United States Internal Revenue Service, the California Franchise Tax Board and the Agenzia delle Entrate. The statute of limitations for which the Company’s tax returns are subject to examination are as follows: Federal 2018-2021, California 2017-2021, and Italy 2017-2021.

 

14. INDEBTEDNESS

 

Debt consisted of the following as of (in thousands):            

 

   June 30,   December 31, 
   2022   2021 
Notes payable  $6,460   $5,735 
Line of credit   1,510    1,200 
Total debt   7,970    6,935 
Less current debt   (6,538)   (6,219)
Total long-term debt  $1,432   $716 

 

Lines of Credit

 

The Company is 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 the Company until September 30, 2023 (the “Credit Facility”). The Credit Facility provides the Company with up to $25.0 million in revolving credit. Under the Credit Facility, the Company 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 amended and effected on June 30, 2022, the fixed charge coverage ratio was replaced by liquidity requirement. The Company is required to maintain minimum liquidity of not less than $10.0 million. Not less often than monthly (or weekly during a trigger period), the Company shall furnish to lender a borrowing base certificate as of the close of business on the last business day of such week. Trigger period means the period following any date on which (a) an event of default has occurred, or (b) the Company’s liquidity is less than $20.0 million. As of June 30, 2022, the Company was compliance with all of the financial covenants under the Credit Facility.

 

The Credit Facility bears interest at an annual rate equal to the sum of the Daily Adjusting Term SOFR Rate in effect from time to time plus 3.00%. “Daily Adjusting Term SOFR Rate” means, for any day, the rate per annum equal to the Term SOFR. The Daily Adjusting Term SOFR Rate shall be adjusted on a daily basis; provided that, if such rate is not published on such determination date then the rate will be the Term SOFR Rate on the first business day immediately prior thereto. The actual interest rates on outstanding borrowings were at 5.75% and 4.25% as of June 30, 2022 and December 31, 2021, respectively.

 

19

 

  

The Credit Facility has an arrangement associated with it wherein all collections from collateralized receivables are deposited into a collection account and applied to the outstanding balance of the line of credit on a daily basis. The funds in the collection account are earmarked for payment towards the outstanding line of credit and given the Company’s obligation to pay off the outstanding balance on a daily basis, the balance was classified as a current liability on the Company’s condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021. The balance on the Credit Facility was $0.0 million as both of June 30, 2022 and December 31, 2021. As of June 30, 2022, up to the full $25.0 million available for borrowing under the Credit Facility, of which $0.6 million has been utilized for the letter of credit issuance as described below.

 

The Credit Facility includes a letter of credit subfacility in the amount of up to $1.0 million. The Company agrees to pay (i) to the lender for each letter of credit, a per annum fee (the “Letter of Credit Fee”) equal to 1.00% of the outstanding letter of credit obligations, which fee shall be payable monthly in arrears on the first day of each calendar month, (ii) to the letter of credit issuer, for its own account, all customary charges and commissions associated with the issuance, amending, negotiating, payment, processing, renewal, transfer and administration of letters of credit, which charges shall be paid as and when incurred, and (iii) to the lender, all customary charges of the letter of credit issuer referenced in clause (ii) above paid by the lender on behalf of the Company. The Letter of Credit Fee shall be payable when the letter of credit is issued and on each anniversary thereof and on the Credit Facility maturity date. As of June 30, 2022, the Company had $0.6 million outstanding letter of credit under the subfacility.

 

In March 2021, Ittella Italy entered into a credit facility with a financial institution in the amount of up to 0.6 million Euros. The balance on the credit facility was 0.6 million Euros ($0.6 million USD) and 0.6 million Euros ($0.7 million USD) as of June 30, 2022, and December 31, 2021, respectively. The credit facility bears a one-time commission fee at 0.40% and interest at 1.50% per annum. Under this credit facility, Ittella Italy borrows the amount based on the sales invoices presented to the financial institution and pays back within 60 days. This line of credit does not have an expiration date and does not contain financial covenants.

 

In September 2021, Ittella Italy entered into a line of credit (the “Line of Credit”) with a financial institution in the amount of up to 1.4 million Euros. The balance on the line of credit was 0.8 million Euros ($0.9 million USD) and 0.5 million Euros ($0.5 million USD) as of June 30, 2022, and December 31, 2021, respectively. The Line of Credit bears a one-time commission fee at 0.40% and interest at 0.85% per annum. Under this line of credit, the financial institution advances suppliers based on purchase invoices presented and Ittella Italy pays back the amounts borrowed within 180 days. This line of credit does not have an expiration date and does not contain financial covenants.

 

For the lines of credit with payment term greater than 90 days, the Company presents the borrowing and repayment amounts at gross in the condensed consolidated statements of cash flows. For the lines of credit with payment term shorter than 90 days, the Company presents the borrowing and repayment amounts at net in the condensed consolidated statements of cash flows.

 

Notes payable

 

In connection with the NMFD Transaction in May 2021 (see Note 8 Business Combinations), the Company assumed a note payable in the amount of $2.9 million. The note payable bears interest at 3.8% per annum and has a maturity date of December 29, 2025. Under the note payable, NMFD must maintain a minimum fixed charge coverage ratio of 1.20:1.00, assessed semi-annually as of June 30 and December 31 of each calendar year beginning December 31, 2021, and the Company must, on a consolidated basis, maintain a funded debt to EBITDA ratio not to exceed 4.00 to 1.00, tested semi-annually as of June 30 and December 31 of each calendar year beginning June 30, 2021. The outstanding balance of the note payable was $2.8 million and $2.8 million as of June 30, 2022, and December 31, 2021, respectively. The balance was classified as a current liability due to noncompliance with the above financing covenants.

 

In May 2021, Ittella Italy entered into a promissory note with a financial institution in the amount of 1.0 million Euros. The note accrues interest at 1.014% per annum and has a maturity date of May 28, 2025, when the full principal and interest are due. The promissory note does not contain financial covenant. The balance on the promissory note was 0.8 million Euros ($0.8 million USD) and 0.9 million Euros ($1.0 million USD) as of June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022, the balance of the note in the amount of approximately 0.5 million Euros ($0.5 million USD) was classified as long term liability.

 

In April 2022, Ittella Italy entered into a promissory note with a financial institution in the amount of 1.0 million Euros. The note accrues interest at 1.9% per annum and has a maturity date of April 7, 2026, when the full principal and interest are due. The promissory note does not contain financial covenant. The balance on the promissory note was 1.0 million Euros ($1.0 million USD) as of June 30, 2022. As of June 30, 2022, the balance of the note in the amount of approximately 0.9 million Euros ($0.9 million USD) was classified as long term liability.

 

On January 6, 2020, Ittella Properties, the VIE, refinanced all of its existing debt with a financial institution in the amount of $2.1 million. The note accrues interest at 3.60% per annum and has a maturity date of January 31, 2035. Financial covenants of the note include a minimum fixed charge coverage ratio of 1.20 to 1.00. The outstanding balance on the note was $1.9 million as of both June 30, 2022 and December 31, 2021. As of June 30, 2022, the VIE was not in compliance with the fixed charge coverage ratio and the full balance of the note was classified as a current liability. Commencing with the fiscal quarter ending September 30, 2022, the VIE should meet a minimum fixed charge coverage ratio of 1.20 to 1.00.

 

20

 

 

Future minimum principal payments due on the revolving credit facilities and notes payable, for periods subsequent to June 30, 2022 are as follows (in thousands):

 

Six months ending December 31, 2022  $6,230 
2023   586 
2024   563 
2025   437 
2026   154 
Total  $7,970 

 

15. STOCKHOLDERS’ EQUITY

 

The condensed consolidated statements of changes in stockholders’ equity reflect the Reverse Recapitalization as of October 15, 2020 as discussed in Note 1. Since Myjojo was determined to be the accounting acquirer in the Reverse Recapitalization, all periods prior to the consummation of the Transaction reflect the balances and activity of Myjojo (other than shares which were retroactively restated in connection with the Transaction).

 

Further, the Company issued awards to certain officers and all of the directors pursuant to the Tattooed Chef, Inc. 2020 Incentive Award Plan (the “Plan”) on December 17, 2020 (see Note 16 Equity Incentive Plan).

 

Preferred Stock

 

The Company is authorized to issue 10,000,000 shares of preferred stock , par value of $0.0001 per share with such designations, voting and other rights and preferences as may be determined from time to time by the Company’s board of directors. As of June 30, 2022 and December 31, 2021, there were no shares of preferred stock issued or outstanding.

 

Common Stock

 

The Company is authorized to issue 1,000,000,000 shares of common stock, par value of $0.0001 per share. Holders of common stock are entitled to one vote for each share. As of June 30, 2022 and December 31, 2021, there were 82,459,803 and 82,237,813 shares of common stock issued and outstanding, respectively.

 

Warrants

 

In connection with Forum’s IPO and issuance of Private Placement Units in August 2018, Forum issued Units consisting of common stock with attached warrants as follows:

 

1.Public Warrants – Forum issued 20,000,000 Units at a price of $10.00 per Unit, each Unit consisting of one share of common stock and one Public Warrant.

 

2.Private Placement Warrants – Forum issued 655,000 Private Placement Units, each consisting of one share of common stock and one Private Placement Warrant.

 

Each Warrant entitles the holder to purchase one share of the Company’s common stock at an exercise price of $11.50.

 

21

 

 

The Public Warrants contained a redemption feature that provided the Company the option to call the Public Warrants for redemption 30 days after notice to the holder when any of conditions described in the following paragraph was met, and to require that any Public Warrant holder who desires to exercise his, her or its Public Warrant prior to the redemption date do so on a “cashless basis,” by converting each Public Warrant for an equivalent number of shares of common stock, determined by dividing (i) the product of the number of shares of common stock underlying the Warrants, multiplied by the difference between the exercise price and the “Fair Market Value”, and (ii) the Fair Market Value (defined as the average last sale price of the common stock for the ten trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of the Public Warrants).

 

The Public Warrants became exercisable upon the occurrence of certain events (trigger events), including the completion of the Transaction. Once the Public Warrants became exercisable, the Company was able to redeem the Public Warrants in whole, at a price of $0.01 per Warrant within 30 days after a written notice of redemption, and if, and only if, the reported last sale price of the Company’s common stock equaled or exceeded $18.00 per share for any 20 trading days within a 30-trading day period ending three business days before the Company sent the notice of redemption to the holder.

 

The Private Placement Warrants are identical to the Public Warrants, except that so long as they are held by the original holders or any of their permitted transferees, the Private Placement Warrants: (i) may be exercised for cash or on a cashless basis; (ii) may not be transferred, assigned, or sold 30 days after the Closing Date except to a permitted transferee who enters into a written agreement with the Company agreeing to be bound by the transfer restrictions, and (iii) are not redeemable by the Company.

 

A Warrant may be exercised only during the “Exercise Period” commencing on the later of: (i) the date that is 30 days after the first date on which Forum completes its initial business combination; or (ii) 12 months from the date of the closing of Forum’s IPO, and terminating on the earlier to occur (x) five years after Forum completes its initial business combination; (y) the liquidation of the Company or, (z) the redemption date, subject to any applicable conditions as set forth in the warrant agreement governing the Warrants. The Company in its sole discretion may extend the duration of the Warrants by delaying the expiration date, provided it give at least 20 days prior written notice of any such extension to the registered holders of the Warrants.

 

The consummation of the Transaction triggered exercisability of the Warrants.

 

Warrant activity is as follows:   

 

       Private 
   Public   Placement 
   Warrants   Warrants 
Issued and outstanding as of October 15, 2020   20,000,000    655,000 
Exercised   (5,540,316)   (247,423)
Issued and outstanding as of December 31, 2020   14,459,684    407,577 
Exercised   (14,459,684)   (292,417)
Issued and outstanding as of December 31, 2021   -    115,160 
Exercised   -    - 
Redeemed   -    - 
Issued and outstanding as of June 30, 2022   -    115,160 

 

The Public Warrants were considered freestanding equity-classified instruments due to their detachable and separately exercisable features. Accordingly, the Public Warrants were presented as a component of Stockholders’ Equity in accordance with ASC 815-40-25.

 

As discussed in Note 11, the Private Placement Warrants are considered freestanding liability-classified instruments under ASC 815-40-25.

 

22

 

 

16. EQUITY INCENTIVE PLAN

 

On October 15, 2020, the Plan became effective and permits the granting of equity awards of up to 5,200,000 common shares to executives, employees and non-employee directors, with the maximum number of common shares to be granted in a single fiscal year, when taken together with any cash fees paid to the non-employee director during that year in respect of his or her service as a non-employee director, not exceeding $0.1 million in total value to any non-employee director or $0.125 million in total value to any non-employee director who serves as the chairperson of a duly formed and authorized committee of the Company’s board of directors. Awards available for grant under the Plan include incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), other share-based awards, other cash-based awards and dividend equivalents. Shares issued under the Plan may be newly issued shares or reissued treasury shares.

 

Stock Options

 

Stock options under the Plan are generally granted with a strike price equal to 100% of the fair market value of the common stock on the date of grant, with a three-year vesting period and expire 10 years from the date of grant. The strike price may be higher than the fair value of the common stock on the date of the grant but cannot be lower.

 

The table below summarizes the share-based activity under the Plan:  

 

   Number of
Awards
Outstanding
   Weighted- Average
Exercise
Price
   Weighted- Average Remaining Contractual Terms (Years)   Intrinsic  
Value
(in thousands)
 
Balance at December 31, 2021   1,593,800   $       21.30    9.26   $                       -  
Granted 01/01/2022 - 03/31/2022   45,000    13.06    
 
    
 
 
Granted 04/01/2022 - 06/30/2022   -    -    
 
    
 
 
Cancelled and forfeited   (30,000)   19.72    
 
    
 
 
Exercised   -    -    
 
    
 
 
Balance at June 30, 2022   1,608,800   $21.10    8.78   $- 
Vested and Exercisable at June 30, 2022   426,267   $21.69    8.68   $- 

 

   Number of
Awards
Outstanding
   Weighted- Average Exercise Price   Weighted- Average Remaining Contractual Terms (Years)   Intrinsic
Value
(in thousands)
 
Balance at December 31, 2020   756,300   $24.69    9.98   $         - 
Granted 01/01/2021 - 03/31/2021   -    -    
 
    
 
 
Granted 04/01/2021 - 06/30/2021   270,000    17.82    
 
    
 
 
Cancelled and forfeited   (3,000)   24.69         
 
 
Exercised   -    -    
 
    
 
 
Balance at June 30, 2021   1,023,300   $22.88    9.57   $- 
Vested and Exercisable at June 30, 2021   -   $-    -   $- 

 

23

 

 

There were no options exercised during the three months and six months ended June 30, 2022 and 2021, respectively.

 

Compensation expense is recorded on a straight-line basis over the vesting period, which is the requisite service period, beginning on the grant date. The compensation expense is based on the fair value of each option grant using the Black-Scholes option pricing model. During the three and six months ended June 30, 2022, the Company recorded in the aggregate $0.8 million and $1.7 million, respectively, of share-based compensation expense related to stock options, which is included in operating expenses in the Company’s condensed consolidated statements of operations and comprehensive loss. During the three and six months ended June 30, 2021, the Company recorded in the aggregate $0.6 million and $1.1 million, respectively, of share-based compensation expense related to stock options, which is included in operating expenses in the Company’s condensed consolidated statements of operations. As of June 30, 2022, the Company had stock-based compensation of $6.0 million related to stock options not yet recognized that are expected to be recognized over an estimated weighted average period of approximately three years.

 

There were no new options granted during the three months ended June 30, 2022. The fair value of each option grant was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions during the six months ended June 30, 2022:

 

Equity volatility   32.37%
Risk-free interest rate   2.50%
Expected term (in years)   6 
Expected dividend   - 

 

The fair value of each option grant was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions for the three and six months ended June 30, 2021:

 

Equity volatility   33.93%
Risk-free interest rate   1.27%
Expected term (in years)   6 
Expected dividend   - 

 

The weighted-average grant date fair value of granted stock options was $0.0 million and $0.2 million for the three and six months ended June 30, 2022, respectively. The weighted-average grant date fair value of granted stock options was $1.7 million for each of the three and six months ended June 30, 2021.

 

Any option granted under the Plan may include tandem Stock Appreciation Rights (“SARs”). SARs may also be awarded to eligible persons independent of any option. The strike price for common share for each SAR shall not be less than 100% of the fair value of the shares determined as of the date of grant. There were no SARs outstanding as of June 30, 2022 and December 31, 2021.

 

Restricted Stock Awards and Restricted Stock Units

 

RSUs are convertible into shares of Company common stock upon vesting on a one-to-one basis. Restricted stock awards has the same rights as other issued and outstanding shares of Company common stock except they are not entitled to dividends until the awards vest. Restrictions also limit the sale or transfer of the shares during the vesting period. Any unvested portion of restricted stock and RSUs shall typically be terminated and forfeited upon termination of employment or service of the grantee.

 

24

 

 

Director restricted stock activity under the Plan for the six months period ended June 30, 2022 was as follows:

 

   Non-Employee Director Awards 
       Weighted- 
   Number of   Average 
   Shares   Fair Value 
Balance at December 31, 2021   -   $- 
Granted 01/01/2022 - 03/31/2022   -    - 
Granted 04/01/2022 - 06/30/2022   18,162    12.25 
Vested   (18,162)   12.25 
Forfeited   -    - 
Non-vested restricted stock at June 30, 2022   -   $- 

 

Director restricted stock activity under the Plan for the six months period ended June 30, 2021 was as follows:

 

   Non-Employee Director Awards 
       Weighted- 
   Number of   Average 
   Shares   Fair Value 
Balance at December 31, 2020   -   $- 
Granted 01/01/2021 - 03/31/2021   15,216    18.93 
Granted 04/01/2021 - 06/30/2021   -    - 
Vested   (15,216)   18.93 
Forfeited   -    - 
Non-vested restricted stock at June 30, 2021   -   $- 

 

Non-director employee and consultant restricted stock activity under the Plan for the six months period ended June 30, 2022 was as follows:

 

   Employee Awards   Consultant (Non-Employee) Awards 
       Weighted-       Weighted- 
   Number of   Average   Number of   Average 
   Shares   Fair Value   Shares   Fair Value 
Balance at December 31, 2021 
-
   $
-
  
-
   $
-
 
Granted 01/01/2022 - 03/31/2022   3,828    13.06    200,000    15.54 
Granted 04/01/2022 - 06/30/2022   
-
    
-
    
-
    
-
 
Vested   (3,828)   13.06    (50,000)   15.54 
Forfeited   
-
    
-
    
-
    
-
 
Non-vested restricted stock at June 30, 2022   
-
   $
-
    150,000   $15.54 

 

Non-director employee and consultant restricted stock activity under the Plan for the six months period ended June 30, 2021was as follows:

 

   Employee Awards   Consultant (Non-Employee) Awards 
        Weighted-        Weighted- 
   Number of   Average   Number of   Average 
   Shares    Fair Value   Shares    Fair Value 
Balance at December 31, 2020   400,000   $24.28    100,000   $24.69 
Granted 01/01/2021 - 03/31/2021   30,416    23.65    100,000    18.96 
Granted 04/01/2021 - 06/30/2021   
-
    
-
    10,000    18.15 
Vested   (4,916)   24.28    (110,000)   18.89 
Forfeited   (425,500)   24.62    (100,000)   24.69 
Non-vested restricted stock at June 30, 2021   
-
   $
-
    
-
   $
-
 

 

During the three and six months ended June 30, 2022, the Company recorded share-based compensation expense related to restricted stock awards in aggregate of $0.6 million and $1.0 million, respectively. During the three and six months ended June 30, 2021, the Company recorded share-based compensation expense related to restricted stock awards in aggregate of $(0.3) million and $2.4 million, respectively. Share-based compensation expense is included in operating expenses in the Company’s condensed consolidated statements of operations and comprehensive loss.

 

The fair value of granted restricted stock award was $0.2 million and $3.4 million for the three and six months ended June 30, 2022, respectively. The fair value of granted restricted stock was $0.2 million and $2.4 million for the three and six months ended June 30, 2021, respectively.

 

As of June 30, 2022, unrecognized compensation costs related to the restricted stock awards was $2.3 million and is expected to be recognized over a remaining period of 18 months.

 

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17. RELATED PARTY TRANSACTIONS

 

The Company leases office property in San Pedro, California from Deluna Properties, Inc., a company owned by the Company’s CEO, Salvatore Galletti. The amount of rent paid was approximately $40,000 and $80,000 for the three and six months ended June 30, 2022, respectively. The amount of rent paid was approximately $50,000 and $80,000 for the three and six months ended June 30, 2021, respectively. As of June 30, 2022, under the adoption of ASC 842, the Company recorded $2.0 million of operating lease right-of-use asset and $2.1 million of operating lease liabilities in relation to this lease.

 

In addition, the Company leased a building from Ittella Properties, an entity owned by Salvatore Galletti. Ittella Properties is considered as the Company’s VIE and consolidated to the Company’s financial statements. See Note 19 Consolidated Variable Interest Entity,

 

In Connection with Belmont acquisition in December 2021, the Company entered into a lease agreement with Penhurst Realty, LLC, owned by Belmont’s prior owner who is currently serving as the president of BCI. The amounts of rent paid were approximately $60,000 and $120,000 for the three and six months ended June 30, 2022, respectively. As of June 30, 2022, under the adoption of ASC 842, the Company recorded $0.6 million each of operating lease right-of-use asset and operating lease liabilities in related to this lease.

 

A company affiliated with one of the Company’s non-employee directors has been contracted to provide marketing assistance to the Company. The Company paid $0.1 million and $0.2 million to this company for the services provided during the three and six months ended June 30, 2022, respectively.

 

18. COMMITMENTS AND CONTINGENCIES

 

In the ordinary course of business, the Company also enters into leases, which require the Company as lessee to indemnify the lessor from liabilities arising out of the Company’s occupancy of the properties. The Company’s indemnification obligations are generally covered under the Company’s general insurance policies.

 

From time to time, the Company is involved in various litigation matters arising in the ordinary course of business. The Company does not believe the disposition of any current matter will have a material effect on its condensed consolidated financial position or results of operations and cash flows.

 

A subsidiary of the Company, Ittella Italy, is involved in certain litigation related to the death of an independent contractor who fell off of the roof of Ittella Italy’s premises while performing pest control services. The case was brought by five relatives of the deceased worker. The five plaintiffs are seeking collectively 1.87 million Euros from the defendants. In addition to Ittella Italy, the pest control company for which the deceased was working at the time of the accident is co-defendant. Furthermore, under Italian law, the president of an Italian company is automatically criminally charged if a workplace death occurs on site. Ittella Italy has engaged local counsel, and while local counsel does not believe it is probable that Ittella Italy or its president will be found culpable, Ittella Italy cannot predict the ultimate outcome of the litigation. Procedurally, the case remains in a very early stage of the litigation. Ultimately, a trial will be required to determine if the defendants are liable, and if they are liable, a second separate proceeding will be required to establish the amount of damages owed by each of the co-defendants. Ittella Italy believes any required payment could be covered by its insurance policy; however, it is not possible to determine the amount at which the insurance company will reimburse Ittella Italy or whether any reimbursement will be received at all. Based on information received from its Italian lawyers, Ittella Italy believes that the litigation may continue for a number of years before it is finally resolved. Based on the assessment by management together with the independent assessment from its local legal counsel, the Company believes that a loss is currently not probable and an estimate cannot be made. Therefore, no accrual has been made as of June 30, 2022 nor December 31, 2021.

 

26

 

 

19. CONSOLIDATED VARIABLE INTEREST ENTITY

 

Ittella Properties, the Company’s consolidated VIE, owns the Alondra Building, which is leased by Ittella International for 10 years from August 1, 2015 through August 1, 2025. Ittella Properties is wholly owned by Salvatore Galletti. The construction and acquisition of the Alondra building by Ittella Properties were funded by a loan agreement with unconditional guarantees by Ittella International and terms providing that 100% of the Alondra building must be leased to Ittella International throughout the term of the loan agreement.

 

Ittella International guarantees the loan for Ittella Properties and substantially all of Ittella Properties’ transactions occur with the Ittella International. Thus, Ittella Properties’ equity at risk is considered to be insufficient to finance its activities without additional support from Ittella International. Therefore, Ittella Properties was designed in a way such that substantially all of the assets benefit the Company, and substantially all of the obligations are absorbed by the Company. Given the Company has control over the assets that most significantly affect the economic performance of Ittella Properties, the Company is determined to be the primary beneficiary of Ittella Properties. As a result, Ittella Properties is considered a VIE of the Company and is required to be consolidated.

 

The results of operations and cash flows of Ittella Properties are included in the Company’s condensed consolidated financial statements. For the three and six month periods ended both of June 30, 2022 and 2021, 100% of the revenue of Ittella Properties, approximately $0.1 million and $0.2 million of lease income, respectively, received from Ittella International, was intercompany and eliminated in consolidation. Ittella Properties contributed expenses of approximately $50,000 for each of the three month periods ended June 30, 2022 and 2021. Ittella Properties contributed expenses of $0.1 million for each of the six month periods ended June 30, 2022 and 2021.

 

20. LOSS PER SHARE

 

The following is the summary of basic and diluted loss per share for the three and six months ended June 30, 2022 and 2021 (in thousands):

 

   Three months ended   Six months ended 
   June 30,   June 30, 
   2022   2021   2022   2021 
Numerator                
Net loss  $(26,437)  $(57,472)  $(43,988)  $(65,714)
Dilutive net loss  $(26,437)  $(57,472)  $(43,988)  $(65,811)
                     
Denominator                    
Weighted average common shares outstanding   82,284,005    81,981,428    82,261,079    81,121,795 
Weighted average diluted shares outstanding   82,284,005    81,981,428    82,261,079    81,258,427 
                     
Loss per share                    
Basic  $(0.32)  $(0.70)  $(0.53)  $(0.81)
Diluted  $(0.32)  $(0.70)  $(0.53)  $(0.81)

 

The following have been excluded from the calculation of diluted loss per share as the effect of including them would have been anti-dilutive for the three and six months ended June 30, 2022 and 2021 (in thousands):

 

   Three months ended   Six months ended 
   June 30,   June 30, 
   2022   2021   2022   2021 
Warrants   115    75    115    189 
Stock options   1,624    445    1,601    408 
Restricted stock awards   163    25    175    - 
Total   1,902    545    1,891    597 

 

21. SUBSEQUENT EVENTS

 

The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the condensed consolidated financial statements were issued. Other than as described in these financial statements, the Company did not identify any subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements.

 

On August 5, 2022, the Company expanded the Credit Facility with UMB Bank N.A. from $25.0 million to $40.0 million and extended the maturity date from September 2023 to September 2025.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 to Tattooed Chef, Inc., a Delaware 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 ending December 31, 2021 filed with the SEC and Part II, Item 1A. Risk Factors herein. The Company’s securities filings can be accessed on the EDGAR section of the SEC’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 Ukraine), 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.

 

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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 in the 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 and Tattooed Chef branded products during 2022. Our Mexican-style plant-based Tattooed Chef branded products, including burritos, enchiladas, and quesadillas, total 18 new SKUs, were introduced to the market during the six months ended June 30, 2022. The Karsten facility is not currently in operation and is expected to become active during the third quarter of 2022. The Karsten facility is expected to manufacture Tattooed Chef branded salty snacks and other alternative Tattooed Chef branded and private label products. BCI is also expected to start manufacturing Tattooed Chef branded products during the third quarter of 2022. We anticipate continued growth in Tattooed 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 ended June 30, 2022 and 2021:

 

   Three months Ended   Six months Ended 
   June 30,   June 30, 
(in thousands)  2022   % of revenue   2021   % of revenue   2022   % of revenue   2021   % of revenue 
Net revenue  $58,110    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 June 30, 2022 Compared to the Three Months Ended June 30, 2021.

 

Net revenue

 

Net revenue increased by $7.8 million, or 15.6%, to $58.1 million for the three months ended June 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 in Tattooed 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 ended June 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 ended June 30, 2022 from 83.5% for the three months ended June 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 in Vernon, California that started on April 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 ended June 30, 2022 as compared to $8.3 million for the comparable period in 2021. Gross margin for the three months ended June 30, 2022 was 1.3%, as compared to 16.5% for the three months ended June 30, 2021. We are in the process of ramping production on new Tattooed Chef branded products utilizing the facilities and equipment acquired through the NMFD transaction and the BCI acquisitions. Moving forward, we expect Tattooed 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 for Tattooed Chef branded products.

 

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Operating expenses

 

Operating expenses increased $7.9 million, or 48.3%, to $24.3 million for the three months ended June 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 on January 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 ended June 30, 2021. The decrease in professional expenses is primarily related to acquisitions that occurred during the three months ended June 30, 2021.

 

Income tax expense

 

Income tax expense decreased $49.6 million, or 99.1%, to $0.5 million for the three months ended June 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 the U.S.

 

Net Loss

 

For the three months ended June 30, 2022, we had a net loss of $26.4 million, compared to a net loss of $57.5 million for the three months ended June 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 June 30, 2022 Compared to the Six Months Ended June 30, 2021.

 

Net revenue

 

Net revenue increased by $27.4 million, or 26.7%, to $130.2 million for the six months ended June 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 in Tattooed 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 ended June 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 ended June 30, 2022 from 84.9% for the six months ended June 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 in Vernon that started on April 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.

 

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Gross Profit

 

Gross profit decreased $6.6 million, or 42.6%, to $8.9 million for the six months ended June 30, 2022 as compared to $15.5 million for the comparable period in 2021. Gross margin for the six months ended June 30, 2022 was 6.8%, as compared to 15.1% for the six months ended June 30, 2021. We are in the process of ramping production on new Tattooed Chef branded products by utilizing the facilities and equipment acquired through the NMFD transaction and the BCI acquisition. Moving forward, we expect Tattooed 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 for Tattooed Chef branded products.

 

Operating expenses

 

Operating expenses increased $18.5 million, or 60.5%, to $49.1 million for the six months ended June 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 ended June 30, 2021.

 

Income tax expense

 

Income tax expense decreased $47.8 million, or 98.5%, to $0.7 million for the six months ended June 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 the U.S.

 

Net Loss

 

For the six months ended June 30, 2022, we had a net loss of $44.0 million, compared to a net loss of $65.7 million for the six months ended June 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.

 

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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 June 30, 2022, and 2021:

 

   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 ended June 30, 2022, respectively, compared to adjusted EBITDA of negative $6.1 million and negative $9.3 million for the three and six months ended June 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 for Tattooed Chef.

 

Liquidity and Capital Resources

 

As of June 30, 2022, we had $27.7 million in cash and cash equivalents. The cash outflow during the six months ended June 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.

 

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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 until September 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 of June 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. On August 5, 2022, we expanded the Credit Facility with the lender from $25.0 million to $40.0 million and extended the maturity date from September 2023 to September 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 ended June 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  $(64,413)  $8,298 

 

Operating Activities

 

For six months ended June 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 ended June 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.

 

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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 ended June 30, 2022, net cash used in investing activities was $15.6 million as compared to $44.1 million for the six months ended June 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 June 30, 2022, net cash provided by financing activities was $1.3 million, primarily from borrowings under our credit facilities, net of repayments.

 

For the six months ended June 30, 2021, net cash provided by financing activities was $76.7 million, primarily from $74.0 million due to warrant exercises and borrowings under the Credit Facility of $2.1 million to support working capital requirements to fund continued growth.

 

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 ended December 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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to certain market risks in the ordinary course of our business, including fluctuations in interest rates, raw material prices, foreign currency exchange fluctuations and inflation as follows:

 

Interest Rate Risk

 

Our exposure to market risk for changes in interest rates relates primarily to our cash that consists of amounts held by third-party financial institutions and our long-term debt. Our treasury policy has as its primary objective to preserve principal without significantly increasing risk. We generally held our cash with financial institutions without investment activities, therefore we are not exposed to increasing interest rate risk. Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt obligations to increase along with the interest rate increase. Our long-term debt is carried at amortized cost and thus fluctuations in interest rates do not impact our condensed consolidated financial statements. However, the fair value of our long term debt, which pays interest at a fixed rate, will generally fluctuate with movements of interest rates, increasing in periods of declining rates of interest and declining in periods of increasing rates of interest.

 

Ingredient Risk

 

We are exposed to risk related to the price and availability of our ingredients because our profitability is dependent on, among other things, our ability to anticipate and react to raw material and food costs. We manage the impact of the ingredients costs through select raw material contracts with growers and cooperatives in Italy that allow us to better control ingredient costs.

 

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We source many of our vegetables from Italy, which is one of the largest organic crop areas in the European Union. We engage the services of an agronomist to help with forecasting and scheduling. Based in part on these forecasts, we obtain written commitments from a number of growers and cooperatives to grow certain crops in specified amounts for agreed upon prices, confirmed by purchase orders issued closer to the start of each harvesting season. In addition, we utilize multiple growers across various regions in Italy and are not dependent on any single grower for any single commodity. These commitments provide us with consistent supply throughout the growing season to support our year-round production schedule.

 

We source strawberries and certain other crops in the United States but are not bound by purchase agreements for the crops sourced in the United States. Acai purée was primarily sourced from Brazil through an American supplier and we buy, at one time, all of our organic Acai that we need for the whole year. We have secured our source of organic Acai for 2022. While we substantially single source this ingredient, we believe there to be ample supply in the market. In 2021, we engaged two additional suppliers to supply Acai purée and we are currently in process to contract another supplier, which would be our fourth supplier, in 2022.

 

We rely on a sole supplier for liquid nitrogen, Messer LLC, which is used to freeze products during the manufacturing process. We have entered into an agreement that expires in 2025 with Messer LLC to provide up to 120% of our monthly requirements of liquid nitrogen.

 

During the six months ended June 30, 2022, a hypothetical 10% increase or 10% decrease in the weighted-average cost of our primary ingredients, would have resulted in a corresponding increase or decrease of approximately $6.8 million to cost of goods sold. We are working to expand our supply chain to ensure the certainty of supply of the highest quality raw materials that meet our demanding requirements for quality and intend to enter into long-term contracts to better ensure stability of prices of our ingredients.

 

Foreign Currency Risk

 

We are exposed to foreign currency risks that arise from normal business operations. These risks include the translation of local currency balances of foreign subsidiary, transaction gains and losses associated with intercompany loans with foreign subsidiary and transactions denominated in currencies other than a location’s functional currency. Our foreign entity, Ittella Italy, uses its local currency as the functional currency. We translate net assets into U.S. dollars at period end exchange rates, while revenue and expense accounts are translated at average exchange rates prevailing during the periods being reported. Resulting currency translation adjustments are included in “Accumulated other comprehensive income” and foreign currency transaction gains and losses are included in “Other income (expense)”. Transaction gains and losses on long-term intra-entity transactions are recorded as a component of “Other comprehensive income (loss)” in the condensed consolidated statements of operations and comprehensive loss. Transactions denominated in a currency other than the reporting entity’s functional currency may give rise to transaction gains and losses that impact our results of operations.

 

Translation losses, net of tax, reported as cumulative translation adjustments through “Other comprehensive income (loss)” were $0.4 million and $0.9 million for the three and six months ended June 30, 2022, respectively. Foreign currency transaction losses included in “Other income (expense)” were $2.7 million and $3.7 million for the three and six months ended June 30, 2022, respectively

 

Inflation Risk

 

Historically, inflation did not have a material effect on our business, results of operations, or financial condition. Starting in fiscal 2021, some of our ingredient, packaging, freight and storage costs have increased at a rapid rate. We expect the pressures of cost inflation to continue into the remaining of fiscal 2022. In addition, the escalation of the conflict between Russia and Ukraine, including international sanctions in response to that conflict, could result in further inflationary pressures and increase disruption to supply chains, all of which could result in additional increases in the cost of our ingredients, packaging, freight and storage.

 

We use a variety of strategies to offset inflation costs. However, we may not be able to generate sufficient productivity improvements or implement price increases to fully offset these cost increases or do so on an acceptable timeline. Our inability or failure to do so could harm our business, results of operations and financial condition.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2022 and, based on this evaluation, have concluded that due to the material weaknesses in our internal control over financial reporting previously identified in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2021, our disclosure controls and procedures were not effective as of June 30, 2022. These material weaknesses did not result in a material misstatement of the condensed consolidated financial statements.

 

Remediation of Material Weaknesses

 

Our remediation efforts previously disclosed in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2021 to address the identified material weaknesses are ongoing. In the quarter ended June 30, 2022, we hired an Executive Vice President of Accounting, who has experience in serving in lead roles over financial reporting and implementation of internal controls at other public companies. In addition, we engaged a technical advisory firm to assist with the Company’s SOX compliance program. While we believe the steps taken to date and those planned for future implementation will improve the effectiveness of our internal control over financial reporting, we have not completed all remediation efforts.

 

The material weaknesses cannot be considered remediated until applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Accordingly, we will continue to monitor and evaluate the effectiveness of our internal control over financial reporting.

 

Changes in Internal Control Over Financial Reporting

 

In 2021, we began a multi-year implementation of a new enterprise resource planning (“ERP”) system, which replaced our existing core financial system at our Paramount location in January 2022, and will replace our existing core financial systems at certain other locations and acquired locations in the future. The ERP system is designed to accurately maintain the Company’s financial records, enhance the flow of financial information, improve data management and provide timely information to our management team. As the phased implementation of the new ERP system progresses, we may change our processes and procedures which, in turn, could result in changes to our internal control over financial reporting. As such changes occur, we will evaluate quarterly whether such changes materially affect our internal control over financial reporting.

 

Other than the ongoing steps being taken to implement the remediation plan described above and under Part II, Item 9A in our Annual Report on Form 10-K for the year ended December 31, 2021, and the ERP system implementation described above, there have been no other changes in internal control over financial reporting that occurred during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

The information required by this Item is incorporated herein by reference to the Notes to Condensed Consolidated Financial Statements - Note 18.

 

Commitments and Contingencies in Part I, Item 1, of this Quarterly Report on Form 10-Q.

 

ITEM 1A. RISK FACTORS.

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in our 2021 Form 10-K, as updated and supplemented below. These risk factors could materially harm our business, operating results and financial condition. Additional factors and uncertainties not currently known to us or that we currently consider immaterial also may materially adversely affect our business, financial condition or future results.

 

Increasing tensions between the United States and Russia, and other effects of the ongoing conflict in Ukraine, could negatively impact our business, results of operations, and financial condition.

 

While we do not operate in Russia or Ukraine, the increasing tensions between the United States and Russia and the other effects of the ongoing conflict in Ukraine, have resulted in many broader economic impacts such as the United States imposing sanctions and bans against Russia and Russian products imported into the United States. Such sanctions and bans have and may continue to impact commodity pricing such as fuel and energy costs, making it more expensive for us and our carriers to deliver products to our customers. Further sanctions, bans or other economic actions in response to the ongoing conflict in Ukraine could result in an increase in costs, further disruptions to our supply chain, or a lack of consumer confidence resulting in reduced demand. While the extent of such items is not presently known, any of them could negatively impact our business, results of operations, and financial condition.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

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ITEM 6. EXHIBITS.

 

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report.

 

No.   Description of Exhibit
10.1   Amended and Restated loan and security agreement loan between UMB Bank N.A and Ittella International, LLC and each Affiliate, effective as of June 30,2022.
31.1   Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2   Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS   Inline XBRL Instance Document
101.SCH   Inline XBRL Taxonomy Extension Schema Document
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). 36

 

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SIGNATURES

 

Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  TATTOOED CHEF, INC.
   
Date: August 9, 2022 By: /s/ Salvatore Galletti
Name: Salvatore Galletti
Title: Chief Executive Officer
    (Principal Executive Officer)
     
Date: August 9, 2022 By: /s/ Stephanie Dieckmann
Name: Stephanie Dieckmann
Title: Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

 

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