UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended September 30, 2022
For the transition period from to
Commission File No. 001-38615
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(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 | ||||||||||||
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 x No o
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 x No o
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.
| x | o | Accelerated filer | ||||||||||||
| o | 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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No x
As of November 11, 2022, there were 83,658,357 shares of common stock, par value $0.0001, issued and outstanding.
TATTOOED CHEF, INC.
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 2022
TABLE OF CONTENTS
| Page | ||||||||
i
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
TATTOOED CHEF, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands, except for share information)
| September 30, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS | |||||||||||
| Cash | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventory | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| TOTAL CURRENT ASSETS | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Operating lease right-of-use asset, net | |||||||||||
| Finance lease right-of-use asset, net | |||||||||||
| Intangible assets, net | |||||||||||
| Deferred income taxes, net | |||||||||||
| Goodwill | |||||||||||
| Other assets | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| CURRENT LIABILITIES | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Line of credit | |||||||||||
| Notes payable, current portion | |||||||||||
| Forward contract derivative liability | |||||||||||
| Operating lease liabilities, current portion | |||||||||||
| Other current liabilities | |||||||||||
| TOTAL CURRENT LIABILITIES | |||||||||||
| Warrant liability | |||||||||||
| Operating lease liabilities, net of current portion | |||||||||||
| Notes payable, net of current portion | |||||||||||
| TOTAL LIABILITIES | |||||||||||
COMMITMENTS AND CONTINGENCIES (See Note 18) | |||||||||||
| STOCKHOLDERS’ EQUITY | |||||||||||
Preferred stock - $ | |||||||||||
Common stock- $ | |||||||||||
| Additional paid in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| TOTAL STOCKHOLDERS’ EQUITY | |||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | |||||||||
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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (As Restated) | (As Restated) | ||||||||||||||||||||||
| NET REVENUE | $ | $ | $ | $ | |||||||||||||||||||
| COST OF GOODS SOLD | |||||||||||||||||||||||
| GROSS (LOSS) PROFIT | ( | ( | |||||||||||||||||||||
| OPERATING EXPENSES | |||||||||||||||||||||||
| LOSS FROM OPERATIONS | ( | ( | ( | ( | |||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Other expense, net | ( | ( | ( | ( | |||||||||||||||||||
| LOSS BEFORE INCOME TAX BENEFIT (EXPENSE) | ( | ( | ( | ( | |||||||||||||||||||
| INCOME TAX BENEFIT (EXPENSE) | ( | ( | |||||||||||||||||||||
| NET LOSS | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| NET LOSS PER SHARE | |||||||||||||||||||||||
| Basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| WEIGHTED AVERAGE COMMON SHARES | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| OTHER COMPREHENSIVE LOSS, NET OF TAX | |||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | ( | |||||||||||||||||||
| COMPREHENSIVE LOSS | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
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 Capital | Accumulated Comprehensive Loss | Accumulated Deficit | Total | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | ( | — | ( | ||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuance of restricted stock awards | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuance of restricted stock awards | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuance of restricted stock awards | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
(continued on the next page)
3
TATTOOED CHEF, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)
(in thousands, except for share information)
| Common Stock | Treasury Shares | Additional Paid-In Capital | Accumulated Comprehensive Income (Loss) | Retained Earnings (Deficit) | Total | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| (As Restated) | (As Restated) | ||||||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2021 | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Distribution | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Forfeiture of stock-based awards | ( | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Cancellation of treasury shares | ( | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Exercise of warrants | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Non-employee stock-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Forfeiture of stock-based awards | ( | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Exercise of warrants | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Non-employee stock-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Exercise of warrants | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
4
TATTOOED CHEF, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | (As Restated) | ||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Bad debt expense | |||||||||||
| Accretion of debt financing costs | |||||||||||
| Unrealized foreign currency losses | |||||||||||
| Unrealized forward contract loss | |||||||||||
| Revaluation of warrant liability | ( | ( | |||||||||
| Non-cash lease cost | |||||||||||
| Stock compensation expense | |||||||||||
| Deferred taxes, net | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Inventory | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Accrued expenses | |||||||||||
| Other current liabilities | |||||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Purchases of property, plant and equipment | ( | ( | |||||||||
| Acquisition of subsidiaries, net of cash acquired | ( | ||||||||||
| Acquisition price change from working capital adjustment | |||||||||||
| Acquisition of intangible asset | ( | ||||||||||
| Acquisition of below-market lease asset | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Net borrowings on line of credit | |||||||||||
| Borrowings on line of credit | |||||||||||
| Repayments on line of credit | ( | ||||||||||
| Repayments of notes payable to related parties | ( | ||||||||||
| Borrowings of notes payable | |||||||||||
| Repayments of notes payable | ( | ( | |||||||||
| Proceeds from the exercise of warrants | |||||||||||
| Payment of distributions | ( | ||||||||||
| Net cash provided by financing activities | |||||||||||
| NET DECREASE IN CASH | ( | ( | |||||||||
| EFFECT OF EXCHANGE RATE ON CASH | ( | ( | |||||||||
| CASH AT BEGINNING OF PERIOD | |||||||||||
| CASH AT END OF PERIOD | $ | $ | |||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||||||
| Cash paid for: | |||||||||||
| Interest | $ | $ | |||||||||
| Income taxes | $ | $ | |||||||||
| Noncash investing and financing activities: | |||||||||||
| Capital expenditures included in accounts payable | $ | $ | |||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5
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, LLC (“Ittella International”), a wholly owned subsidiary of Tattooed Chef, 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 and Asset Acquisitions.
On September 28, 2021, Tattooed Chef formed BCI Acquisition, Inc. (“BCI”). On December 31, 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 and Asset Acquisitions.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
6
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/A for the year ended December 31, 2021 as filed with the SEC on November 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/A for the year ended December 31, 2021. The interim results for the three and nine months ended September 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.
Restatement of Previously Issued Financial Statements
Subsequent to the issuance of the condensed consolidated financial statements as of and for the quarter ended September 30, 2021, included in the Form 10-Q/A filed with the Securities and Exchange Commission (the “SEC”) on May 2, 2022, the following errors were identified:
–The Company incorrectly recorded expenses for advertising placement by a marketing services firm on a straight-line basis over the life of the contract rather than when the services were actually rendered. As a result, marketing expenses were overstated by $0.5 million for the three months ended September 30, 2021 and understated by $2.0 million for the nine months ended September 30, 2021.
–The Company incorrectly recorded expenses related to a multi-vendor mailer program with a customer as operating expenses rather than as a reduction of revenue. As a result, revenue was overstated by $0.04 million and $4.8 million for the three and nine months ended September 30, 2021, respectively. Operating expenses were overstated by $0.04 million and $4.8 million for the three and nine months ended September 30, 2021, respectively.
–The Company incorrectly recorded certain payments to customers as promotional and bad debt expenses within operating expenses rather than a reduction of revenue. As a result, both revenue and operating expenses were overstated by $0.3 0.6
–The Company identified errors related to the underlying data used in the inventory capitalization and inventory net realizable value assessment. As a result, cost of goods sold was understated by $0.2 million from inventory capitalization calculation net of $0.1 million from net realizable value write-downs for the three months ended September 30, 2021. Cost of goods sold was overstated by $0.5 million for the nine months ended September 30, 2021.
–The income tax impact of the errors identified above resulted in a decrease of deferred tax assets by $0.7 million as of June 30, 2021 and the $0.7 million was fully reserved during the three months ended June 30, 2021 due to the Company established a full valuation allowance starting the second quarter of 2021. As a result, the income tax expense was decreased by $0 million and $0.5 million for the three months and nine months ended September 30, 2021, respectively.
7
| ($ in thousands) | Condensed Consolidated Statements of Operations and Comprehensive Income | |||||||||||||||||||
| For the three months ended September 30, 2021 | As Reported | Adjustments | As Restated | |||||||||||||||||
| NET REVENUE | ( | |||||||||||||||||||
| COST OF GOODS SOLD | ||||||||||||||||||||
| GROSS (LOSS) PROFIT | ( | |||||||||||||||||||
| OPERATING EXPENSES | ( | |||||||||||||||||||
| LOSS FROM OPERATIONS | ( | ( | ||||||||||||||||||
| LOSS BEFORE INCOME TAX BENEFIT (EXPENSE) | ( | ( | ||||||||||||||||||
| NET LOSS | ( | ( | ||||||||||||||||||
| COMPREHENSIVE LOSS | ( | ( | ||||||||||||||||||
| ($ in thousands except per share amounts) | Condensed Consolidated Statements of Operations and Comprehensive Income | |||||||||||||||||||
| For the nine months ended September 30, 2021 | As Reported | Adjustments | As Restated | |||||||||||||||||
| NET REVENUE | ( | |||||||||||||||||||
| COST OF GOODS SOLD | ( | |||||||||||||||||||
| GROSS (LOSS) PROFIT | ( | |||||||||||||||||||
| OPERATING EXPENSES | ( | |||||||||||||||||||
| LOSS FROM OPERATIONS | ( | ( | ( | |||||||||||||||||
| LOSS BEFORE INCOME TAX BENEFIT (EXPENSE) | ( | ( | ( | |||||||||||||||||
| INCOME TAX BENEFIT (EXPENSE) | ( | ( | ||||||||||||||||||
| NET LOSS | ( | ( | ( | |||||||||||||||||
| NET LOSS PER SHARE | ||||||||||||||||||||
| Basic | ( | ( | ( | |||||||||||||||||
| Diluted | ( | ( | ( | |||||||||||||||||
| COMPREHENSIVE LOSS | ( | ( | ( | |||||||||||||||||
| ($ in thousands) | Condensed Consolidated Statements of Stockholders’ Equity | |||||||||||||||||||
| For the three months ended September 30, 2021 | As Reported | Adjustments | As Restated | |||||||||||||||||
| Net loss in retained earnings (deficit) | ( | ( | ||||||||||||||||||
| Retained earnings (deficit) ending balance | ( | ( | ||||||||||||||||||
| Total stockholders’ equity ending balance | ||||||||||||||||||||
8
| ($ in thousands) | Condensed Consolidated Statements of Cash Flows | |||||||||||||||||||
| For the nine months ended September 30, 2021 | As Reported | Adjustments | As Restated | |||||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||||||
| Net loss | ( | ( | ( | |||||||||||||||||
| Adjustments to reconcile net loss to net cash from operating activities: | ||||||||||||||||||||
| Bad debt expense | ( | |||||||||||||||||||
| Deferred taxes, net | ( | |||||||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||||||
| Accounts receivable, net | ( | ( | ||||||||||||||||||
| Inventory | ( | ( | ||||||||||||||||||
| Prepaid expenses and other current assets | ( | ( | ||||||||||||||||||
Significant Accounting Policies. There have been no material changes to the Company’s significant accounting policies from its Annual Report on Form 10-K/A for the fiscal year ended December 31, 2021.
Leases. In April 2022, the Company commenced one operating lease for a facility in Vernon, California, with 10 years initial term with option to extend two additional five-year terms. The Company determined the reasonably certain lease term was 10 years. Approximately $9.5 million of operating lease right of use ("ROU") asset and $9.4 million of operating lease liabilities were recognized on the Company’s consolidated balance sheet upon the commencement date.
In connection with the asset acquisition from Desert Premium Group, LLC (“DPG”) in August 2022, see Note 8 Business Combinations and Asset Acquisitions, the Company assumed one operating lease for a facility in Albuquerque, New Mexico, for 2 years remaining lease term with option to extend two additional five-year terms. The Company determined the reasonably certain lease term was 7 years. Approximately $3.5 million of operating lease ROU asset ($1.7 million of the $3.5 million recognized value from below-market lease) and $1.8 million of operating lease liabilities were recognized on the Company's consolidated balance sheet upon the lease assumption date.
Going Concern. As of September 30, 2022, the Company had total cash of $14.2 million and an accumulated deficit of $109.2 million. For the nine months ended September 30, 2022, the Company had a net loss of $86.8 million and net cash used in operating activities of $67.3 million.
The Company has historically financed operations and capital expenditures through a combination of internally generated cash from operations, available cash on hand, the ability to draw on the line of credit, as well as the proceeds from the Reverse Recapitalization with Forum on October 15, 2020. The Company’s recent financial performance has been adversely impacted by the inflationary pressures on labor, freight and material costs, and its marketing expenditures on the Tattooed Chef brand investment to raise brand awareness, as well as a moderate impact from the conflict between Russia/Ukraine war. In addition, as disclosed in Note 14 Indebtedness, the Company expanded its primary line of credit (the “Credit Facility”) from $25.0 million to $40.0 million in August 2022. The Credit Facility contains a financial covenant that requires the Company to maintain a minimum negative $20.0 million of consolidated adjusted EBITDA for the trailing 1-quarter period ended September 30, 2022. The Company was not in compliance with the adjusted EBITDA minimum requirement as of the date these condensed consolidated financial statements were issued. Further, as disclosed in Note 14 Indebtedness, $2.7 million note payable under NMFD and $1.8 million note payable under Ittella Properties, were not in compliance with the financial covenant as of September 30, 2022.
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In order to alleviate these conditions and or events that may raise substantial doubt about the entities ability to continue as a going concern, management plans to continue to closely monitor its operating forecast and pursue additional sources of outside capital. If the Company is unable to (a) improve its operating results, (b) obtain additional outside capital on terms that are acceptable to the Company to fund the Company’s operations, and/or (c) secure a waiver or avoid forbearance from the lender if the Company is continually unable to remain in compliance with the financial covenants required by the Credit Facility, the Company will have to make significant changes to its operating plan, such as delay and reduce marketing expenditures, reduce investments in new products, reduce its capital expenditures, reduce its sale and distribution infrastructure, or otherwise significantly reduce the scope of its business. Moreover, if the Company fails to secure a waiver or avoid forbearance from the lender, the failure could accelerate the repayment of the outstanding borrowings under the Credit Facility or the exercise of other rights or remedies the lender may have under the loan documents and applicable law. While management believes the Company will be able to secure additional outside capital, no assurances can be provided that such capital will be obtained or on terms that are acceptable to the Company. Furthermore, given the inherent uncertainties associated with the Company’s growth strategy and as the Company is currently not in compliance with the financial covenants required by the Credit Facility, these uncertainties raise substantial doubt about the Company’s ability to continue as a going concern.
The accompanying interim condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and payments of liabilities in the ordinary course of business. Accordingly, the condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the classification of liabilities that may result should the Company be unable to continue as a going concern.
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 September 30, 2022 and 2021. As such, the Company is not subject to significant concentration risk on suppliers.
Three customers accounted for 52 % of the Company’s revenue during the three months ended September 30, 2022. Three customers accounted for more than 63 % of the Company’s revenue during the three months ended September 30, 2021.
| Customer | 2022 | 2021 | ||||||||||||
| Customer A | % | % | ||||||||||||
| Customer B | % | % | ||||||||||||
| Customer C | * | % | ||||||||||||
| Customer D | % | * | ||||||||||||
________________________________
*Customer accounted for less than 10% of revenue in the period. | ||
Four customers accounted for 64 % of the Company’s revenue during the nine months ended September 30, 2022. Three customers accounted for more than 76 % of the Company’s revenue during the nine months ended September 30, 2021.
| Customer | 2022 | 2021 | ||||||||||||
| Customer A | % | % | ||||||||||||
| Customer B | % | % | ||||||||||||
| Customer C | % | % | ||||||||||||
| Customer D | % | * | ||||||||||||
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Three customers accounting for more than 10
| Customer | September 30, 2022 | December 31, 2021 | ||||||||||||
| Customer A | % | % | ||||||||||||
| Customer C | * | % | ||||||||||||
| Customer D | * | % | ||||||||||||
*Customer accounted for less than 10% of accounts receivable as of the date indicated.
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, in addition to 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. Recently, the surging of energy cost in Europe moderately adversely impacted on our growers and our manufacturing subsidiary in Italy. Therefore, the conflict between Russia and Ukraine has had a moderate adverse impact on the Company’s business, financial condition, and 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.
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 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
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on January 1, 2022. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.
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.
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 sold by NMFD, acquired by the Company on May 2021 (see Note 8 Business Combinations and Asset Acquisitions), 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 September 30, 2022 and December 31, 2021.
Revenue streams for the three months and nine months ended September 30, 2022 and 2021 were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Revenue Streams | Revenue | % Total | Revenue | % Total | Revenue | % Total | Revenue | % Total | ||||||||||||||||||||||||||||||||||||||||||
| Tattooed Chef | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| Private Label | % | % | % | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Other revenues | % | % | % | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
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 days 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.
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5. ACCOUNTS RECEIVABLE, NET
The Company evaluates the creditworthiness of its customers regularly and, based on its analysis, the Company has recognized allowance for credit losses of $0.6 million as of September 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 consideration and will reduce the transaction price on sales. In addition, the Company estimates variable consideration expected to reduce the related accounts receivables or record related accruals. 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 $0.8 million and $4.1 million is recorded and presented as a reduction of accounts receivable as of September 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 accrued product demonstration were $1.0 million and $1.5 million as of September 30, 2022 and December 31, 2021, respectively (see Note 12 Accrued Expenses).
6. INVENTORY
Inventory consists of the following as of (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||||||||
| Raw materials | $ | $ | |||||||||||||||
| Work-in-process | |||||||||||||||||
| Finished goods | |||||||||||||||||
| Packaging | |||||||||||||||||
| Total inventory | $ | $ | |||||||||||||||
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following as of (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Land | $ | $ | |||||||||
| Buildings | |||||||||||
| Leasehold improvements | |||||||||||
| Machinery and equipment | |||||||||||
| Computer equipment | |||||||||||
| Furniture and fixtures | |||||||||||
| Construction in progress | |||||||||||
| Property, plant and equipment at cost | |||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| Property, plant and equipment, net | $ | $ | |||||||||
The Company recorded depreciation expense for the three months ended September 30, 2022 and 2021 of $1.7 million and $1.1 million, respectively. The Company recorded depreciation expense for the nine months ended September 30, 2022 and 2021 of $4.7 million and $2.5 million, respectively.
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8. BUSINESS COMBINATIONS AND ASSET ACQUISITIONS
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. 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 $8.4 million and $12.7 million for the three and nine months ended September 30, 2021, respectively. During the three and nine months ended September 30, 2021, the contribution of net operating loss from NMFD and Karsten were $1.1 million and $1.1 million, respectively.
Though the purchase agreements for each of NMFD and Karsten were executed as legally separate transacti