UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
For the fiscal year ended December 31 , 2022
OR
For the transition period from ______________ to
Commission File Number: 001-38615
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Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 4l5 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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
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Indicate by check mark whether the registrant is a large, accelerated filer, an accelerated filer, a non-accelerated filer, 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.
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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
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As of June 30, 2022, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the common stock held by non-affiliates, computed by reference to the closing sales price of $6.30 reported on The Nasdaq Capital Market, was approximately $307.0 million.
As of May 9, 2023, there were 83,658,357 shares of the registrant’s common stock, $0.0001 par value per share, issued and outstanding.
TATTOOED CHEF, INC.
FORM 10-K
TABLE OF CONTENTS
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PART I
Each of the terms the “Company,” “Tattooed Chef,” “we,” “our,” “us” and similar terms used herein refer collectively to Tattooed Chef, Inc., a Delaware corporation, and its consolidated subsidiaries, unless otherwise stated.
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements (including within the meaning of the Private Securities Litigation Reform Act of 1995) concerning us and other matters. These statements may discuss goals, intentions and expectations as to future plans, trends, events, results of operations or financial condition, or otherwise, based on current beliefs of management, as well as assumptions made by, and information currently available to, management. Forward-looking statements may be accompanied by words such as “achieve,” “aim,” “anticipate,” “believe,” “can,” “continue,” “could,” “drive,” “estimate,” “expect,” “forecast,” “future,” “grow,” “improve,” “increase,” “intend,” “may,” “outlook,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” or similar words, phrases or expressions. These forward-looking statements are subject to various risks and uncertainties, many of which are outside our control. Therefore, you should not place undue reliance on such statements.
Additional factors that may cause actual results to differ materially from current expectations include, among other things, those set forth in Part I, Item 1A. “Risk Factors”, Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and under “Summary of Risk Factors” below and for the reasons described elsewhere in this Annual Report on Form 10-K. Although we believe that the expectations reflected in the forward-looking statements are reasonable, our information may be incomplete or limited, and we cannot guarantee future results. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
Summary of Risk Factors
In addition to the other information in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating the Company and our business. A summary of the principal factors that create risk in investing in our securities and might cause actual results to differ from expectations is set forth below:
•Our recurring losses and significant accumulated deficit have raised substantial doubt regarding our ability to continue as a going concern.
•We may be unable to sustain our revenue growth rate and, as our costs increase, generate sufficient revenue to return to profitability over the long term.
•We may require additional financing to achieve our goals and a failure to obtain this necessary capital when needed on acceptable terms, or at all, may negatively impact our product manufacturing and development, and other operations.
•Our operations in United States may be exposed to inflation risk, which could adversely affect our results of operations.
•Food safety and food-borne illness incidents or advertising or product mislabeling may adversely affect our business by exposing us to lawsuits, product recalls or regulatory enforcement actions, increasing operating costs and reducing demand for product offerings.
•We are subject to substantial customer concentration. If we fail to retain existing customers, derive revenue from existing customers consistent with historical performance or acquire new customers cost-effectively, our business could be adversely affected.
•We may not be able to obtain raw materials on a timely basis or in quantities sufficient to meet the demand for our products.
•Failure to introduce new products or successfully improve existing products may adversely affect our ability to continue to grow.
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•Consumer preferences for our products are difficult to predict and may change, and, if we are unable to respond quickly to new trends, our business may be adversely affected.
•We may not be able to implement our growth strategy successfully.
•Ingredient, packaging, freight and storage costs are volatile and may rise significantly, which may negatively impact the profitability of our business.
•Our disclosure controls and procedures were not effective as of December 31, 2022. Failure to achieve and maintain effective internal controls over financial reporting could lead to misstatements in our financial reporting and adversely affect our business.
•Our failure to prepare and timely file our periodic reports with the Securities and Exchange Commission (“SEC”) limits our access to the public markets to raise debt or equity capital and restricts our ability to issue equity securities.
•Our failure to meet the continued listing requirements of the Nasdaq Capital Market could result in a delisting of our common stock.
•We may not be able to compete successfully in our highly competitive market.
`Item 1. Business.
We were initially formed on May 4, 2018 for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses. On August 7, 2018, we consummated our initial public offering. From the time of our formation to the time of the consummation of the Business Combination (defined below), our name was “Forum Merger II Corporation” (also referred to as “Forum”). On October 15, 2020, we acquired all the equity of Myjojo, Inc., a Delaware corporation (“Ittella Parent”) pursuant to an Agreement and Plan of Merger, dated June 11, 2020, as amended on August 10, 2020 with Sprout Merger Sub, Inc., a Delaware corporation and our wholly owned subsidiary, Ittella Parent, and Salvatore Galletti, in his capacity as the holder representative. The business combination between Ittella Parent and Forum is referred to as the “Business Combination”. Effective upon the closing of the Business Combination, we changed our name to Tattooed Chef, Inc. In May 2021, we acquired New Mexico Food Distributors, Inc. (“NMFD”) and Karsten Tortilla Factory LLC (“Karsten”) and on December 21, 2021, we acquired substantially all of the assets and assumed certain liabilities from Belmont Confections, Inc. (“Belmont”). In August 2022, we, through our subsidiary, TTCF-NM Holdings Inc., (“NM Holdings”) entered into an equipment purchase agreement with Desert Premium Group, LLC (“DPG”) pursuant to which we acquired certain manufacturing, production, and storage assets, organized workforce, as well as assumed a lease for a manufacturing facility located in Albuquerque.
Overview
We are a 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, bars and quesadillas. Our products are available both in private label and through our “Tattooed Chef™” brand mainly in the frozen food section of retail food stores.
We believe our innovative food offerings converge with consumer trends and demands for great-tasting, wholesome, plant-based foods made from sustainably sourced ingredients, including preferences for flexitarian, vegetarian, vegan, organic, and gluten-free lifestyles. Various industry studies indicate that consumers want healthier and more convenient food options. As of December 31, 2022, our products were sold in approximately 21,000 retail outlets in the United States. Our brand strategy is to introduce the attributes of a plant-based lifestyle to build a connection with a broad array of consumers that are seeking delicious, sustainably sourced, plant-based foods. Our diverse offering of plant-based meals includes certified organic, non-GMO, certified Kosher, gluten-free, as well as plant protein elements that we believe provide health-conscious consumers an affordable, great tasting, clean label food option.
To capture this significant market opportunity, we focus on manufacturing, product innovation and distinctive flavor profiles that appeal to a broad range of consumers. We create and develop new products to address emerging market
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demands and food trends for healthy, plant-based foods. We also seek to create what we believe are unique meals and snacks by taking regular or “plain” versions of our products and integrating spices and flavors. We believe that our track record of delivering innovative food concepts in both branded and private label has strengthened and expanded relationships with our existing customers and as well as attracting new customers. As of December 31, 2022, we had 132 SKUs and over 175 plant-based food concepts and recipes under development and testing.
We are led by our President and CEO, Salvatore “Sam” Galletti, who has over 35 years of experience in the food industry as both a manager and an investor, and Sarah Galletti, our Chief Creative Officer and the creator of the Tattooed Chef brand, who was instrumental in changing our focus to plant-based food products in 2017.
We experienced strong revenue growth since our inception. Revenue increased to $230.9 million for the year ended December 31, 2022 (“Fiscal 2022”) as compared to $208.0 million for the year ended December 31, 2021 (“Fiscal 2021”) and $148.5 million for the year ended December 31, 2020 (“Fiscal 2020”), representing a year over year growth rate of 11.0% and 40.1%, respectively. Revenue growth has been primarily driven by strong branded sales growth into retail channels as well as year over year contribution from BCI Acquisition, Inc. (“BCI”), NMFD, and NM Holdings. See Note 9 Business Combinations and Asset Acquisitions to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K. We generated a net loss before noncontrolling interest of $141.5 million in Fiscal 2022, as compared to a net loss of $87.0 million in Fiscal 2021 and net income before noncontrolling interest of $69.7 million in Fiscal 2020. Net loss before noncontrolling interest increases were primarily driven by (i) aggressive investments made toward scaling manufacturing capabilities to meet growing demand for Tattooed Chef branded sales, (ii) investments targeted at growing brand awareness and acquiring key tier-1 United State club and retail partners and (iii) inflationary pressures on the operating costs of our business. Adjusted EBITDA was negative $91.7 million in Fiscal 2022 as compared to negative $26.1 million in Fiscal 2021 and positive $9.7 million in Fiscal 2020. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion on this non-GAAP measure and a reconciliation to net income, the most closely comparable generally accepted accounting principles in the United States of America (“GAAP”) measure.
Our Market Opportunity
We operate in the large global food industry. According to IRI/Spins, in the 52 weeks ended January 1, 2023, sales of frozen food products in the categories in which we compete totaled approximately $47.6 billion (excluding frozen meat and poultry). Frozen entrees, which include prepared meals, pizza and pasta, accounted for over 23% of total frozen food sales in the 52 weeks ended January 1, 2023, comprising one of the largest food categories within frozen foods, behind frozen meat and poultry. Additionally, according to the Plant Based Foods Association one-third of Americans are actively reducing their meat and dairy consumption. While a small number of Americans identify as vegetarian or vegan, flexitarians represent the largest growth opportunity for plant-based foods.
Further, we believe that our products are well-positioned to benefit from the growth in frozen food sales and in particular, plant-based food sales. As a group, the categories in which we compete such as entrees, snacks & appetizers, breakfast and vegetables, comprise approximately 40% of all frozen food categories. Excluding frozen meat and poultry, we offer products in 73% of the frozen food categories. Other frozen food sectors where we do not currently compete, such as desserts (which represents approximately 15% of all frozen food categories), present additional growth opportunities for us.
Our Competitive Strengths
Brand Mission Aligned with Consumer Trends
We believe that our products align with current major food trends, with our broad portfolio of plant-based food products meeting the demands of consumers who seek to follow a natural and “cleaner-label” diet. Moreover, most of our products are certified organic, non-GMO, and gluten-free, which we believe will broaden our appeal to those consumers and to those who wish to follow a vegetarian or vegan diet.
We believe that our “Tattooed Chef” brand, which we launched in 2017, will continue to grow by appealing to younger consumers seeking food products that are sustainable and ethically sourced, wholesome, and delicious. Revenue attributed to the Tattooed Chef brand was $117.9 million in Fiscal 2022, $127.1 million in Fiscal 2021, and $84.6 million in Fiscal 2020. We currently sell ready-to-cook bowls, zucchini spirals, riced cauliflower, acai and smoothie bowls, cauliflower crust pizza, plant-based burgers, wood fire crusted pizza, handheld burritos, tortillas, chips, bars and quesadillas under Tattooed
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Chef. The brand’s tagline, “Serving Plant-Based Foods to People Who Give a Crop”, aims to convey the brand’s mission to deliver plant-based foods to consumers who care about sustainable and ethically sourced foods.
Track Record of Innovation
We have invested resources in the development of our innovative plant-based food products, which is demonstrated by products such as the buddha bowl, acai bowl, cauliflower mac n’ cheese bowl, organic zucchini spirals, cauliflower crusted pizza, Mexican style street corn, handheld burritos, quesadillas and bars. Our innovation efforts are led by Sarah Galletti and focus on identifying popular food trends that we believe we can successfully bring to market. We can quickly develop prototype versions of a product to present internally and ultimately to various retail customers for feedback. We released 54 new SKUs during 2022 bringing our total as of December 31, 2022 to 132 SKUs. In addition, we have built a library of over 175 new product concepts and recipes, ready for further development and testing. In particular, we believe that we excel at taking regular or “plain” versions of our products and integrating new and appealing spices and flavors to create unique meals and snacks. For example, we currently offer plain riced cauliflower and value-added riced cauliflower options such as organic riced cauliflower stir fry and riced cauliflower buddha bowl.
Our processing facility in Paramount, California manufactures an array of plant-based products including pizzas, acai and smoothie bowls and other value-add riced cauliflower bowls. In addition, our innovation and product development personnel reside in this facility. By housing our product innovation capabilities in the same location as our primary manufacturing operation, we believe we are able to transition from product concept to prototype (including real-time feedback from retail customers), to commercial manufacturing faster and more efficiently.
Established Branded and Private Label Presence at Leading Retailers
The Tattooed Chef brand was created in 2017 and was initially introduced into the club store channel. We believe that our high-quality, clean-label, ready-to-cook, plant-based products fill a void in the marketplace and are well received by our target customers. Our retail partners are attracted to the breadth of our product portfolio and view us as an innovation partner that delivers great tasting products with distinctive flavor profiles at a competitive price. The Tattooed Chef brand seeks to be young, edgy, yet friendly, and appeal to consumers who prefer a plant-based lifestyle. As noted above, revenue from Tattooed Chef branded products was approximately 51% of our total revenue in Fiscal 2022 ($117.9 million), approximately 61% of our total revenue in Fiscal 2021 ($127.1 million), and approximately 57% of our total revenue in Fiscal 2020 ($84.6 million).
In addition, we have a strong base of private label customers, with private label revenue of $100.0 million in Fiscal 2022, $75.6 million in Fiscal 2021 and $62.9 million in Fiscal 2020. Our initial focus beginning in 2009 was to establish a strong private label customer base due to lower sales and marketing costs. We believe that our private label customers are some of the best run retailers in North America and we provide these customers high quality product, support and high service levels.
See “— Customer Overview” and “— Innovation and Product Development” below for more information.
Integrated Sourcing, Manufacturing and Product Development
Our processing facility in Prossedi, Italy is located in close proximity to many of the growers that supply us product. This facility opened in 2017 and manufactures various products, including riced cauliflower (plain and value-added), diced squash/zucchini, and vegetable spirals. Italy’s climate and fertile growing regions of organic and non-GMO produce provide us with high-quality raw materials. Due to the location of the facility, we are able to transport raw materials to the facility, process them, and manufacture products within a relatively short time. Prior to each growing season, we obtain written commitments as to quantity and price from various growers, who commit to supply our projected needs, which commitments are then followed by written purchase orders closer to the start of the harvest season. When necessary (whether as a result of greater than anticipated demand from our customers, or poor crop yields due to inclement weather, infestation and the like), we have been able to obtain alternative raw material supply from other sources or on the spot market on satisfactory terms. The Prossedi plant was originally leased from a third party. In April 2021, we spent approximately $4.9 million to acquire this facility to secure and upgrade our frozen food manufacture capabilities. During the past two years, we improved our internal cold storage capabilities to better manage inventory and to capitalize on seasonal purchases of raw materials during peak harvest season.
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We have a processing facility in Paramount, California that also serves as our headquarters. This facility manufactures an array of products including pizzas, acai and smoothie bowls and value-add riced cauliflower bowls. Our innovation and product development personnel also reside in this facility. By housing our product innovation capabilities in the same location as our primary manufacturing operation, we are able to transition quickly from product concept to prototype (which can in turn be shared with retail customers for feedback), to commercial manufacturing.
In 2021, we completed two business acquisitions, the NMFD and Karsten transaction and the Belmont transaction. In 2022, we competed the DPG transaction. See “ – Expand through Investments and Acquisitions” below for more information.
Proven and Experienced Management Team
Our executive management team, led by Salvatore “Sam” Galletti, includes individuals who possess substantial industry experience. Cumulatively, our management team has over 160 years of industry experience, with an average of 25 years’ experience in the food industry, and an average tenure with us of seven years. We believe that the depth of experience of our management team demonstrates our capability to continue growing our business.
Our Growth Strategy
Continue to Grow the Tattooed Chef Brand
The Tattooed Chef brand was created in 2017 and is the brainchild of Sarah Galletti, our Chief Creative Officer, based on her experiences with various food cultures while travelling internationally. She recognized a lack of readily available, high-quality, clean-label, ready-to-cook, plant-based products, which formed the foundation of Tattooed Chef.
Tattooed Chef products are mainly sold in the frozen food section of retail stores and club stores. We initially approached club stores to carry Tattooed Chef products, recognizing the demanding volume requirements associated with these customers. We believe our success with club stores across an array of Tattooed Chef branded products indicates that the Tattooed Chef brand resonates with our target consumer and is also attractive to conventional retail grocery customers.
In addition, while Tattooed Chef products are available in all 50 states through club stores and certain other retail outlets, we have primarily used social media and product demonstrations to introduce Tattooed Chef to consumers. We believe there is continued opportunity to increase brand awareness, trial rate, and ultimately revenue attributed to Tattooed Chef products. In 2021, we engaged a national marketing firm to develop and implement a comprehensive marketing campaign. In 2022, we spent money on slotting and in store promotion and Tattooed Chef product became available in over 23,000 stores. The goal in 2023 is to continue to provide innovative products to the consumer and focus on new product categories such as ambient and refrigerated sections of the store.
Continue to Expand Demand from Existing Customers
We remain focused on addressing existing demand from current customers and expanding our business with these customers. In addition, with certain customers we have the opportunity to convert select existing products that are seasonal or promotional into “everyday” items that will be stocked on shelves on a continual basis, which we expect will increase our overall revenue.
Attract New Customers
We believe that the reputation and popularity of our products has attracted interest from new customers for Tattooed Chef products as well as our private label products. We believe there is a significant opportunity to continue to expand our business with new customers. We intend to invest in the development of our sales and marketing capabilities to support new customer additions. See “Sales and Marketing” below for additional details on our expansion plans.
Expand Product Offerings
We believe that there is significant consumer demand for plant-based products as evidenced by the successful launch of a variety of our products. In addition, we believe that we have been successful in identifying meaningful consumer trends and translating these preferences into products that meet our customers’ requirements. We intend to leverage this knowledge and experience to continue to build our new concept library and expand our existing portfolio of products by creating new products and line extensions. For example, new product launches in Fiscal 2022 included the refrigerated oat
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butter bars, wood fired pizzas, Mexican style entrées and items including Mexican style burritos, quesadillas and enchiladas as well as various new value added entrée bowls to name a few.
Furthermore, we have been increasing our investment in product development and production capabilities to continue to innovate within our core product categories.
Expand to New Geographic Markets
We intend to explore opportunities to expand Tattooed Chef internationally. In 2022, approximately 2% of our total sales were sold to international customers. In the long term, we believe our current product offerings and existing production resources in Italy will enable us to expand in the global frozen food market.
Expand through Investments and Acquisitions
We had approximately $5.8 million in cash as of December 31, 2022. In addition to investing in operating activities to expand recognition of Tattooed Chef branded products, we are selectively considering investments in fixed assets, and other investments to enhance our growth and profitability. In 2021, we completed three acquisitions including one asset acquisition of our processing facility located in Italy and two business acquisitions in the United States. In April 2021, we spent approximately $4.9 million on our Italy facility to acquire the building, land and machinery to secure and upgrade our frozen food processing capabilities. In May 2021, we acquired NMFD and Karsten for a total purchase price of approximately $34.1 million. In December 2021, we acquired substantially all of the assets and assumed certain liabilities from Belmont for a total purchase price of $16.7 million. In August 2022, we entered into an equipment purchase agreement with DPG for a purchase price of approximately $10.4 million in cash, whereby we acquired certain manufacturing, production, and storage assets and assumed an 80,000 square foot manufacturing facility lease in Albuquerque, New Mexico. These acquisitions will support the production of ambient and refrigerated Tattooed Chef branded products, enable Tattooed Chef to unlock more shelf space and expand its market channels. The Belmont facility started manufacturing Tattooed Chef branded products during 2022 and also continues to service its legacy private label customers.
Product Offerings Overview
We sell a range of branded and private label plant-based products across our core platforms of ready-to-cook bowls, cauliflower crust pizza, vegetable spirals and ready-to-eat acai, smoothie bowls, wood fire crusted pizza, handheld burritos, bars and quesadillas. Our products are found primarily in the frozen food section of retail customers.
Branded Products
Revenue of Tattooed Chef branded products in Fiscal 2022 was approximately $117.9 million (approximately 51% of total revenue), a decrease of 7.2% from approximately $127.1 million (approximately 61% of total revenue) in Fiscal 2021. Tattooed Chef branded products include ready to cook meals and snacks such as value-added entrees, breakfast items, smoothie bowls, gluten and vegan free pizzas, vegan wood fired crust pizzas, meat alternatives, refrigerated bars, Mexican inspired burritos, quesadillas and enchiladas and other value-added vegetable meals.
Private Label Products
Revenue from private label products in Fiscal 2022 was approximately $100.0 million (approximately 43% of total revenue), and approximately $75.6 million (approximately 36% of total revenue) in Fiscal 2021. Private label products include cauliflower pizza crusts and pizzas, riced cauliflower, acai and smoothie bowls, bulk vegetables (plain and value-added), and riced cauliflower stuffing. Depending on the customer, we may make exclusive products for that customer. The difference between an exclusive product for a particular customer compared to another primarily relates to product sizing or a specific set of ingredients.
Customer Overview
Our products (both branded and private label) are available at leading club stores and other major retailers. As of December 31, 2022, our products were available in approximately 21,000 retail stores in the United States, compared to 14,000 retail stores as of December 31, 2021.
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Club store customers often require different sizes or value packs while other retailers may have different requirements in terms of desired margins, allowance of promotional spend, and early payment discounts. These customer-specific parameters (which includes customers who purchase branded and private label products) are typical in the industry and we believe we will be able to price products appropriately for new retail customers. The process of placing products on shelves for new grocery customers can take anywhere from nine months to one year, from obtaining initial approvals to stocking products on shelves.
For Fiscal 2022, our four largest customers accounted for approximately 62% of total revenue. In Fiscal 2022, revenue from these customers accounted for approximately 26%, 14%, 11%, and 11%, respectively, of total revenue. For Fiscal 2021, our three largest customers accounted for approximately 72% of total revenue. In Fiscal 2021, revenue from these customers accounted for approximately 35%, 26%, and 11%, respectively, of total revenue. For Fiscal 2020, our three largest customers accounted for approximately 88% of total revenue. In Fiscal 2020, revenue from these customers accounted for approximately 39%, 32% and 17%, respectively, of total revenue. We have increased the number of our sales team personnel to focus on conventional retail customers (i.e., retailers that are not club stores) to diversify our customer base and lower our customer concentration.
In addition, as of December 31, 2022, three customers accounted for approximately 41% of our accounts receivable. These three customers individually accounted for approximately 16%, 15% and 10%of our accounts receivable as of December 31, 2022. As of December 31, 2021, three customers accounted for approximately 63% of our accounts receivable. These three customers individually accounted for approximately 38%, 13%, and 12% of our accounts receivable at December 31, 2021.
While we believe our relationships with these customers are strong, and none have indicated any intent to cease or reduce the volume of business they do with us, loss or significant reduction in business from any of these customers could adversely affect our business. See “Risk Factors — We are subject to substantial customer concentration. If we fail to retain existing customers, derive revenue from existing customers consistent with historical performance or acquire new customers cost-effectively, our business could be adversely affected.” See “— Our Growth Strategy — Continue to Grow the Tattooed Chef Brand” for discussion regarding growing sales of branded products to new customers. As we grow sales of branded products to new customers, we believe our customer base will become more diversified and that our customer concentration will be reduced.
We utilize food brokers to assist in establishing and maintaining relationships with certain key customers and market channels. Pursuant to these agreements, each of our brokers is entitled to a commission based on the revenue it facilitates between us and the customer. See “Risk Factors — If we experience the loss of one or more of our food brokers that cannot be replaced in a timely manner, results of operations may be adversely affected.”
Supply Chain
Sourcing and Suppliers
We primarily source 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. Prior to 2021, our acai purée was primarily sourced from Brazil through an American supplier. 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 during 2022 we added two suppliers providing us with a variety of options for sourcing acai purée.
We continue to expand our supply chain to ensure the certainty of supply of the highest quality raw materials that meet our demanding requirements for quality.
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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 our sole supplier of liquid nitrogen to provide up to 120% of our monthly requirements of liquid nitrogen.
Social Responsibility
Our corporate social responsibility management system has several elements, including environmental, health and safety compliance, ethics, and governance.
The safety and well-being of our employees is paramount. In response to the COVID-19 pandemic, we quickly and continuously adopted and implemented safety measures to protect our employees. We are focused on fostering a culture of caring and safety; we are continuously striving toward zero injuries and accidents.
Social responsibility is also an area of increasing regulation, such as the California Transparency in Supply Chains Act (the “Supply Chain Act”), which requires every retail seller and manufacturer doing business in California having annual worldwide gross receipts that exceed $100 million to disclose its efforts to eradicate slavery and human trafficking from its direct supply chain for tangible goods offered for sale. We are currently subject to the Supply Chain Act and have a supply chain monitoring program.
In addition, California law requires that publicly held corporations whose principal executive offices are located in California must have, by December 31, 2021, a minimum of three female directors and one director from an “underrepresented community” if the corporation’s number of directors is six or more. As of December 31, 2022, women represented three of the nine members of our board of directors and one of our directors is from an underrepresented community. We value diversity at all levels and continue to focus on enhancing our diversity and inclusion initiatives across our entire workforce.
Manufacturing
We have a processing facility in Prossedi, Italy, comprising over 100,000 square feet. We leased the facility since October 2017 and purchased the facility and its machinery in April 2021 for a total purchase price approximately of $4.9 million. The main products processed at this facility are riced cauliflower (plain and value-added), diced squash/zucchini, and vegetable spirals. Over the past two years, we upgraded the internal cold storage capabilities at the Prossedi plant. In December 2021, we leased approximately 270,000 square feet of cold storage facility in Ceccano, Italy.
We lease multiple buildings in Paramount, California that serve as a processing facility and as our headquarters. This facility is over 50,000 square feet. The main products processed at this facility are cauliflower crust pizzas, acai bowls, smoothie bowls, Mexican style street corn, and other riced cauliflower bowls.
Upon the completion of our business acquisitions in New Mexico (NMFD and Karsten) and Ohio (Belmont), we took over or entered lease agreements to lease the manufacturing facilities in New Mexico and Ohio. In addition, upon completion of the DPG transaction we assumed a lease for an additional manufacturing facility located in New Mexico. We are integrating our manufacturing capabilities to develop and produce more ambient and frozen Tattooed Chef branded products. See “Expand through Investments and Acquisitions” above.
The manufacturing process is similar across all product lines and we have been able to be produce new products without significant re-tooling costs or material equipment upgrades. We regularly make capital investments in our facilities to meet increased volumes resulting from growing demand of our products. During Fiscal 2022, our aggregate capital expenditures for continuing operations were $29.7 million.
Our riced cauliflower and vegetable spirals are processed and packaged in our Prossedi, Italy facility. From this facility, the products are either held locally in cold storage or directly transported to United States for distribution.
Our bowls, smoothies, tray products (such as pizza crusts), and other products with more complex flavor profiles (such as Mexican Style Street Corn) are manufactured and processed in our Paramount, California facility.
The New Mexico manufacturing facilities are expected to manufacture Tattooed Chef branded salty snacks, Mexican entrees, traditional entree bowls and private label products. BCI began manufacturing Tattooed Chef branded products in addition to legacy private label products.
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We utilize outside suppliers on an as-needed basis for certain products or components of our products. One of our signature products, cauliflower pizza crust, is provided by outside suppliers. The termination of a supplier relationship may leave us with periods during which we have limited or no ability to manufacture these products or product components.
Facilities
In 2021, we purchased our processing facility in Prossedi, Italy. We currently lease processing facilities in Paramount, California, Albuquerque, New Mexico, and Youngstown, Ohio, a storage facility in Vernon, California, approximately 270,000 square feet of cold storage facility in Ceccano, Italy and have a small office suite lease in San Pedro, California. The Paramount facility also serves as our headquarters. Ittella Properties, LLC, a California limited liability company (“Ittella Properties”), a related entity controlled by Mr. Galletti, owns one of the buildings that comprise the Paramount facility and Deluna Investments, Inc., a California corporation (“Deluna”), a related entity controlled by Mr. Galletti, owns the building located in San Pedro. We believe that the lease terms with Ittella Properties and Deluna are on an arms-length basis.
We believe that our current facilities are adequate to meet ongoing needs and that, if we require additional space, we will be able to obtain additional facilities on commercially reasonable terms.
Competition
We operate in a highly competitive environment. We compete with companies that produce products in the plant-based, vegetarian, and frozen food categories, such as Sweet Earth (Nestle), Birds Eye (Conagra Brands), Amy’s, Green Giant (B&G Foods), Caulipower and Evol. Additionally, a number of United States and international companies are working on developing or promoting plant-based products.
We believe that consumers consider the following product qualities in their purchasing decisions:
•taste;
•nutritional profile;
•ingredients;
•lack of soy, gluten and GMOs;
•organic;
•convenience;
•cost;
•wide variety of products;
•brand awareness and loyalty among consumers; and
•access to major retailer shelf space and retail locations.
We believe we compete effectively with respect to each of these factors. However, many companies in our industry have substantially greater financial resources, more comprehensive product lines, broader market presence, longer-standing relationships with distributors, retailers, and suppliers, longer operating histories, greater production and distribution capabilities, stronger brand recognition and greater marketing resources than we do.
Seasonality and Working Capital
Prior to 2021, we experienced greater demand for certain products during the third and fourth quarters, primarily due to increased demand in the summer season and increased holiday orders from retailers and club stores. In 2022, we experienced first half seasonality driven by promotional programs that ran at our largest club retail partner. We do expect this to continue into the future or once our sales concentration to this club partner declines. We manage our inventory
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levels to meet the demand forecasts from select customers as well as our own internal forecasts. We believe our customers’ payment terms are customary for our industry.
Order Fulfillment
We receive orders either by purchase orders pursuant to a previously agreed upon customer commitment or by a stand-alone purchase order from the customer. In either situation, the product is manufactured, packaged, and shipped either to a third-party cold storage facility or directly to the customer utilizing a third-party freight company. We utilize multiple third-party common carriers for all of our shipping needs.
Sales and Marketing
General
Sam Galletti and Sarah Galletti have historically led our sales and marketing efforts. Each has extensive experience in food product sales to grocery retailers. Ms. Galletti, as the creator of the Tattooed Chef brand, is uniquely suited to work with retailers to educate them about the brand, respond quickly to their concerns, and consult on food trends.
As we grow our Tattooed Chef brand, we have added critical internal team members to our sales and marketing team and brought in house key roles and services to serve our expanding Tattooed Chef branded customer base. We continue to add outside sales representatives and/or brokers to extend our sales efforts.
Marketing expenditures are primarily on product demonstration allowances, slotting fees (as we expand to additional retail grocery stores) and other similar in-store marketing costs. Some of these expenses will be categorized as net deductions to revenue under GAAP as opposed to marketing expense. We have also hired a national marketing firm to implement campaigns for digital video and display, connected television, social media and search engine marketing.
Sarah Galletti continues to lead our marketing efforts with respect to the Tattooed Chef brand. As we expand and grow our business, we anticipate building out a broader brand management team with a focus on digital marketing and social media.
We utilize food brokers in conjunction with our internal sales team to establish and manage customer relationships.
Digital Marketing and Social Media
We drive consumer awareness and interest in our brand via (i) social and digital media, (ii) a public relations/marketing services firm that provides assistance in scheduling interviews and various news articles, (iii) ambassador and influencer activations, and (iv) customer media. Although we increased spending in the past two years on search engine marketing and campaign commercials, we anticipate decreasing our spending on these items in 2023. We maintain a registered domain website at www.tattooedchef.com. The website is used as a platform to promote our Tattooed Chef brand and products, provide information about the brand, as well as where to purchase products in stores. In addition, we launched our direct-to-consumer platform in the fourth quarter of Fiscal 2020 through our website. We use social media platforms to build customer engagement and to directly reach desirable target demographics such as millennials and “Generation Z.” Below is a summary of our various social media platforms.
•Facebook: We maintain a Facebook page, which is used to engage customers, distribute brand information and news, and publish videos and pictures promoting our brand.
•Instagram: We maintain an active Instagram account, @tattooedcheffoods, which is used to publish content related to our products, and to better connect with potential and existing consumers.
•Twitter: We maintain an active Twitter account, @tattooed_chef, which is used to disseminate trending news and information, as well as to publish short format product information and tips.
•Tiktok: We maintain an active Tiktok account, @tattooedcheffoods, which is used to publish content related to our products, and to better connect with potential and existing consumers.
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Human Capital Resources
As of December 31, 2022, we had approximately 800 full-time employees in the United States and 140 full-time employees in Italy. None of our employees are represented by a labor union. We believe our employee relations are good. Our employees are either employed directly through us or through a staffing agency.
Innovation and Product Development
We invest significant resources in innovating food concepts and creating new plant-based food products, based on market trends.
Our product development process begins with identifying popular food trends that we believe we can successfully bring to market. We then develop several prototype versions of each product and present these ideas internally and ultimately to various retail customers for feedback. We integrate this feedback into further product refinement, often in an iterative process, until we believe the product formulation is finalized. We do not utilize third-party product development firms to innovate products on our behalf.
Furthermore, we intend to increase our investment in product development and production capabilities to continue to innovate within our core product categories.
Trademarks and Other Intellectual Property
We own domestic copyrights and domestic and foreign trademarks, trademark applications, registrations, and other proprietary rights that are important to our business. Depending upon the jurisdiction, trademarks and their corresponding registrations are valid if they are used in the regular course of trade and/or their registrations are properly maintained. Our primary trademarks include the Tattooed Chef® and People Who Give a Crop™.
We aggressively protect our intellectual property rights by relying on trademark, copyright, trade dress and trade secret laws. We own the domain names: www.ittellafoods.com and www.tattooedchef.com.
We do not have any issued patents and we are not pursuing any patent applications.
We consider our marketing, promotions and products as a trade secret and thus, keep this information confidential. In addition, we consider as proprietary any information related to recipes, formulas, processes, know-how and methods used in production and manufacturing as trade secrets. We believe we have taken reasonable measures to keep the aforementioned items, as well as our business and marketing plans, customer lists and contracts, reasonably protected, and they are, accordingly, not readily ascertainable by the public.
Government Regulation
We are subject to extensive laws and regulations in the United States by federal, state and local government authorities and in Italy and the European Union.
Our activities in the United States are subject to regulation by various governmental agencies, including the Food and Drug Administration (“FDA”), the United States Department of Agriculture/national organic program (“USDA/NOP”), the Federal Trade Commission (“FTC”), the Environmental Protection Agency (“EPA”), the Occupational Safety and Health Administration (“OSHA”), and the Departments of Commerce and Labor, as well as voluntary regulation by other bodies. Various state and local agencies also regulate our activities.
In Italy, our food production activities are regulated by specific legislation and compliance is overseen and regulated by the Italian Ministry of Health (“MOH”), with administrative authority further delegated to local agencies, each referred to as an Azienda Sanitaria Locale (“ASL”). The MOH, among other legal and regulatory regimes, prescribe the requirements and establish the standards for quality and safety and regulate ingredients, manufacturing, labeling and other marketing and advertising to consumers.
The facilities in which our products and ingredients are manufactured must register with the FDA and MOH, comply with current good manufacturing practices, or cGMPs, and comply with a range of food safety requirements established by, and implemented under, the Food Safety and Modernization Act of 2011 (the “FSMA”) and applicable foreign food safety and
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manufacturing requirements. Federal, state, local and foreign regulators have the authority to inspect our facilities to evaluate compliance with applicable requirements. Regulatory authorities also require that certain nutrition and product information appear on product labels, that product labels and labeling be truthful and non-misleading, and that our marketing and advertising be truthful, non-misleading and not deceptive to consumers. We are also prohibited from making certain types of claims about our products (including for example, in the United States, nutrient content claims and health claims, whether express or implied), unless we satisfy certain regulatory requirements.
In addition to federal regulatory requirements in the United States, California imposes its own manufacturing and labeling requirements. California requires facility registration with the relevant state food safety agency, and those facilities are subject to state inspection as well as federal inspection. We believe that our products are manufactured and labeled in material compliance with all relevant state requirements. We monitor developments at the state and country (United States federal and European Union) level that could apply to our products.
In addition, we are subject to labor and employment laws, laws governing advertising, privacy laws, safety regulations and other laws, including consumer protection regulations that regulate retailers or govern the promotion and sale of merchandise. Our operations, and those of our distributors and suppliers, are also subject to various laws and regulations relating to environmental protection and worker health and safety matters. We monitor changes in these laws and believes that we are in material compliance with applicable laws.
We are also subject to disclosure requirements regarding abusive labor practices in portions of our supply chain under the California Supply Chain Act and have implemented a supply chain monitoring program.
Quality Control/Food Safety
We utilize a comprehensive food safety and quality management program, which employs strict manufacturing procedures, expert technical knowledge on food safety science, employee training, ongoing process innovation, use of quality ingredients and both internal and independent auditing.
Our Paramount, California, Albuquerque, New Mexico, Youngstown, Ohio and Prossedi, Italy facilities each has a Food Safety Plan (“FSP”) that focuses on preventing food safety risks and is compliant with the requirements set forth under the FSMA. In addition, each facility has at least one Preventive Controls Qualified Individual who has successfully completed training in the development and application of risk-based preventive controls at least equivalent to that received under a standardized curriculum recognized by the FDA and by MOH.
All of our manufacturing sites and suppliers comply with the Global Food Safety Initiative. All of our manufacturing sites are certified against a standard recognized by Brand Reputation through Compliance Global Standards and/or Safe Quality Foods Institute. These standards are integrated food safety and quality management protocols designed specifically for the food sector and offer a comprehensive methodology to manage food safety and quality. Certification provides an independent and external validation that a product, process or service complies with applicable regulations and standards.
In addition to third-party inspections of our co-manufacturers, we have instituted audits to address topics such as allergen control; ingredient, packaging and product specifications; and sanitation. Under FSMA, each of our co-manufacturers is required to have a FSP, a Hazard Analysis Critical Control Points plan that identifies critical pathways for contaminants and mandates control measures that must be used to prevent, eliminate or mitigate relevant food-borne hazards.
Independent Certification
In the United States, our organic products are certified in accordance with the USDA’s National Organic Program through Quality Assurance International and Oregon Tilth, third-party certifying agencies. In Italy, our organic products are certified by the ICEA (Icea Istituto Per La Certificazione Etica Ed Ambientale).
Our facilities have obtained certain important certifications or verifications, including the BRC Food Safety certification, Non-GMO Project verification, USDA Organic certification, a gluten-free certification from the Gluten-Free Certification Organization, OneCert Organic certification, and OU Kosher certification from the Orthodox Union. Our facility located in Italy is certified Kosher under the supervision of OK Kosher Certification.
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Available Information
We file annual, quarterly and current reports, proxy statements and other information with SEC. Our SEC filings are available to the public over the internet at the SEC’s website at www.sec.gov. Our SEC filings are also available free of charge on the Investor Information page of our website at www.tattooedchef.com as soon as reasonably practicable after they are filed with or furnished to the SEC. Our website and the information contained on or through that site are not incorporated into this Annual Report on Form 10-K.
Item 1A. Risk Factors.
Our operations and financial results are subject to various risks and uncertainties including those described below. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks or others not specified below materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline.
Risk Factors Related Our Business and Industry
Our recurring losses and significant accumulated deficit have raised substantial doubt regarding our ability to continue as a going concern.
See Note 1 Basis of Presentation and Significant Accounting Policies under “Going Concern” in our consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K for details regarding our going concern consideration. We have historically incurred losses and expect to continue to generate operating losses and consume cash resources in the near term. These conditions raise substantial doubt about our ability to continue as a going concern for a period of twelve months from the date the consolidated financial statements are issued and may cause us to continue to be unable to maintain compliance with our financial covenants giving the lenders the right to accelerate repayment of the line of credit and note payable. We have implemented and continue to implement plans to achieve operating profitability, including various margin improvement initiatives, the optimization of our pricing strategy, and new product innovation.
We will seek outside capital for the foreseeable future until we begin generating positive cash flow. However, there can be no assurances that we will be able to obtain additional capital on terms acceptable to us or at all. Our ability to raise additional capital may be adversely impacted by the potential worsening of global economic conditions, including inflationary pressures, and the recent disruptions to, and volatility in, the credit and financial markets in the United States.
We may be unable to sustain our revenue growth rate and, as our costs increase, generate sufficient revenue to return to profitability over the long term.
From 2021 to 2022, our revenue grew from $208.0 million to $230.9 million, which represents a year over year growth rate of 11.0%. This growth has placed significant demands on our management, financial, operational, technological and other resources. Our operating expenses and capital expenditures increased substantially over the past two years as we invested to increase our customer base, expand our marketing channels, invest in distribution and manufacturing facilities, pursue expansion, hire additional employees, and enhance our technology and production capabilities. In addition, commencing in the fourth quarter of Fiscal 2020, we began incurring additional costs as a public company, which continues. We incur significant expenses in developing our innovative products, securing an adequate supply of raw materials, obtaining and storing ingredients and other products and marketing the products we offer. In addition, many expenses, including some of the costs associated with existing and any future manufacturing facilities, are fixed.
Although we have grown rapidly over the last several years, our revenue growth rate may slow over time for a number of reasons, including increasing competition, market saturation, slowing demand for our offerings, increasing regulatory costs and challenges, the impact of COVID-19, and failure to capitalize on growth opportunities, and we may not be able to achieve sufficient revenue to sustain profitability. Accordingly, we may continue to incur losses for the foreseeable future.
We may require additional financing to achieve our goals and a failure to obtain this necessary capital when needed on acceptable terms, or at all, may negatively impact our product manufacturing and development, and other operations.
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We plan to continue to expand into additional markets we may choose to pursue. These expenditures are expected to include costs associated with research and development, the acquisition or expansion of manufacturing and supply capabilities, as well as marketing and selling existing and new products. In addition, other unanticipated costs may arise.
Our operating plan may have to change because of factors currently unknown to us, and we may not be able to obtain additional funds including through public equity or debt financings or other sources. Such financing may result in dilution to stockholders, imposition of debt covenants and repayment obligations, or other restrictions that may adversely affect our business.
Our future capital requirements depend on many factors, including:
•the expenses associated with our marketing initiatives;
•investment in manufacturing to expand manufacturing and production capacity;
•the costs required to fund domestic and international growth;
•any lawsuits related to our products or commenced against us;
•the expenses needed to attract and retain skilled personnel;
•the costs associated with being a public company; and
•the timing, receipt and amount of sales of future products.
Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available on a timely basis, we may be required to:
•delay, limit, reduce or terminate the expansion of sales and marketing capabilities or other activities that may be necessary to generate revenue and increase profitability.
Our debt exposes us to adverse changes in interest rates during times, if any, that we avail ourselves of our credit facility.
We may continue to be in a position of non-compliance with financial covenants.
We may continue to be in a position of non-compliance with our financial covenants on our primary line of credit (the “Credit Facility”) and notes payable in the United States, which could adversely affect on our business, financial condition, and results of operations. Factors that could lead to continued non-compliance include unexpected changes in market conditions, increased competition, and other factors beyond our control.
Our Credit Facility and notes payable in the United States contain financial covenants, including requirements to maintain certain ratios. Our Credit Facility contains a financial covenant that requires us to maintain a minimum negative $30.0 million of consolidated adjusted EBITDA for the trailing 2-quarters period ended December 31, 2022. We were not in compliance with the adjusted EBITDA minimum requirement as of December 31, 2022 and as of the date our consolidated financial statements were issued. In addition, we were not in compliance with the financial covenants on certain of our notes payable in the United States as of December 31, 2022 and as of the date our consolidated financial statements were issued. Our ability to comply with these covenants depends on various factors, including our operating performance and the condition of the markets in which we operate.
We are in default under our Credit Facility and notes payable in the United States, which could result in an acceleration of our debt, termination of our credit facilities and notes payable, and other adverse consequences. Even if we are able to obtain waivers or amendments from our lenders, the process of obtaining such waivers or amendments could be time-consuming and expensive, and could require us to agree to additional terms and conditions that could adversely affect our business. Moreover, if we fail to secure a waiver or avoid forbearance from the lenders, the failure could accelerate the repayment of the outstanding borrowings under the Credit Facility and notes payable in the United States, or the exercise of other rights or remedies the lender may have under the loan documents and applicable law. While management believes we
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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 us.
Our continued non-compliance with financial covenants could adversely affect on our business, financial condition, and results of operations, including our ability to access credit on favorable terms or at all, and our ability to execute on our strategic objectives.
Our operations may be exposed to inflation risk, which could adversely affect our results of operations.
During Fiscal 2022, some of our ingredients, packaging, freight and storage costs increased at a rapid rate. We use a variety of strategies to seek to offset the cost inflation. 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.
We have recently recognized impairment charges for goodwill and we may need to recognize further impairments for other assets in the future, which could materially adversely impact our financial condition and results of operations.
The carrying value of goodwill was $25.6 million, net of measurement period adjustment, before a triggering event occurred during the year ended December 31, 2022, which necessitated interim assessments for impairment. We regularly evaluate our assets for impairment in line with GAAP. Further impairments to other long-lived assets can arise due to negative industry or economic trends, business disruptions, changes in asset usage, divestitures, and declines in market capitalization.
We recognized a full goodwill impairment charge of $25.6 million for the year ended December 31, 2022. (See Note 10 Intangible assets, net and goodwill in our consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K). This impairment indicates that the fair value of the reporting unit is less than its carrying amount. The macroeconomic environment, such as inflationary pressures and supply chain disruptions, a sustained decline in share price, and the sales and profitability outlook for the affected reporting unit, primarily drove this impairment. The impairment charge had an adverse impact on our results of operations for the year ended December 31, 2022, and additional impairment charges for other assets in the future could have further adverse effects on our results of operations.
Food safety and food-borne illness incidents or advertising or product mislabeling may adversely affect our business by exposing us to lawsuits, product recalls or regulatory enforcement actions, increasing operating costs and reducing demand for product offerings.
Selling food for human consumption involves inherent legal and other risks, and there is increasing governmental scrutiny of and public awareness regarding food safety. Our internal processes, training and quality control and food safety procedures and compliance may not be effective in preventing contamination of food products that could lead to food-borne illness incidents (such as e. coli, salmonella or listeria). Unexpected side effects, illness, injury or death related to allergens, food-borne illnesses or other food safety incidents caused by products we sell or manufacture, or involving our suppliers, could result in the discontinuance of sales of these products or our relationships with our suppliers, increased operating costs, regulatory enforcement actions or harm to our reputation. If consumers lose confidence in the safety and quality of our products or plant-based products generally, even in the absence of a recall or a product liability case, our business, financial condition and results of operations could be materially and adversely affected. Shipment of adulterated or mislabeled products, even if inadvertent, can result in criminal or civil liability. These incidents could also expose us to product liability, negligence or other lawsuits, including consumer class action lawsuits. Any claims brought against us may exceed or be outside the scope of our existing or future insurance policy coverage or limits. Any judgment against us that is more than our policy limits or not covered by our policies or not subject to insurance would have to be paid from our cash reserves, which would reduce our capital resources.
The occurrence of food-borne illnesses or other food safety incidents, whether real or perceived, could also adversely affect the price and availability of affected ingredients, resulting in higher costs, disruptions in supply and a reduction in sales. Furthermore, any instances of food contamination or regulatory noncompliance, whether or not caused by us, could compel us, our suppliers and our customers, depending on the circumstances, to conduct a recall in accordance with FDA or the MOH regulations, comparable state and locality laws, or international laws. If we are found to be out of compliance with respect to food safety regulations, an enforcement authority could issue a warning letter and/or institute enforcement actions that could result in additional costs, substantial delays in production or even a temporary shutdown in manufacturing and product sales while the non-conformances are rectified. Also, we may have to recall the product or otherwise remove the product from the market, and temporarily cease our manufacturing and distribution process, which
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would increase our costs and reduce our revenues. Food recalls could result in significant losses due to their costs, the destruction of product inventory, lost sales due to the unavailability of the product for a period of time, potential loss of existing distributors or customers and a potential negative impact on our ability to attract new customers due to negative consumer experiences or because of an adverse impact on our brand and reputation. The costs of a recall could exceed or be outside the scope of our existing or future insurance policy coverage or limits. Any product liability claims resulting from the failure to comply with applicable laws and regulations would be expensive to defend and could result in substantial damage awards against us or harm our reputation. Any of these events would negatively impact our revenues and costs of operations.
In addition, food companies have been subject to targeted, large-scale tampering as well as to opportunistic, individual product tampering, and we, like any food company, could be a target for product tampering. Forms of tampering could include the introduction of foreign material, chemical contaminants and pathological organisms into consumer products as well as product substitution. Recently issued FDA regulations require companies like us to analyze, prepare and implement mitigation strategies specifically to address tampering (i.e., intentional adulteration) designed to inflict widespread public health harm. If we do not adequately address the possibility, or any actual instance, of intentional adulteration, we could face possible seizure or recall of its products and the imposition of civil or criminal sanctions, which could adversely affect our business, financial condition and operating results.
Further, if we are forced, or voluntarily elect, to recall certain products, the public perception of the quality of our food products may be diminished. We may also be adversely affected by news reports or other negative publicity, regardless of their accuracy, regarding other aspects of our business, such as public health concerns, illness, safety, security breaches of confidential consumer or employee information, employee related claims relating to alleged employment discrimination, health care and benefit issues or government or industry findings concerning our retailers, distributors, suppliers or others across the food industry supply chain.
We are subject to substantial customer concentration. If we fail to retain existing customers, derive revenue from existing customers consistent with historical performance or acquire new customers cost-effectively, our business could be adversely affected.
We are subject to substantial customer concentration risk, with four customers accounting for approximately 62% of our net revenue for the year ended December 31, 2022. The four customers individually accounted for approximately 26%, 14%, 11%, and 11%, respectively, of our net revenue for the year ended December 31, 2022. In addition, three customers accounted for approximately 16%, 15% and 10% of total accounts receivable as of December 31, 2022. Accordingly, any factor adversely affecting sales generally with these customers (such as competitive pressures, declining sales, or store closings, among others), or any reduction or elimination by these customers of carrying our products, could adversely affect our business, financial condition and the result of our operations.
Our success, and our ability to increase revenue and operate profitably, depends in part on our ability to retain and keep existing customers, particularly those noted above, engaged so that they continue to purchase products from us, and to acquire new customers cost-effectively. We intend to continue to expand our number of retail customers as part of our growth strategy. If we fail to retain existing customers and to attract and retain new customers, our business, financial condition and results of operations could be adversely affected.
Further, if customers do not perceive our product offerings to be of sufficient value, quality, or innovation, or if we fail to offer innovative and relevant product offerings, we may not be able to attract or retain customers or engage existing customers so that they continue to purchase products from us or increase the amount of products purchased from us. We may lose current customers to competitors if the competitors offer products superior to ours or if we are unable to satisfy our customers’ orders in a timely manner. The loss of any large customer or the reduction of purchasing levels or the cancellation of business from such customers could adversely impact our business. Furthermore, as retailers consolidate, they may reduce the number of branded products they offer in order to accommodate private label products and generate more competitive terms from branded suppliers competing for limited retailer shelf space. While we produce private label products and might benefit from a shift towards private label products, our long-term strategy is to grow sales of branded products. Consequently, financial results may fluctuate significantly from period to period based on the actions of one or more significant retailers. A retailer may take actions that affect us for reasons that we cannot always anticipate or control, such as the retailer’s financial condition, changes in its business strategy or operations, the introduction of competing products or the perceived quality of our products.
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We may not be able to obtain raw materials on a timely basis or in quantities sufficient to meet the demand for our products.
Our financial performance depends in large part on our ability to purchase raw materials in sufficient quantities and of acceptable quality at competitive prices. There can be no assurance on the availability of continued supply or stable pricing of raw materials. Any of our suppliers could discontinue or seek to alter their relationship with us. While we do have commitments with many of our suppliers of raw materials, these commitments do not extend past the growing season and do not insulate our committed crops from inclement weather, insects, disease, or other harvesting problems.
Events that adversely affect our suppliers could impair our ability to obtain raw material inventory in the quantities or of a quality we desire. The crust component of one of our signature products, cauliflower crust cheese pizza, is supplied by third parties. The termination of a supplier relationship may leave us with periods during which we have limited or no ability to manufacture certain products. An interruption in, or the loss of operations at, any of these manufacturing facilities, which may be caused by work stoppages, production disruptions, product quality issues, disease outbreaks or pandemics (such as the recent coronavirus (COVID-19) pandemic), acts of war, terrorism, fire, earthquakes, weather, flooding or other natural disasters, could delay, postpone or reduce production of some of our products, which could adversely affect our business, results of operations and financial condition until the interruption is resolved or an alternate source of production is secured.
We rely on a sole supplier, Messer LLC, for liquid nitrogen, which is used in production to freeze products during the manufacturing process. The agreement with this supplier provides for up to 120% of our monthly requirements of liquid nitrogen and does not expire until 2025. We also believe we can obtain liquid nitrogen from an alternate supplier on commercially reasonable terms. Nonetheless, there is no guarantee that our supply of liquid nitrogen will not be disrupted due to various risks, including increases in fuel prices, employee strikes and inclement weather, or disruptions in the supplier’s operations.
We currently source most of our raw materials from Italy. Though we are not dependent on any single Italian grower for our supply of a certain crop, events generally affecting these growers could adversely affect our business. Such events include problems with our suppliers’ businesses, finances, labor relations, ability to import raw materials, product quality issues, costs, production, insurance and reputation, as well as disease outbreaks or pandemics (such as the recent coronavirus (COVID-19) pandemic), acts of war, insect infestations, terrorism, natural disasters, fires, earthquakes, weather, flooding or other catastrophic occurrences. We continuously seek alternative sources of raw materials, but we may not be successful in diversifying the suppliers of raw materials we use in our products.
If we need to replace an existing supplier, there can be no assurance that supplies of raw materials will be available when required on acceptable terms, or at all, or that a new supplier would allocate sufficient capacity to us in order for us to meet requirements, fill orders in a timely manner or meet quality standards. If we are unable to manage our supply chain effectively and ensure that our products are available to meet consumer demand, costs of goods sold could increase and sales and profit margins could decrease.
Our products are primarily manufactured in our facilities in Paramount, California, Albuquerque, New Mexico, Youngstown, Ohio and Prossedi, Italy and any damage or disruption at these facilities may harm our business.
A significant portion of our operations are located in our Paramount, California, Albuquerque, New Mexico, Youngstown, Ohio and Prossedi, Italy facilities. A natural disaster, fire, power interruption, work stoppage, outbreaks of pandemics or contagious diseases (such as the recent coronavirus (COVID-19) pandemic) or other calamity at one or both of these facilities would significantly disrupt our ability to deliver products and operate our business. If any material amount of machinery or inventory were damaged, we may be unable to meet our contractual obligations and to predict when, if at all, we could replace or repair such machinery, which could adversely affect our business, financial condition and operating results.
In addition, we have not developed any contingency plans to address disruptions such as natural disaster, fire, power interruption, work stoppage, outbreaks of pandemics or contagious diseases, such as the current COVID-19 pandemic, or other calamity in our operations. Please see “The COVID-19 pandemic could adversely impact our business, results of operations and financial condition” for a discussion of our current response to COVID-19. If such a disruption occurs, our operations and results of operations could be harmed.
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Our corporate offices, research and development functions, and certain manufacturing and processing functions are located in Paramount, California, Albuquerque, New Mexico, Youngstown, Ohio and Prossedi, Italy. The impact of a major natural disaster in these areas on our facilities and overall operations is difficult to predict, but a natural disaster could disrupt our business. Our insurance may not adequately cover losses and expenses in the event of such a natural disaster. As a result, natural disasters could lead to substantial losses.
Failure to introduce new products or successfully improve existing products may adversely affect our ability to continue to grow.
A key element of our growth strategy depends on our ability to develop and market new products and improvements to our existing products that meet our standards for quality and appeal to continuously changing consumer preferences. The success of our innovation and product development efforts is affected by our ability to anticipate changes in consumer preferences, accurately predict taste preferences and purchasing habits of consumers in new geographic markets, the technical capability of our innovation staff in developing and testing product prototypes (including complying with applicable governmental regulations), and the success of our management and sales and marketing teams in introducing and marketing new products. Failure to develop and market new products that appeal to consumers may lead to a decrease in growth, sales and profitability. Furthermore, if we are unsuccessful in meeting our objectives with respect to new or improved products, our business could be harmed.
Consumer preferences for our products are difficult to predict and may change, and, if we are unable to respond quickly to new trends, our business may be adversely affected.
Our business is focused on the development, manufacturing, marketing, and distribution of a portfolio of plant-based products. Consumer demand could change based on a number of possible factors, including dietary habits and nutritional values, concerns regarding the health effects of ingredients, and shifts in preference for various product attributes. If consumer demand for our products decreased, our business and financial condition would suffer. In addition, sales of plant-based products are subject to evolving consumer preferences to which we may not be able to accurately predict or respond. Consumer trends that we believe favor sales of our products could change based on a number of possible factors, including economic factors and social trends. Views towards healthy eating and plant-based products are trendy in nature, with constantly changing consumer perceptions.
Our success depends, in part, on our ability to anticipate the tastes and dietary habits of consumers and other consumer trends and to offer products that appeal to their needs and preferences on a timely and affordable basis. A change in consumer discretionary spending, due to economic downturn or other reasons, may also adversely affect our sales and our business, financial condition and results of operations. A significant shift in consumer demand away from our products could reduce sales or market share and the perception of the Tattooed Chef brand, which would harm our business and financial condition.
If we fail to expand manufacturing and production capacity effectively, forecast demand for products accurately, or respond to forecast changes quickly, our business and operating results and our brand reputation could be harmed.
As demand increases, we will need to expand our operations, supply, and manufacturing capabilities. However, there is a risk that we will be unable to scale production processes effectively and manage our supply chain requirements effectively. We must accurately forecast demand for products and inventory needs in order to ensure we have adequate available manufacturing capacity and to ensure we are effectively managing inventory.
Our forecasts are based on multiple assumptions that may cause estimates to be inaccurate and affect our ability to obtain adequate manufacturing capacity and adequate inventory supply in order to meet the demand for products, which could prevent us from meeting increased customer demand and harm our brand and business.
In addition, if we overestimate demand and overbuild our capacity, we may have significantly underutilized assets and will experience reduced gross margins and will have excess inventory that we may be required to write-down. If we do not accurately align our manufacturing capabilities and inventory supply with demand, if we experience disruptions or delays in our supply chain, or if we cannot obtain raw materials of sufficient quantity and quality at prices that are consistent with our current pricing and in a timely manner, our business, financial condition and results of operations may be adversely affected.
Failure to retain our senior management may adversely affect operations.
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Our success is substantially dependent on the continued service of certain members of senior management, including Salvatore “Sam” Galletti, our founder, President and Chief Executive Officer, Stephanie Dieckmann, our Chief Financial Officer, Sarah Galletti, the “Tattooed Chef” and our Chief Creative Officer, Giuseppe Bardari, President of Ittella Italy and our Chief Operating Officer. These executives have been primarily responsible for determining the strategic direction of our business and for executing our growth strategy and are integral to our brand, culture, product development and the reputation we enjoy with suppliers, co-manufacturers, distributors, customers and consumers. In particular, Ms. Galletti is responsible for leading our branding initiatives, creative strategy, and product development. In addition, Mr. Galletti and Ms. Galletti have historically been the primary sales and marketing contacts for our customers. The loss of the services of any of these executives could adversely affect our business, relationship with key customers and suppliers, branding, creative strategies, and prospects, as we may not be able to find suitable individuals to replace them on a timely basis, if at all. In addition, any such departure could be viewed in a negative light by investors and analysts, which may cause the price of any of our publicly traded securities to decline. We do not currently carry key-person life insurance for any of our management team.
We may not be able to protect our intellectual property adequately, which may harm the value of our brand.
We believe that our intellectual property has substantial value and has contributed significantly to the success of our business. Our trademarks, including “Tattooed Chef” and “People Who Give a Crop”, are valuable assets that reinforce our brand and consumers’ favorable perception of our products. We also rely on unpatented proprietary expertise, recipes and formulations and trade secret protection to develop and maintain our competitive position. Our continued success depends, to a significant degree, upon our ability to protect and preserve our intellectual property, including our trademarks, trade dress, and trade secrets. We rely on confidentiality agreements and trademark and trade secret law to protect our intellectual property rights. As of the date of this Annual Report on Form 10-K, we do not have any issued patents and have forgone pursuing any patent applications. As a result, we cannot rely on any protection provided under applicable patent laws.
Our confidentiality agreements with our suppliers who use our formulations to manufacture some products generally require that all information made known to them be kept strictly confidential. Nevertheless, trade secrets are difficult to protect. Although we attempt to protect our trade secrets, our confidentiality agreements may not effectively prevent disclosure of proprietary information and may not provide an adequate remedy in the event of unauthorized disclosure of our proprietary information or any reverse engineering. In addition, we cannot guarantee that we have entered into confidentiality agreements with all suppliers addressing each of our recipes. From time to time, we share product concepts with customers who are not under confidentiality obligations. In addition, others may independently discover our trade secrets, in which case we would not be able to assert trade secret rights against these parties.
We cannot provide assurances that the steps we have taken to protect our intellectual property rights are adequate, that our intellectual property rights can be successfully defended and asserted in the future, that third parties will not infringe upon or misappropriate any such rights, or that we own the rights to all improvements or modifications of recipes we have provided to suppliers. In addition, our trademark rights and related registrations may be challenged in the future and could be canceled or narrowed. Failure to protect our trademark rights could prevent us in the future from challenging third parties who use names and logos similar to our trademarks, which may in turn cause consumer confusion or negatively affect consumers’ perception of our brand and products. In addition, if we do not keep our trade secrets confidential, others may produce products with our recipes or formulations. Sophisticated suppliers and food companies can replicate or reverse engineer our recipes fairly easily. Moreover, intellectual property disputes and proceedings and infringement claims may result in a significant distraction for management and significant expense, which may not be recoverable regardless of whether or not we are successful. These proceedings may be protracted with no certainty of success, and an adverse outcome could subject us to liabilities, force us to cease use of certain trademarks or other intellectual property or force us to enter into licenses with others. Any one of these occurrences may adversely affect our business, results of operations and financial condition.
We do not have contracts with customers that require the purchase of a minimum amount of our products.
None of our customers provide us with firm, long-term or short-term volume purchase commitments. As a result, we could have periods during which we have no or limited orders for our products but will continue to have fixed costs. We may not be able to find new customers in a timely manner if we experience no or limited purchase orders. Periods of no or limited purchase orders for our products, particularly from one or more of our four largest customers, could adversely affect our business, financial condition and results of operations.
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We may not be able to implement our growth strategy successfully.
Our future success depends on our ability to implement our growth strategy of expanding supply and distribution, improving placement of our products, attracting new consumers to our brand and introducing new products and product extensions, and expanding into new geographic markets. Our ability to implement this growth strategy depends, among other things, on our ability to:
•manage relationships with various suppliers, brokers, customers and other third parties, and expend time and effort to integrate new suppliers, distributors and customers into our fulfillment operations;
•continue to compete in the retail channel;
•increase the brand recognition of Tattooed Chef;
•expand and maintain brand loyalty;
•develop new product lines and extensions;
•successfully integrate any acquired companies or additional production capacity (see “ – Future acquisitions or investments could disrupt our business and harm our financial condition”); and
•expand into new geographic markets.
We may not be able to do any of the foregoing successfully. If we do not effectively implement our growth strategy, we may not be able to execute on our business plan, respond to competitive pressures, take advantage of market opportunities, satisfy customer requirements or maintain high-quality product offerings, any of which could harm our business, brand, results of operations and financial condition.
The “Tattooed Chef” brand has limited awareness among the general public.
We have not conducted a dedicated and significant marketing campaign to educate consumers on the Tattooed Chef brand and we still have limited awareness among the general public. In addition, Tattooed Chef products are available in a limited number of retail stores in the United States.
We will need to dedicate significant resources in order to effectively plan, coordinate, and execute a marketing campaign and to add additional sales and marketing staff. Substantial advertising and promotional expenditures may be required to improve our brand’s market position or to introduce new products to the market. An increase in our marketing and advertising efforts may not maintain our current reputation, or lead to an increase in brand awareness.
Further, we compete against other large, well-capitalized food companies who have significantly greater resources than we do. Therefore, we may have limited success, or none at all, in increasing brand awareness and favorability around the Tattooed Chef brand.
Maintaining, promoting and positioning this brand and our reputation will depend on, among other factors, the success of our plant-based product offerings, food safety, quality assurance, marketing and merchandising efforts, and our ability to provide a consistent, high-quality customer experience. Any negative publicity, regardless of its accuracy, could adversely affect our business. Brand value is based on perceptions of subjective qualities, and any incident that erodes the loyalty of customers or suppliers, including adverse publicity, product recall or a governmental investigation or litigation, could significantly reduce the value of the Tattooed Chef brand and significantly damage our business, financial condition and results of operations.
Ingredient, packaging, freight and storage costs are volatile and have risen and may continue to rise significantly, which may negatively impact the profitability of our business.
We purchase large quantities of raw materials outside of the United States, including from Italy and Brazil. In addition, we purchase and use significant quantities of cardboard, film, and plastic to package our products.
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Costs of ingredients, packaging, freight and storage are volatile and have fluctuated and may continue to fluctuate due to conditions that are difficult to predict, including global competition for resources, weather conditions, consumer demand and changes in governmental trade and agricultural programs. Volatility in the prices of raw materials and other supplies we purchase and in the freight and storage cost have increased and could further increase our cost of goods sold and reduce our profitability. Moreover, we may not be able to implement price increases for our products to cover any increased costs, and any price increases we do implement may result in lower sales volumes. If we are not successful in managing our ingredient, packaging, freight and storage costs, if we are unable to increase our prices to cover increased costs or if these price increases reduce sales volumes, then these increases in costs could adversely affect our business, results of operations and financial condition.
Our operations in Italy may expose us to the risk of fluctuation in currency exchange rates and rates of foreign inflation, which could adversely affect our results of operations.
We currently incur some costs and expenses in Euros and expect in the future to incur additional expenses in this currency. As a result, our revenues and results of operations are subject to foreign exchange fluctuations, which we may not be able to manage successfully. There can be no assurance that the Euro will not significantly appreciate or depreciate against the United States dollar in the future. We bear the risk that the rate of inflation in the foreign countries where we incur costs and expenses or the decline in value of the United States dollar compared to these foreign currencies will increase our costs as expressed in United States dollars. Future measures by foreign governments to control inflation, including interest rate adjustments, intervention in the foreign exchange market and changes to the fixed value of their currencies, may trigger increases in inflation. We may not be able to adjust the prices of our products to offset the effects of inflation on our cost structure, which could increase our costs and reduce our net operating margins. While we attempt to mitigate these risks through hedging or other mechanisms, if we do not successfully manage these risks our revenues and results of operations could be adversely affected.
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. During 2022, the inflated energy cost in Europe adversely impacted our growers and our manufacturing subsidiary in Italy. Further sanctions, bans or other economic actions in response to the ongoing conflict in Ukraine could result in a further increase in costs, disruptions to our supply chain, or a lack of consumer confidence resulting in reduced demand. Any of them could further negatively impact our business, results of operations, and financial condition.
Our revenues and earnings may fluctuate as a result of promotional activities.
We offer sales discounts and promotions through various programs to customers that may occasionally result in reduced revenues or margins. These programs include in-store demonstrations, product discounts, temporary on shelf price reductions, off-invoice discounts, sales samples, retailer promotions, product coupons, and other trade activities we may implement in the future, depending on the customer. At times, these promotional activities may adversely affect our revenues and results of operations. During 2022 the trade spend allowance was utilized to drive trial by the consumer as the brand entered new stores across the United States. In 2023, the Company will reduce the in-store promotions to levels that are consistent with other brands in the frozen better for you area of the store. The reduction in promotions and discounts could affect the sales of the branded items.
Litigation or legal proceedings could expose us to significant liabilities and negatively impact our reputation or business.
From time to time, we may be party to various claims and litigation proceedings. We evaluate these claims and litigation proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we may establish reserves, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a significant amount of management judgment. Actual outcomes or losses may differ materially from our assessments and estimates.
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A subsidiary of ours, Ittella Italy, is involved in certain litigation related to the death of an independent contractor who fell off 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 €1.9 million 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 a 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. 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. As of the reporting date, the insurance company paid €0.2 million to settle the civil portion of the case and the criminal portion is outstanding. Based on local counsel's professional estimation, our remaining liability exposure could be from zero to €0.4 million. Ittella Italy believes any required payments could be covered by its insurance policy; however, it is not probable 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, we believe that a loss is currently not probable and an estimate cannot be made.
On December 23, 2022, a purported class action lawsuit was filed in the United States District Court for the Central District of California against us, our Chief Executive Officer, Salvatore Galletti, and our Chief Financial Officer, Stephanie Dieckmann. The complaint alleges generally that during the purported class period between March 20, 2021 and October 12, 2022, we and the named executive officers made misleading statements and/or failed to disclose material facts about our business and operations due to alleged material weaknesses in our financial reporting internal controls. The complaint seeks to assert claims for violations of Section 10(b) (and Rule 10b-5 promulgated thereunder) and Section 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, and seeks unspecified damages. The Court has appointed a lead plaintiff and lead plaintiff's counsel and has set a deadline for the lead plaintiff to file an amended complaint. At this time, it is not possible to estimate any potential material losses or predict the outcome of our anticipated motion to dismiss.
On March 17, 2023, a verified derivative complaint was filed in the United States District Court for the Central District of California against certain of our officers and directors. The complaint alleges: (1) breach of fiduciary duty, (2) unjust enrichment, (3) abuse of control, (4) gross mismanagement, (5) waste of corporate assets, (6) violations of Section 14(a) of the Exchange Act, and (7) contribution under sections 10(b) and 21D of the Exchange Act. At this time, it is not possible to estimate any potential material losses or predict the outcome of our anticipated motion to dismiss.
On April 3, 2023, a second and related verified derivative complaint was filed in the United States District Court for the Central District of California against certain of our officers and directors. The complaint alleges: (1) violations of Section 14(a) of the Exchange Act, (2) breach of fiduciary duty, and (3) unjust enrichment, (4) aiding and abetting breaches of fiduciary duty, (5) waste of corporate assets, and (6) violations of sections 10(b) and 21D of the Exchange Act. The Court consolidated this action with the other related derivative action and appointed lead counsel and the parties are entering stay discussions. At this time, it is not possible to estimate any potential material losses or predict the outcome of our anticipated motion to dismiss.
Generally, while we maintain insurance for certain potential liabilities, such insurance does not cover all types and amounts of potential liabilities and is subject to self-insured retentions, various exclusions as well as caps on amounts recoverable. Even if we believe a claim is covered by insurance, insurers may dispute our entitlement to recovery for a variety of potential reasons, which may affect the timing and, if the insurers prevail, the amount of our recovery.
Failure by our transportation providers to deliver products on time, or at all, could result in lost sales.
We currently rely upon numerous third-party transportation providers for all product shipments. Our utilization of delivery services for shipments is subject to risks, including increases in fuel prices, which would increase shipping costs, employee strikes, disease outbreaks or pandemics (such as the recent COVID-19 pandemic), and inclement weather, which may impact the ability of providers to provide delivery services that adequately meet our shipping needs, if at all. If we need to source alternative transportation methods, we may not be able to obtain terms as favorable as those we receive from the third-party transportation providers that we currently use, which in turn would increase costs and thereby adversely affect operating results.
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We rely on independent certification for a number of our products.
We rely on independent third-party certifications, such as certifications of our products as “USDA organic,” “BRC,” “gluten free,” “Non-GMO” or “kosher,” to differentiate our products from others. We must comply with the requirements of independent organizations or certification authorities in order to label our products with these certifications, and there can be no assurance that we will continue to meet these requirements. The loss of any independent certifications could adversely affect our business.
Our geographic focus makes us particularly vulnerable to economic and other events and trends in the United States.
We operate and sell our products primarily in the United States and, therefore, are particularly susceptible to adverse regulations, economic climate, consumer trends, market fluctuations, and other adverse events in the United States. The concentration of our businesses in the United States could present challenges and may increase the likelihood that an adverse event in the United States would adversely affect our product sales, financial condition and operating results.
If we experience the loss of one or more of our food brokers that cannot be replaced in a timely manner, results of operations may be adversely affected.
We utilize food brokers to assist in establishing and maintaining relationships with certain key customers, which represent the bulk of our revenue. We have written agreements with several different brokers, each of whom facilitates our relationship with a different key customer. Pursuant to these agreements, our brokers are entitled to a commission based on the revenue they facilitate between us and our key customers. Commissions range from 1.5% to 3.0% of sales, with the exception of one broker to whom we owe commissions 5.0% of sales, this broker agreement has been subsequently cancelled in April 2023. The loss of any one of these food brokers could negatively impact the customer relationship resulting in our business, results of operation and financial condition being adversely affected.
Identifying new brokers can be time-consuming and any resulting delay may be disruptive and costly to our business. While we believe we may be able to continue to supply these key customers without broker relationships, we believe that doing so could consume a significant amount of management’s time and attention. There is no assurance that we will be able to establish and maintain successful relationships with new brokers. We may have to incur significant expenses to attract and maintain brokers.
Our disclosure controls and procedures were not effective as of and for the years ended December 31, 2022 and 2021. Failure to achieve and maintain effective internal controls over financial reporting could lead to misstatements in our financial reporting and adversely affect our business.
Ineffective internal control over financial reporting could result in errors or misstatements in our financial statements, reduce investor confidence, and adversely impact our stock price. As discussed in Part II, Item 9A “Controls and Procedures” in this Annual Report on Form 10-K, our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of December 31, 2022. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of December 31, 2022 because of the material weaknesses in our internal control over financial reporting described in Part II, Item 9A “Controls and Procedures” in this Annual Report on Form 10-K.
If we are unable to attract, train and retain employees, we may not be able to grow or successfully operate our business.
Our success depends in part on our ability to attract, train and retain a sufficient number of employees who understand and appreciate our culture and can represent our brand effectively and establish credibility with our business partners and customers. We believe a critical component of our success has been our company culture and long-standing core values. We have invested substantial time and resources in building our team. Furthermore, as sales grow and customers are acquired, we added employees to serve in the production, finance and accounting, and sales and marketing functions. If we are unable to retain employees capable of meeting our business needs and expectations, or if we fail to preserve our company culture among a larger number of employees dispersed in various geographic regions as we continue to grow and develop the infrastructure associated with being a public company, our business and brand image may be impaired. Any failure to meet staffing needs or any material increase in turnover rates of employees may adversely affect our business, results of operations and financial condition.
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In order to meet demand, we also rely on temporary employees procured through staffing agencies. In the future, we may be unable to attract and retain employees with the required skills, whether or not through staffing agencies, which could impact our ability to expand operations or meet customer demand.
We need to complete the implementation of our Enterprise Resource Planning (“ERP”) system. Significant additional costs, cost overruns and delays in connection with the implementation of an ERP system may adversely affect results of operations.
We are in the process of implementing a company-wide ERP system. Ittella International, LLC (“Ittella International”), our major subsidiary in Paramount, California and subsidiaries in New Mexico, have completed the initial installation and implementation and started operating under the ERP system in 2022. We will implement the ERP system to the remaining active subsidiaries in 2023. This is a lengthy and expensive process that will result in a diversion of resources from other operations. Any disruptions, delays or deficiencies in the design and/or implementation of the new ERP system, particularly any disruptions, delays or deficiencies that impact operations, could adversely affect our ability to run and manage our business effectively.
The implementation of an ERP system has and will continue to involve substantial expenditures on system hardware and software, as well as design, development and implementation activities. There can be no assurance that other cost overruns relating to the ERP system will not occur. Our business and results of operations may be adversely affected if we experience operating problems, additional costs, or cost overruns during the ERP implementation process.
Risk Factors Related to Regulations
Our operations are subject to FDA, FTC and other foreign, federal, state and local regulation, and there is no assurance that we will be in compliance with all regulations.
Our operations are subject to extensive regulation by the FDA, including new food allergen list and re-release 2022 edition of the FDA Food Code. We also must comply with regulations from the FTC, and other foreign, federal, state and local authorities. Specifically, for products manufactured or sold in the United States, we are subject to the requirements of the Federal Food, Drug and Cosmetic Act and regulations promulgated thereunder by the FDA. This comprehensive regulatory program governs, among other things, the manufacturing, composition and ingredients, packaging, labeling and safety of food. Under this program, the FDA requires that facilities that manufacture food products comply with a range of requirements, including risk-based hazard analysis and preventive controls regulations, current good manufacturing practices, or cGMPs, and supplier verification requirements including foreign supplier verification program. Our processing facilities, as well as those of our suppliers, are subject to periodic inspection by foreign, federal, state and local authorities. We do not control the manufacturing processes of, and rely upon, suppliers for compliance with cGMPs for the manufacturing of some products by our suppliers. If we or our suppliers cannot successfully manufacture products that conform to our specifications and the strict regulatory requirements of the FDA or other regulators, we or our suppliers may be subject to adverse inspectional findings or enforcement actions, which could impact our ability to market our products, could result in our suppliers’ inability to continue manufacturing for us, or could result in a recall or withdraw of our product that has already been distributed. In addition, we rely upon our suppliers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable state, local or foreign regulatory authority determines that we or our suppliers have not complied with the applicable regulatory requirements, our business may be impacted. The FTC and other authorities regulate how we market and advertise our products, and we could be the target of claims relating to alleged false or deceptive advertising under federal, state, and foreign laws and regulations. Changes in these laws or regulations or the introduction of new laws or regulations could increase the costs of doing business for us or our customers or suppliers or restrict our actions, causing our operating results to be adversely affected.
In Italy, food safety is regulated by specific legislation and compliance by the MOH, with administrative authority further delegated to ASLs. The MOH is organized into 12 directorates-general and the directorate-general and monitors, among others, the health and safety of food production and marketing, nutrition labeling, and food additives. While the ASLs administer compliance of the food safety laws through, among other things, inspections, the MOH may also conduct inspections under the purview of the relevant directorate-general. If products manufactured in Italy do not conform to local requirements, production in our Italy facility could be suspended until this facility is brought into compliance.
Failure by us or our suppliers to comply with applicable laws and regulations or maintain permits, licenses or registrations relating to us or our suppliers’ operations could subject us to civil remedies or penalties, including fines, injunctions, recalls, withdraw or seizures, warning letters, restrictions on the marketing or manufacturing of products, or refusals to
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permit the import or export of products, as well as potential criminal sanctions, which could result in increased operating costs resulting in an adverse effect on our operating results and business.
We are subject to international regulations that could adversely affect our business and results of operations.
We are subject to extensive regulations internationally where we manufacture, distribute and/or sell products. A significant portion of our products are manufactured in our facility in Italy. Our products are subject to numerous food safety and other laws and regulations relating to the sourcing, manufacturing, composition and ingredients, storing, labeling, marketing, advertising and distribution of these products. In addition, enforcement of existing laws and regulations, changes in legal requirements and/or evolving interpretations of existing regulatory requirements may result in increased compliance costs and create other obligations, financial or otherwise, that could adversely affect our business, financial condition or operating results. In addition, with expanding international operations, we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act, or FCPA, and similar worldwide anti-bribery laws, which generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials or other third parties for the purpose of obtaining or retaining business. While our policies mandate compliance with these anti-bribery laws, our internal control policies and procedures may not protect us from reckless or criminal acts committed by our employees, contractors or agents. Violations of these laws, or allegations of such violations, could disrupt our business and adversely affect our operations, cash flows and financial condition.
Legal claims, government investigations or other regulatory enforcement actions could subject us to civil and criminal penalties.
We operate in a highly regulated environment with constantly evolving legal and regulatory frameworks. Consequently, we are subject to heightened risk of legal claims, government investigations or other regulatory enforcement actions. Although we have implemented policies and procedures designed to ensure compliance with existing laws and regulations, there can be no assurance that our employees, temporary workers, contractors or agents will not violate our policies and procedures. Moreover, a failure to maintain effective control processes could lead to violations, unintentional or otherwise, of laws and regulations. Legal claims, government investigations or regulatory enforcement actions arising out of failure or alleged failure to comply with applicable laws and regulations could subject us to civil and criminal penalties that could adversely affect our product sales, reputation, financial condition and operating results. In addition, the costs and other effects of defending potential and pending litigation and administrative actions against us may be difficult to determine and could adversely affect our financial condition and operating results.
Changes in existing laws or regulations, or the adoption of new laws or regulations may increase costs and otherwise adversely affect our business, results of operations and financial condition.
The manufacture and marketing of food products is highly regulated. We and our suppliers are subject to a variety of laws and regulations. These laws and regulations apply to many aspects of our business, including the manufacture, composition and ingredients, packaging, labeling, distribution, advertising, sale, quality and safety of products, as well as the health and safety of employees and the protection of the environment.
In the United States, we are subject to regulation by various government agencies, including the FDA, the FTC, OSHA, laws related to product labeling and advertising and marketing, and the EPA, as well as the requirements of various state and local agencies, including, the Los Angeles County Department of Public Health and California’s Safe Drinking Water and Toxic Enforcement Act of 1986 (“Proposition 65”). We are also regulated outside the United States by various international regulatory bodies. In addition, we are subject to certain third-party private standards, including Global Food Safety Initiative (“GFSI”) related certifications such as British Retail Consortium standards. We could incur costs, including fines, penalties and third-party claims, because of any violations of, or liabilities under, such requirements, including any competitor or consumer challenges relating to compliance with such requirements.
The regulatory environment in which we operate could change significantly and adversely in the future. Any change in manufacturing, labeling or packaging requirements for our products may lead to an increase in costs or interruptions in production, either of which could adversely affect our operations and financial condition. New or revised government laws and regulations could result in additional compliance costs and, in the event of non-compliance, civil remedies, including fines, injunctions, withdrawals, recalls or seizures and confiscations, as well as potential criminal sanctions, any of which may adversely affect our business, results of operations and financial condition.
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Failure by suppliers to comply with food safety, environmental or other laws and regulations, or with the specifications and requirements of our products, may disrupt our supply of products and adversely affect our business.
If our suppliers fail to comply with food safety, environmental or other laws and regulations, or face allegations of non-compliance, their operations may be disrupted. Additionally, our suppliers are required to maintain the quality of our products and to comply with our product specifications, and these suppliers must supply ingredients that meet quality standards. In the event of actual or alleged non-compliance, our supply of raw materials or finished inventory could be disrupted, or our costs could increase, which would adversely affect our business, results of operations and financial condition. The failure of any supplier to produce products that conform to our standards could adversely affect our reputation in the marketplace and result in product recalls, product liability claims and economic loss. Additionally, actions we may take to mitigate the impact of any disruption or potential disruption in the supply of raw materials or finished inventory, including increasing inventory in anticipation of a potential supply or production interruption, may adversely affect our business, results of operations and financial condition.
Good manufacturing practice standards and food safety compliance metrics are complex, highly subjective and selectively enforced.
The federal regulatory scheme governing food products establishes guideposts and objectives for complying with legal requirements rather than providing clear direction on when particular standards apply or how they must be met. For example, FDA regulations referred to as Hazard Analysis and Risk Based Preventive Controls for Human Food require that we evaluate food safety hazards inherent to our specific products and operations. We must then implement “preventive controls” in cases where we determine that qualified food safety personnel would recommend that we do so. Determining what constitutes a food safety hazard, or what a qualified food safety expert might recommend to prevent such a hazard, requires evaluating a variety of situational factors. This analysis is necessarily subjective, and a government regulator may find our analysis or conclusions inadequate. Similarly, the standard of “good manufacturing practice” to which we are held in our food production operations relies on a hypothesis regarding what individuals and organizations qualified in food manufacturing and food safety would find to be appropriate practices in the context of our operations. Government regulators may disagree with our analyses and decisions regarding the good manufacturing practices appropriate for our operations.
Decisions made or processes adopted by us in producing our products are subject to after the fact review by government authorities, sometimes years after the fact. Similarly, governmental agencies and personnel within those agencies may alter, clarify or even reverse previous interpretations of compliance requirements and the circumstances under which they will institute formal enforcement activity. It is not always possible to accurately predict regulators’ responses to actual or alleged food production deficiencies due to the large degree of discretion afforded regulators. We may be vulnerable to civil or criminal enforcement action by government regulators if they disagree with our analyses, conclusions, actions or practices. This could adversely affect our business, financial condition and operating results.
Our failure to prepare and timely file our periodic reports with the SEC limits our access to the public markets to raise debt or equity capital and restricts our ability to issue equity securities.
Our failure to file this Annual Report on Form 10-K, as well as our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2022, in a timely manner has resulted in us not being current in our reporting requirements with the SEC. This has limited our ability to access the public markets to raise capital through debt or equity, and may prevent us from pursuing business strategies or transactions that we believe could be beneficial to our business. As of now, we are not eligible to use a registration statement on Form S-3, which allows us to continuously incorporate our SEC reports into the registration statement, or to use “shelf” registration statements for offerings until approximately one year from the date that we regain and maintain our status as a current filer. If we decide to pursue a public offering, we would have to file a registration statement on Form S-1, which would need to be reviewed and declared effective by the SEC. This process would take significantly longer than using a registration statement on Form S-3, increase our transaction costs, and adversely impact our ability to raise capital or complete acquisitions of other companies in a timely manner if we are not able to conduct offerings using alternative methods.
Our failure to meet the continued listing requirements of the Nasdaq Capital Market could result in a delisting of our common stock.
Our common stock is listed on the Nasdaq Capital Market under the symbol “TTCF”. In order to maintain that listing, we must satisfy minimum financial and other requirements including, without limitation, timely filing periodic reports, the
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minimum stockholders equity requirement and the minimum bid price requirement. Nasdaq Listing Rule 5250(c)(1) requires listed companies to timely file all required periodic financial reports with SEC. Nasdaq Listing Rule 5550(a)(2) requires listed securities to maintain a minimum bid price of USD 1.00 per share and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days. As of May 9, 2023, the closing price of our common stock was $1.44, near the $1.00 minimum bid price for continued listing on the Nasdaq Capital Market.
Our failure to meet the continued listing requirements of the Nasdaq Capital Market could result in a delisting of our common stock. Under the listing rules, if a company falls out of compliance with the $1.00 minimum bid price, the company will not be able to avail itself of any compliance periods and Nasdaq will instead require the issuance of a Staff delisting determination, which is able to appeal to a hearings panel. Our ability to remain listed on the Nasdaq Capital Market may be negatively impacted by this new Nasdaq rule.
In addition, we were unable to timely file this Annual Report on Form 10-K, as well as our Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, which resulted in us not being in compliance with Nasdaq Listing Rule 5250(c)(1). We subsequently filed this Annual Report on Form 10-K and such Quarterly Report on Form 10-Q within the additional period granted by Nasdaq. However, it is possible that we will be unable to timely file future periodic reports in a timely manner. If we fail to regain and maintain compliance with Nasdaq’s continued listing requirements, Nasdaq may take steps to delist our common stock.
Delisting from Nasdaq could adversely affect our ability to raise additional financing through the public or private sale of equity securities and we would incur additional costs under requirements of state “blue sky” laws in connection with any sales of our securities. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities. If our common stock is delisted by Nasdaq, the price of our common stock may decline and our common stock may be eligible to trade on the OTC Bulletin Board, another over-the-counter quotation system, or on the pink sheets, which would negatively affect the liquidity of our common stock and an investor may find it more difficult to dispose of their common stock or obtain accurate quotations as to the market value of our common stock.
We continue to actively monitor our performance with respect to the listing standards and will consider available options to resolve any deficiency and maintain compliance with the Nasdaq rules. There can be no assurance that we will be able to maintain compliance or, if we fall out of compliance, regain compliance with any deficiency, or if we implement an option that regains our compliance, maintain compliance thereafter.
Risk Factors Relating to Ownership of Our Securities
Mr. Galletti has significant influence or control over us, and his interests may conflict with those of other stockholders.
As of December 31, 2022, Mr. Galletti and Project Lily LLC, which is controlled by Mr. Galletti, own approximately 38% of our outstanding common stock. As such, Mr. Galletti has significant influence, including over the election of the members of our Board, and thereby may significantly influence our policies and operations, including the appointment of management, future issuances of our common stock or other securities, the payment of dividends, if any, the incurrence or modification of debt, amendments to our certificate of incorporation and bylaws, and the entering into of extraordinary transactions, and Mr. Galletti’s interests may not in all cases be aligned with those of other stockholders.
We have adopted policies and procedures, specifically a Code of Ethics and a Related Party Transactions Policy, to identify, review, consider and approve such conflicts of interest. In general, if an affiliate of a director, executive officer or significant stockholder, including Mr. Galletti, intends to engage in a transaction involving us, that director, executive officer or significant stockholder must report the transaction for consideration and approval by our audit committee. However, there are no assurances that our efforts and policies to eliminate the potential impacts of conflicts of interest will be effective.
Anti-takeover provisions contained in our charter and proposed bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Our charter contains provisions that may hinder unsolicited takeover proposals that stockholders may consider to be in their best interests. We are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change
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of control. Together these provisions may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.
Sales of shares by existing stockholders could cause our stock price to decline.
Sales of shares common stock, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. As of December 31, 2022, all of the public warrants have been exercised and sold. As of December 31, 2022, private placement warrants to purchase up to 115,160 shares of our common stock remained outstanding. See Note 17 Stockholders’ Equity to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K.
General Risk Factors
The COVID-19 pandemic could continue to adversely impact our business, results of operations and financial condition.
The COVID-19 pandemic has adversely affected many of our business units and facilities. The ongoing impact of the pandemic on our operations is uncertain and unpredictable, both in the short and long term. The COVID-19 pandemic has introduced various risk factors that may impact our operations in one or more ways as follow but not limited to:
•shutdowns or slowdowns of one or more of our production facilities;
•disruptions in our supply chain and in our ability to obtain ingredients, packaging, and other sourced materials due to labor shortages, governmental restrictions, or the failure of our suppliers, distributors, or manufacturers to meet their obligations to us;
•continued increases in ingredients packaging, freight and storage costs;
•shifts and volatility in consumer spending and purchasing behaviors; and
The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the emergence and spread of variants, infection rates in areas where we operate, the extent and effectiveness of containment actions, including the continued availability and effectiveness of vaccines in the markets where we operate, and the impact of these and other factors on our employees, customers, suppliers, distributors, and manufacturers. Should these conditions persist for a prolonged period, the COVID-19 pandemic, including any of the above factors and others that are currently unknown, could have a material adverse effect on our business, financial condition, and results of operations. The impact of the COVID-19 pandemic may also have the effect of heightening many of the other risks and uncertainties described in this “Risk Factors” section.
We may not be able to compete successfully in our highly competitive market.
We compete with conventional frozen food companies such as Nestle, Conagra Brands, B&G Foods and Amy’s Kitchen that may have substantially greater financial and other resources than we do. They may also have lower operational costs, and as a result may be able to offer products at lower costs than our plant-based products. This could cause us to lower prices, resulting in lower profitability or, in the alternative, cause us to lose market share if we fail to lower prices. Views towards plant-based products may also change, which may result in lower consumption of these products. If other foods or other plant-based products become more popular, we may be unable to compete effectively. Generally, the food industry is dominated by multinational corporations with substantially greater resources and operations than ours. We cannot be certain that we will successfully compete with larger competitors that have greater financial, sales, and technical resources. Conventional food companies may acquire competitors or launch their own plant-based products, and they may be able to use their resources and scale to respond to competitive pressures and changes in consumer preferences by introducing new products, reducing prices, or increasing promotional activities, among other things. Retailers also may market competitive products under their own private labels, which are generally sold at lower prices and may compete with some of our products. Competitive pressures or other factors could cause us to lose market share, which may require us to lower prices, increase marketing and advertising expenditures, or increase the use of discounting or promotional campaigns, each of which would adversely affect our margins and could result in a decrease in our operating results and profitability.
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Our growth may be limited if we are unable to expand our distribution channels and secure additional retail space for our products.
Our results will depend on our ability to drive revenue growth, in part, by expanding the distribution channels for our products and the number of products carried by each retailer. Our ability to do so, however, may be limited by an inability to secure additional retail space for our products. Retail space for frozen products is limited and is subject to competitive and other pressures, and there can be no assurance that retail stores will provide sufficient space to enable us to meet our growth objectives.
A cybersecurity incident, other technology disruptions or failure to comply with laws and regulations relating to privacy and the protection of data relating to individuals could negatively impact our business, reputation and relationships with customers.
We use computers in substantially all aspects of business operations, including using mobile devices, social networking and other online activities to connect with our employees, suppliers, distributors, customers and consumers. This use, as is present with nearly all companies, gives rise to cybersecurity risks, including security breaches, espionage, system disruption, theft and inadvertent release of information. Our business involves the storage and transmission of numerous classes of sensitive and/or confidential information and intellectual property, including customers’ and suppliers’ information, private information about employees and financial and strategic information about us and our business partners. Further, as we pursue new initiatives that improve our operations and cost structure, potentially including acquisitions, we may also expand our information technologies, resulting in a larger technological presence and corresponding exposure to cybersecurity risk. If we fail to assess and identify cybersecurity risks associated with new initiatives or acquisitions, we may become increasingly vulnerable to such risks. Additionally, while we have implemented measures to prevent security breaches and cyber incidents, these preventative measures and incident response efforts may not be entirely effective. The theft, destruction, loss, misappropriation, or release of sensitive and/or confidential information or intellectual property, or interference with our information technology systems or the technology systems of third parties on which we rely, could result in business disruption, negative publicity, brand damage, violation of privacy laws, loss of customers, potential liability, and competitive disadvantage, all of which could adversely affect our business, financial condition or results of operations.
In addition, we are subject to laws, rules and regulations in North America and the European Union relating to the collection, use and security of personal information and data. These data privacy laws, regulations and other obligations may require us to change our business practices and may negatively impact its ability to expand its business and pursue business opportunities. We may incur significant expenses to comply with the laws, regulations and other obligations that apply to us. Additionally, the privacy and data protection related laws, rules and regulations applicable to us are subject to significant change. Several jurisdictions have passed new laws and regulations in this area, and other jurisdictions are considering imposing additional restrictions. For example, our operations are subject to the European Union’s General Data Protection Regulation, which imposes data privacy and security requirements on companies doing business in the European Union, including substantial penalties for non-compliance. In addition, the California Consumer Privacy Act (the “CCPA”), which went into effect on January 1, 2020, imposes similar requirements on companies handling data of California residents and creates a new and potentially severe statutory damages framework for violations of the CCPA and businesses that fail to implement reasonable security procedures and practices to prevent data breaches. Privacy and data protection related laws and regulations also may be interpreted and enforced inconsistently over time and from jurisdiction to jurisdiction. Any actual or perceived inability to comply with applicable privacy or data protection laws, regulations, or other obligations could result in significant cost and liability, litigation or governmental investigations, damage our reputation, and adversely affect our business.
We depend on digital technologies, including information systems, infrastructure and cloud applications and services, including those of third parties with which we may deal. Sophisticated and deliberate attacks on, or security breaches in, our systems or infrastructure, or the systems or infrastructure of third parties or the cloud, could lead to corruption or misappropriation of our assets, proprietary information and sensitive or confidential data. While we have not experienced any cyber breaches, potential incidents of this nature could have a significant negative impact on our company in the future. In order to address risks to our information systems, we continue to make investments in personnel, technologies and training. Data protection laws and regulations around the world often require “reasonable,” “appropriate” or “adequate” technical and organizational security measures, and the interpretation and application of those laws and regulations are often uncertain and evolving; there can be no assurance that our security measures will be deemed adequate, appropriate or reasonable by a regulator or court. Moreover, even security measures that are deemed appropriate, reasonable or in accordance with applicable legal requirements may not be able to protect the information we maintain. In
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addition to potential fines, we could be subject to mandatory corrective action due to a cybersecurity incident, which could adversely affect our business operations and result in substantial costs for years to come. We maintain an information risk management program which is supervised by information technology management. As part of this program, we provide security trainings to employees and regularly monitor the systems to identify any emerging risks, as well as present to our senior management. As an early-stage company without significant investments in data security protection, we may not be sufficiently protected against such occurrences. We may not have sufficient resources to adequately protect against, or to investigate and remediate any vulnerability to, cyber incidents. It is possible that any of these occurrences, or a combination of them, could have adverse consequences on our business and lead to financial loss.
Disruptions in the worldwide economy may adversely affect our business, results of operations and financial condition.
The global economy can be negatively impacted by a variety of factors such as the spread or fear of spread of contagious diseases (such as the recent COVID-19 pandemic) in locations where our products are sold, man-made or natural disasters, actual or threatened war (such as the escalation in conflict between Russia and Ukraine), terrorist activity, political unrest, civil strife and other geopolitical uncertainty. In addition, Italian operations could be affected by criminal violence, primarily due to the activities of organized crime that Italy has experienced and may continue to experience. These adverse and uncertain economic conditions may impact distributor, retailer, foodservice and consumer demand for our products. In addition, our ability to manage normal commercial relationships with our suppliers, distributors, customers and consumers and creditors may suffer. Consumers may shift purchases to lower-priced or other perceived value offerings during economic downturns as a result of various factors, including job losses, inflation, higher taxes, reduced access to credit, change in federal economic policy and international trade disputes. A decrease in consumer discretionary spending may also result in consumers reducing the frequency and amount spent on food prepared away from home. Distributors and customers may become more conservative in response to these conditions and seek to reduce their inventories. Our results of operations depend upon, among other things, our ability to maintain and increase sales volume with our existing customers, our ability to attract new consumers, the financial condition of consumers and our ability to provide products that appeal to consumers at the right price. Decreases in demand for products without a corresponding decrease in costs would put downward pressure on margins and would negatively impact financial results. Prolonged unfavorable economic conditions or uncertainty may adversely affect our sales and profitability and may result in consumers making long-lasting changes to their discretionary spending behavior on a more permanent basis.
Future acquisitions or investments could disrupt our business and harm our financial condition.
In the future, we may pursue acquisitions of companies or of production capacity or make investments that we believe will help us achieve our strategic objectives. Although we completed three acquisitions including two business acquisitions (see Note 9 Business Combinations and Asset Acquisitions to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K) in the United States and one asset purchase in Italy during previous two years, our management team still lacks significant experience negotiating acquisitions of other companies and integrating acquired companies. We may not be able to find suitable acquisition candidates, and even if we do, we may not be able to complete acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not ultimately achieve our goals or realize anticipated benefits. Pursuing acquisitions and any integration process related to acquisitions will require significant time and resources and could divert management time and focus from operation of our then-existing business, and we may not be able to manage the process successfully. Any acquisitions we complete could be viewed negatively by customers or consumers. An acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures, including disrupting ongoing operations and subjecting us to additional liabilities, increasing expenses, and adversely impacting our business, financial condition and operating results. Moreover, we may be exposed to unknown liabilities related to the acquired company or product, and the anticipated benefits of any acquisition, investment or business relationship may not be realized if, for example, we fail to successfully integrate an acquisition into our business. To pay for any such acquisitions, we would have to use cash, incur debt, or issue equity securities, each of which may affect our financial condition or value. If we incur more debt it would result in increased fixed obligations and could also subject us to covenants or other restrictions that would impede our ability to manage our operations. Our acquisition strategy could require significant management attention, disrupt our business and harm our business, financial condition and results of operations.
Climate change may negatively affect our business and operations.
There is growing concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns, and the frequency and severity of extreme weather and natural disasters. In the event that such climate change has a negative effect on agricultural productivity, we may be subject to decreased
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availability or less favorable pricing for certain commodities that are necessary for our products, such as cauliflower, zucchini, carrots, and a wide array of other vegetables. Adverse weather conditions and natural disasters can reduce crop size and crop quality, which in turn could reduce our supplies of raw materials, lower recoveries of usable raw materials, increase the prices of our raw materials, increase our cost of transporting and storing raw materials, or disrupt our production schedules.
We may also be subjected to decreased availability or less favorable pricing for water as a result of such change, which could impact our manufacturing and distribution operations. In addition, natural disasters and extreme weather conditions may disrupt the productivity of our facilities or the operation of our supply chain. The increasing concern over climate change also may result in more regional, federal, and/or global legal and regulatory requirements to reduce or mitigate the effects of greenhouse gases. In the event that such regulation is enacted and is more aggressive than the sustainability measures that we are currently undertaking to monitor our emissions and improve our energy efficiency, we may experience significant increases in our costs of operation and delivery. In particular, increasing regulation of fuel emissions could substantially increase the distribution and supply chain costs associated with our products. As a result, climate change could negatively affect our business and operations.
Our stock price may be volatile and may decline regardless of our operating performance.
Our stock price is likely to continue to be volatile. The trading prices of the securities of companies in our industry have been highly volatile. As a result of this volatility, investors may not be able to sell their common stock at or above their purchase price. The market price of our common stock and warrants may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
•actual or anticipated fluctuations in our revenue and other operating results, including as a result of the addition or loss of any number of clients;
•announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;
•the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
•failure of securities analysts to initiate or maintain coverage of us, changes in ratings and financial estimates and the publication of other news by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
•changes in operating performance and stock market valuations of our competitors or companies in similar industries;
•the size of our public float;
•new laws or regulations or new interpretations of existing laws or regulations applicable to our business or industry, including data privacy and data security;
•price and volume fluctuations in the trading of our common stock and warrants and in the overall stock market, including as a result of trends in the economy as a whole;
•lawsuits threatened or filed against us for claims relating to intellectual property, employment issues, inadequate disclosure or otherwise;
•changes in our board of directors (our “Board”) or management;
•short sales, hedging, and other derivative transactions involving our common stock;
•sales of large blocks of our common stock including sales by our executive officers, directors, and significant stockholders; and
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•other events or factors, including changes in general economic, industry and market conditions, and trends, as well as any natural disasters that may affect our operations.
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies in our industry. Stock prices of such companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies.
In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management, and harm our business.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal properties include our manufacturing and storage facilities, as well as our corporate headquarters.
We lease processing facilities in Paramount, California, Albuquerque, New Mexico, Youngstown, Ohio and have an office suite lease in San Pedro, California. The Paramount facility also serves as our headquarters. Ittella Properties, a related entity controlled by Mr. Galletti, owns one of the buildings that comprise the Paramount facility and Deluna, a related party controlled by Mr. Galletti, owns the San Pedro building. We believe that the lease terms with Ittella Properties and Deluna are on an arms-length basis.
In April 2021, we acquired the processing facility in Prossedi, Italy with approximately 7.0 acres of land and over 100,000 square feet manufacturing facility with machinery and equipment. In December 2021, we leased approximately 270,000 square feet of cold storage facility in Ceccano, Italy, which allows us to better manage inventory and take advantage of seasonal purchases of raw materials during the peak harvest season.
On November 12, 2021, we entered into a 10-year lease expiring December 31, 2031 with two 5-year renewal options. Under the terms of the lease, we will lease approximately 46,510 square feet freestanding industrial building situated on 76,230 square feet of land for our distribution center in Vernon, California.
On August 19, 2022, we entered into an equipment purchase agreement and assumed a lease for an 80,000 square feet manufacturing facility located in Albuquerque, New Mexico. The facility is located near our Karsten and NMFD production facilities. This lease expires on November 30, 2024 and is subject to two options to extend the term of the lease, each for an additional five year term.
In addition, we lease various cold storage spaces in the United States which allows for effective promoting and presenting our products to more wide and distant markets.
We believe that our current facilities are adequate to meet ongoing needs and that, if we require additional space, we will be able to obtain additional facilities on commercially reasonable terms.
Item 3. Legal Proceedings.
From time to time, we are 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 consolidated financial position or results of operations and cash flows.
A subsidiary of ours, 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 were originally seeking collectively €1.9 million 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.
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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. As of the reporting date, the insurance company paid €0.2 million to settle the civil portion of the case and the criminal portion is outstanding. Based on local counsel's professional estimation, our remaining liability exposure could be from zero to €0.4 million. Ittella Italy believes any required payments could be covered by its insurance policy; however, it is not probable 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, we believe that a loss is currently not probable and an estimate cannot be made.
On December 23, 2022, a purported class action lawsuit was filed in the United States District Court for the Central District of California against us, our Chief Executive Officer, Salvatore Galletti, and our Chief Financial Officer, Stephanie Dieckmann. The complaint alleges generally that during the purported class period between March 20, 2021 and October 12, 2022, we and the named executive officers made misleading statements and/or failed to disclose material facts about our business and operations due to alleged material weaknesses in our financial reporting internal controls. The complaint seeks to assert claims for violations of Section 10(b) (and Rule 10b-5 promulgated thereunder) and Section 20(a) of the Exchange Act, as amended, and seeks unspecified damages. The Court has appointed a lead plaintiff and lead plaintiff's counsel and has set a deadline for the lead plaintiff to file an amended complaint. At this time, it is not possible to estimate any potential material losses or predict the outcome of our anticipated motion to dismiss.
On March 17, 2023, a verified derivative complaint was filed in the United States District Court for the Central District of California against certain of our officers and directors. The complaint alleges: (1) breach of fiduciary duty, (2) unjust enrichment, (3) abuse of control, (4) gross mismanagement, (5) waste of corporate assets, (6) violations of Section 14(a) of the Exchange Act, and (7) contribution under sections 10(b) and 21D of the Exchange Act. At this time, it is not possible to estimate any potential material losses or predict the outcome of our anticipated motion to dismiss.
On April 3, 2023, a second and related verified derivative complaint was filed in the United States District Court for the Central District of California against certain of our officers and directors. The complaint alleges: (1) violations of Section 14(a) of the Exchange Act, (2) breach of fiduciary duty, and (3) unjust enrichment, (4) aiding and abetting breaches of fiduciary duty, (5) waste of corporate assets, and (6) violations of sections 10(b) and 21D of the Exchange Act. The Court consolidated this action with the other related derivative action and appointed lead counsel and the parties are entering stay discussions. At this time, it is not possible to estimate any potential material losses or predict the outcome of our anticipated motion to dismiss.
Generally, while we maintain insurance for certain potential liabilities, such insurance does not cover all types and amounts of potential liabilities and is subject to self-insured retentions, various exclusions as well as caps on amounts recoverable. Even if we believe a claim is covered by insurance, insurers may dispute our entitlement to recovery for a variety of potential reasons, which may affect the timing and, if the insurers prevail, the amount of our recovery.
Except as set forth above, we are not currently a party to any legal proceeding that we believe would adversely affect our financial position, results of operations, or cash flows and are not aware of any material legal proceedings contemplated by governmental authorities.
Item 4. Mine Safety Disclosures.
None.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is traded on the Nasdaq Capital Market under the symbol “TTCF.”
Holders
As of May 9, 2023, there were 36 holders of record of our shares of common stock. The actual number of stockholders of our common stock is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares of common stock are held in street name by banks, brokers and other nominees.
Dividends
We have not paid any cash dividends on our common stock to date and do not intend to pay cash dividends in the foreseeable future. The payment of cash dividends in the future will be dependent upon our revenues and earnings, if any, capital requirements, contractual restrictions under our credit facility and other factors and general financial condition. The payment of any cash dividends will be within the discretion of our board of directors. In addition, our board of directors is not currently contemplating and does not anticipate declaring any stock dividends in the foreseeable future.
Performance Graph
The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing, or otherwise subject to the liabilities under the Securities Act or Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.
The following graph depicts the total cumulative stockholder return on our common stock from September 12, 2018, the first day of trading of our common stock on the Nasdaq Global Select Market, through December 31, 2018, relative to the performance of the Nasdaq Composite Index and the S&P Food and Beverage Select Index. The graph assumes an initial investment of $100 in our common stock at the market close on September 12, 2018, which was the initial trading day on a stand-alone basis. The closing of our business combination with Forum occurred on October 15, 2020. The performance shown in the graph below is not intended to forecast or be indicative of future stock price performance.
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| 9/12/2018 | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | 12/30/2022* | |||||||||||||||
| Tattooed Chef Inc. | $100.00 | $100.84 | $106.69 | $239.18 | $162.38 | $12.85 | ||||||||||||||
| Nasdaq Composite | $100.00 | $83.42 | $112.80 | $162.03 | $196.69 | $131.58 | ||||||||||||||
| S&P Food and Beverage Select Industry Index | $100.00 | $86.17 | $103.66 | $122.17 | $139.48 | $135.73 | ||||||||||||||
* Last trading day at year end
Item 6. Reserved.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in Part I, Item 1A, “Risk Factors” and under the heading “Cautionary Note Regarding Forward-Looking Statements” elsewhere in this Annual Report on Form 10-K.
Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 are not included in this Annual Report on Form 10-K, and can be found in Part II, Item 7 of the Company’s Annual Report on Form 10-K/A filed on November 17, 2022 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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, bars and quesadillas. Our products are available both in private label and our Tattooed Chef™ brand mainly in the frozen food section of retail food stores.
We've completed two business acquisitions and one asset acquisition during the past two years (see Note 9 Business Combinations and Asset Acquisitions for additional information). NMFD and BCI primarily manufacture private label
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products. The Karsten facility, which was acquired together with NMFD in the second quarter of 2021, started operations during the first quarter of 2023. In the third quarter of 2022, we entered into an equipment purchase agreement, whereby we acquired certain manufacturing and production assets and assumed an 80,000 square foot manufacturing facility in Albuquerque, New Mexico. The New Mexico manufacturing facilities are expected to manufacture Tattooed Chef branded salty snacks, Mexican entrees, traditional entree bowls and private label products. In the fourth quarter of 2021, we completed the Belmont Acquisition and BCI began manufacturing Tattooed Chef branded products during the third quarter of 2022 in addition to legacy private label products. We anticipate continued growth in Tattooed Chef branded products primarily due to new product introductions and further stock keeping units ("SKUs") and store count expansion with current customers. While we are primarily focused on growing our branded business, we will continue to support our private label channel and evaluate new private label opportunities as they arise.
Segment Information
We have one operating segment and one reportable segment, as our chief operating decision maker, our Chief Executive Officer, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance.
Trends and Other Factors Affecting Our Operating Performance
Our management team monitors the following trends and factors that could impact our operating performance.
•Revenue Strategy — Up until the end of 2019, our revenue growth strategy was focused on private label products, but starting at the beginning of 2020, our strategy shifted towards growing the sales of “Tattooed Chef” branded products, which were approximately 57% of net revenue in Fiscal 2020, 61% of net revenue in Fiscal 2021, and 51% of net revenue in Fiscal 2022. The decrease of the percentage in 2022 was due to the newly acquired NMFD and BCI facilities, which primarily manufactured private label products in 2022. The Company will continue to focus on product innovation within the branded Tattooed Chef products moving forward, while maintaining a healthy mix of private label items.
•Long-Term Consumer Trends, and Demand — We participate in the North American frozen food category. We believe our innovative food offerings converge with consumer trends and demands for great-tasting, wholesome, plant-based foods made from sustainably sourced ingredients, including preferences for flexitarian, vegetarian, vegan, organic, and gluten-free lifestyles. We expect consumer trends towards these healthier lifestyles to continue.
•Competition — We compete with companies that operate in the highly competitive plant-based and frozen food segments, many of which have substantially greater financial resources, more comprehensive product lines, broader market presence, longer-standing relationships with distributors, retailers, and suppliers, longer operating histories, greater production and distribution capabilities, stronger brand recognition and greater marketing resources than we do. We believe that Tattooed Chef's principal competitive factors in this category include, among others, taste, nutritional profile, ingredients, cost and convenience.
•Operating Costs — Our operating costs include raw materials, direct labor and other wages and related benefits, manufacturing overhead, selling, distribution, and other general and administrative expenses. We select raw material contracts with growers and cooperatives in Italy that allow us to better control ingredient costs.
•Sales and Marketing Costs — As we continue to grow our “Tattooed Chef” product portfolio, we have added critical internal team members to our sales and marketing team and brought in house key roles and services to service our expanding Tattooed Chef branded customer base. Marketing expenditures are primarily on sales commission and advertisement. We have also hired a national marketing firm to implement campaigns for digital video and display, connected television, social media and search engine marketing. As we expand and grow revenue, we continue to build out a brand management team (to support Ms. Galletti, who currently oversees all “Tattooed Chef” marketing efforts) to focus on digital marketing, social media and other marketing functions. In 2023, we are redirecting our sales and marketing costs to in house and more of a social media approach utilizing influencers and connecting on a more personal level with our consumer.
•Commodity Trends — Our profitability depends, among other things, on our ability to anticipate and react to raw material and food costs. We source our vegetables from a number of growing regions within Italy, and North and
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South America. The prices of vegetables are subject to many factors beyond our control, such as the number and size of growers that produce crops, the vagaries of these farming businesses (including poor harvests due to adverse weather conditions, natural disasters and pestilence), changes in national or world economic conditions, political events, tariffs, trade wars or other conditions in Italy, North America, or South America.
•Debt Obligations — We regularly evaluate our debt obligations, which primarily consist of revolving lines of credit in the United States and Italy and a note payable borrowed from related party used to finance working capital requirements. The line of credit outstanding balance was $20.3 million and $1.2 million as of December 31, 2022 and 2021, respectively. As of December 31, 2022, we borrowed $10.0 million from Salvatore Galletti to be used for operations. Ittella Italy entered into several line of credits and notes used for working capital requirements. Additionally, Ittella Properties and Karsten have notes with financial institutions through financing arrangements. (See Note 16 Indebtedness and Note 19 Related Party Transactions to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K). Due to our operating loss results, we are not in compliance with financial covenants and we are seeking additional financing sources that may be adversely impacted by potential worsening of global economic conditions, including, banking crisis, interest rate environment, inflationary pressures, and the recent disruptions to, and volatility in, the credit and financial markets in the United States.
•Currency Hedging — We currently incur some costs and expenses in Euros and expect in the future to incur additional costs and expenses in that currency. As a result, revenues and results of operations are subject to foreign exchange fluctuations. We utilize currency hedging (or purchase forward currency contracts) to mitigate currency exchange rate fluctuations.
•Acquisitions — We made two strategic business acquisitions in 2021 and one asset acquisition in 2022 that are strategically aligned with our mission and needs.
•Goodwill impairment — We recorded an impairment charge of $25.6 million, fully impairing goodwill, during the fourth quarter of 2022 resulting from the fair value of the Company’s single reporting unit being less than its carrying amount as of December 31, 2022.
Use of Adjusted EBITDA
We seek to achieve profitable, long term growth by monitoring and analyzing key operating metrics, including Adjusted EBITDA, as defined below in “Non-GAAP Financial Measures”. Our management uses this non-GAAP financial metric and related computations to evaluate and manage our business and to plan and make near and long-term operating and strategic decisions. Our management team believes this non-GAAP financial metric is useful to investors to provide supplemental information in addition to the GAAP financial results. Management reviews the use of our primary key operating metrics from time-to-time. Adjusted EBITDA is not intended to be a substitute for any GAAP financial measure and, as calculated, may not be comparable to similarly titled measures of performance of other companies in other industries or within the same industry. Our management team believes it is useful to provide investors with the same financial information that it uses internally to make comparisons of historical operating results, identify trends in underlying operating results, and evaluate our business. Reconciliations between GAAP and non-GAAP financial measures are provided in “Non-GAAP Financial Measures,” which appears later in this section.
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Results of Operations
The following table sets forth selected items in our consolidated financial data in dollar amounts and as a percentage of revenue for the period represented:
Fiscal Year Ended December 31, 2022 Compared to Fiscal Year Ended December 31, 2021
| Fiscal Year Ended December 31, | |||||||||||||||||||||||
| (in thousands) | 2022 | % of net revenue | 2021 | % of net revenue | |||||||||||||||||||
| Net revenue | $ | 230,929 | 100.0 | % | $ | 207,994 | 100.0 | % | |||||||||||||||
| Cost of goods sold | 244,332 | 105.8 | % | 190,857 | 91.8 | % | |||||||||||||||||
| Gross (loss) profit | (13,403) | (5.8) | % | 17,137 | 8.2 | % | |||||||||||||||||
| Selling, general and administrative | 98,263 | 42.6 | % | 54,173 | 26.0 | % | |||||||||||||||||
| Goodwill impairment | 25,552 | 11.1 | % | — | — | % | |||||||||||||||||
| Total operating expenses | 123,815 | 53.6 | % | 54,173 | 26.0 | % | |||||||||||||||||
| Loss from operations | (137,218) | (59.4) | % | (37,036) | (17.8) | % | |||||||||||||||||
| Interest expense | (674) | (0.3 | %) | (261) | (0.1) | % | |||||||||||||||||
| Other expense | (2,479) | (1.1 | %) | (2,222) | (1.1) | % | |||||||||||||||||
| Loss before provision for income taxes | (140,371) | (60.8 | %) | (39,519) | (19.0) | % | |||||||||||||||||
| Income tax expense | 1,112 | 0.5 | % | 47,439 | 22.8 | % | |||||||||||||||||
| Net loss | $ | (141,483) | (61.3 | %) | $ | (86,958) | (41.8) | % | |||||||||||||||
| Other comprehensive loss, net of tax | $ | (721) | (0.3 | %) | $ | (954) | (0.5) | % | |||||||||||||||
Net Revenue
Net revenue increased by $22.9 million, or 11.0%, to $230.9 million for Fiscal 2022 as compared to $208.0 million for Fiscal 2021. The net revenue increase was primarily driven by an increase of $24.4 million in private label product revenue, which benefited from nearly full year revenue contribution attributable to the acquisition of BCI and partial year contribution attributable to NMFD. Other revenue (consisting primarily of burritos, enchiladas and quesadillas and other products sold by NMFD to its restaurant customers as well as co-manufacturing contracts) was up $7.7 million from partial year contribution from NMFD and other revenue items. Tattooed Chef branded product net revenue was down $9.2 million driven by higher trade spend related to our strategy of diversifying our sales channel into retail and other market channels. Branded gross revenue was up $4.3 million, while trade spend, which is a reduction of selling price and net revenue under GAAP, was up $13.0 million. Tattooed Chef gross revenue was primarily driven by expansion in the number of distribution points.
Cost of Goods Sold
Cost of goods sold increased $53.5 million, or 28.0%, to $244.3 million for Fiscal 2022 as compared to $190.9 million for Fiscal 2021. Cost of goods sold, as a percentage of net revenue, increased to 105.8% for Fiscal 2022 from 91.8% for Fiscal 2021. The increase as a percentage of net revenue was primarily driven by an approximately 6% increase from inflationary pressures on raw materials, packaging, supplies and other commodities, a 3% increase in labor and third party services, a 2% increase in freight and storage cost, and another 2% increase from operational inefficiencies as we expanded our manufacturing footprint at a greater rate than sales volume growth. We continue to focus on building more efficient distribution networks and production lines through automation.
Gross (Loss) Profit and Gross Margin
Gross (loss) profit decreased $30.5 million, to $(13.4) million for Fiscal 2022 as compared to $17.1 million for Fiscal 2021. Gross margin for Fiscal 2022 was (5.8)% as compared to 8.2% for Fiscal 2021. The decrease in gross margin is primarily driven by the previously noted inflationary pressures on our material, labor, freight and storage costs, as well as operational inefficiencies.
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Operating Expenses
Operating expenses increased $69.6 million, or 128.6%, to $123.8 million for Fiscal 2022 as compared to $54.2 million for Fiscal 2021. As a percentage of net revenue, total operating expenses increased to 53.6% for Fiscal 2022 from 26.0% for Fiscal 2021. Compared to Fiscal 2021, the increase for Fiscal 2022 is primarily due to an one-time $25.6 million of goodwill impairment (see Note 10 Intangible assets, net and goodwill), a $12.2 million increase in marketing and advertising expenses, an $9.5 million increase in professional expenses, a $6.9 million increase in stock compensation expenses, a $6.4 million increase in labor expenses, a $3.2 million increase in third party cold storage, a $1.5 million increase in supplies, a $1.1 million increase in sales commission and other selling expenses, a $0.8 million increase in bad debt expenses and a $0.8 million increase in depreciation expenses.
The increases in advertising, marketing and selling fees are due to our heavy investment in the Tattooed Chef brand, in order to increase total distribution points, raise brand awareness, and grow revenue. The increase in professional expenses is mainly driven by accounting and auditing fees attributable to being a public company since October 15, 2020 and the business and asset acquisitions (see Note 9 Business Combinations and Asset Acquisitions to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K) we completed in 2021 and 2022. The increases in stock compensation expense, labor and office supplies are primarily a result of recruiting and retaining employees that support our growing business and support the compliance requirements associated with being a public company. The increase in third party cold storage expense is primarily driven by higher inventory levels that support our higher sales volume. The increase in equipment and supplies is primarily driven by our growing headcount and operating sites. The increased bad debt expense is primarily related to one legacy food service account associated with our NMFD acquisition and the higher depreciation expense is related to our heavy investments in systems and infrastructure. The higher selling fees are primarily driven by higher sales volumes and the support of third parties to securing and maintaining those sales volumes. In Fiscal 2022, we spent approximately $1.0 million to start the implementation of an ERP software system to improve our financial reporting control environment in California and New Mexico.
We expect operating expenses to decrease over time as a percentage of net revenue as the Company focuses on profitability and positive cash flow from operations in 2023.
Other Expense, Net and Interest Expense
Other expense increased by $0.3 million for Fiscal 2022 to $2.5 million mainly due to the recognition of foreign exchange change loss in Fiscal 2022. Interest expense increased by $0.3 million for Fiscal 2022 to $0.7 million versus $0.3 million for Fiscal 2021 due to higher line of credit outstanding balance in 2022.
Income Tax Expense
Income tax expense decreased by $46.3 million, or 97.7%, to $1.1 million for Fiscal 2022 as compared to $47.4 million for Fiscal 2021. The decrease was mainly driven by $47.4 million income tax expense recognized during Fiscal 2021, which resulted from a full valuation allowance recognition with respect to our deferred tax assets. We continue to use a full valuation allowance established against our net deferred tax assets in the U.S. See Note 15 Income Taxes to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K.
Net Loss
Net loss increased by $54.5 million, to $141.5 million for Fiscal 2022 as compared to $87.0 million for Fiscal 2021, primarily due to higher operating expenses, operational inefficiencies and higher contra revenue driven primarily by trade spend as covered above.
Other Comprehensive Loss, Net of Tax
Other comprehensive loss, net of tax, represents the effect of the Euro currency translation resulting from income statement accounts that are translated to United States dollars based on an average monthly exchange rate. Balance sheet accounts are translated to United States dollars at the balance sheet date. We recorded losses of $0.7 million and $1.0 million on foreign currency translation in Fiscal 2022 and Fiscal 2021, respectively.
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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 our management team evaluates our 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, financing related costs and operating costs of a non-recurring nature. We believe this non-GAAP measure should be considered along with net income, the most closely related GAAP financial measure. Reconciliations between Adjusted EBITDA and net income are below, and discussion regarding underlying GAAP results are presented throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
We define EBITDA as net income before interest, taxes, depreciation and amortization. Adjusted EBITDA further adjusts EBITDA by adding back non-cash compensation expenses, non-recurring expenses, and other non-operational charges. Adjusted EBITDA is one of the key performance indicators we use in evaluating our operating performance and in making 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 Fiscal 2022 and 2021:
| Fiscal Year Ended December 31, | ||||||||||||||
| ($ in thousands) | 2022 | 2021 | ||||||||||||
| Net loss | (141,483) | (86,958) | ||||||||||||
| Interest expense | 674 | 261 | ||||||||||||
| Income tax expense | 1,112 | 47,439 | ||||||||||||
| Depreciation and amortization | 6,465 | 3,603 | ||||||||||||
| EBITDA | (133,232) | (35,655) | ||||||||||||
| Adjustments | ||||||||||||||
| Goodwill impairment | 25,552 | — | ||||||||||||
| Stock compensation expense | 12,128 | 5,192 | ||||||||||||
| Loss on foreign currency forward contracts | 2,907 | 2,847 | ||||||||||||
| Gain on warrant remeasurement | (808) | (589) | ||||||||||||
| Unrealized foreign currency losses | 463 | — | ||||||||||||
| Acquisition expenses | 342 | 1,043 | ||||||||||||
| UMB ATM transaction | — | 148 | ||||||||||||
| Implementation of ERP | 990 | 415 | ||||||||||||
| Dispute resolution and related fees | — | 465 | ||||||||||||
| Total Adjustments | 41,574 | 9,521 | ||||||||||||
| Adjusted EBITDA | (91,658) | (26,134) | ||||||||||||
Pricing Policies
We negotiate different prices at our different club and retail customers based on product quantity and packaging configuration. Price increases from suppliers require that we carefully observe and evaluate costs in making decisions on price increases, while also remaining competitive in the market. We have increased marketing and advertising expenditures during recent years and will continue to evaluate the use of discounting or promotional campaigns in an effort to build the Tattooed Chef brand in the future.
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Seasonality
Prior to 2021, we experienced greater demand for certain products during the third and fourth quarters, primarily due to increased demand in the summer season and increased holiday orders from retailers and club stores. In 2022, we experienced first half seasonality driven by promotional programs that ran at our largest club retail partner. We do expect this to continue into the future or until our sales concentration to this club partner declines.
Liquidity, Capital Resources and Going Concern
As of December 31, 2022, we had $5.8 million of cash and cash used in operating activities of $82.7 million. The cash outflow during Fiscal 2022 is primarily attributable to continued losses from operating activities which includes $21.6 million in marketing and advertising spend to raise our brand awareness, and $29.7 million in capital expenditures. The $29.7 million in capital expenditures was primarily related to the asset acquisition of NM Holdings and investments in various infrastructure enhancements, automation and robotic machinery that is intended to improve our production efficiency and reduce labor cost.
We have financed our operations and capital expenditures to date primarily from the reverse recapitalization that occurred on October 15, 2020 and in addition through a combination of internally generated cash from operations, available cash on hand, the ability to draw on our line of credit and borrowing from a related party, our CEO, Salvatore Galletti. In connection with the reverse recapitalization on October 15, 2020 (see Note 3 Reverse Recapitalization to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K), we received proceeds of $187.2 million from reverse recapitalization transaction, less a $75.0 million distribution to Myjojo stockholders and $7.2 million in transaction costs. We received $74.5 million and $53.0 million of proceeds from the exercises of warrants (including both public and private warrants) during Fiscal 2021 and Fiscal 2020, respectively.
We expect to use our available cash and potential future borrowings to support and invest in our core business, including completing our investments in initiatives to improve our production efficiency to increase our cash flows from operations. Other than operating expenses, our cash requirements under our significant contractual obligations and commitments are described in Note 13 Leases and Note 16 Indebtedness to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K, and include $23.0 million of total undiscounted lease payments, comprised of $3.4 million in 2023, $10.2 million in 2024 through 2027, and $9.4 million thereafter, and $36.6 million of total debt, of which $25.4 million is current and $11.2 million is non-current and matures primarily in 2025. Our ability to meet our cash flow positive targets is subject to a number of assumptions and uncertainties, including our ability to effectively manage our inventory and working capital, reduce costs and achieve positive gross margins, and meet certain revenue and operating expense targets that may be subject to factors beyond our control.
We are actively seeking to raise outside capital, including debt capital, subject to market and other conditions. Additionally, as part of our growth strategy, we may also raise debt capital for strategic alternatives and general corporate purposes. If additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition may be adversely affected.
Indebtedness
See Note 16 Indebtedness to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10‑K for details regarding our indebtedness.
Lines of Credit
In the United States, our Credit Facility, as amended on August 5, 2022 to expand the Credit Facility to $40.0 million and extend the maturity to September 2025, allows us to borrow up to (a) 85% (or such lesser percentage as our lender may in its sole and absolute discretion determine from time to time) of the net amount of eligible accounts; plus, (b) the lesser of: (i) 50% of the net amount of eligible inventory (ii) $25.0 million; minus (c) the sum of all reserves. Beginning with the quarter ending September 30, 2022, we must meet the following minimum EBITDA tests: (a) for the trailing 1-quarter period ended September 30, 2022, consolidated adjusted EBITDA should not be less than negative $20.0 million; (b) for the trailing 2-quarter period ended December 31, 2022, consolidated adjusted EBITDA should not be less than negative $30.0 million; (c) for the trailing 3-quarter period ended March 31, 2023, consolidated adjusted EBITDA should not be less than negative $35.0 million; (d) for the trailing 4-quarter period ended June 30, 2023, consolidated adjusted EBITDA
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should not be less than negative $40.0 million; (e) for the trailing 5-quarter period ended September 30, 2023, consolidated adjusted EBITDA should not be less than negative $40.0 million; (f) and we are required to achieve positive EBITDA by the two trailing quarters ending December 31, 2023. In addition, commencing with the quarter ending December 31, 2024, we must achieve a fixed charge coverage ratio of not less than 1.00 to 1.00 each quarter. As of December 31, 2022, we were not in compliance with the financial covenants under our Credit Facility.
Our 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 our obligation to pay off the outstanding balance on a daily basis, the balance was classified as a current liability on our consolidated balance sheets as of December 31, 2022 and 2021. As of December 31, 2022, under our Credit Facility, $19.5 million has been borrowed and $0.6 million has been utilized for the letter of credit issuance.
In Italy, Ittella Italy, S.R.L. (“Ittella Italy”) maintains two lines of credit for up to €0.6 million and €1.4 million, of which €0.6 million ($0.6 million) and €0.2 million ($0.2 million), respectively, is outstanding as of December 31, 2022. The lines of credit do not have an expiration date and do not contain financial covenants.
Notes payable
In the United States, we maintain outstanding debt through a note payable borrowed by Ittella Properties, our consolidated variable interest entity (“VIE”), in the amount of $2.1 million, of which $1.8 million is outstanding as of December 31, 2022. Financial covenants of the note payable include a minimum fixed charge coverage ratio of 1.20 to 1.00 commencing with the fiscal quarter ending September 30 2022. As of December 31, 2022, the VIE was not in compliance with the fixed charge coverage ratio and the full balance of the note payable was classified as a current liability.
On May 14, 2021, we acquired NMFD and Karsten in an all-cash transaction for approximately $34.12 million (collectively, the “NMFD Transaction”), we assumed a note payable in the amount of $2.9 million. Under the note payable, NMFD must maintain a minimum fixed charge coverage ratio of 1.20 to 1.00, assessed semi-annually as of June 30 and December 31 of each calendar year beginning December 31, 2021, and we must, on a consolidated basis, maintain a funded debt to EBITDA ratio not to exceed four to one, tested semi-annually as of June 30 and December 31, each calendar year beginning June 30, 2021. The outstanding balance of the note payable was $2.7 million as of December 31, 2022. The balance was classified as a current liability due to noncompliance with the above financial covenants.
On November 23, 2022, we entered a Subordination Agreement with a financial institution (“Senior Creditor”), that provided our Credit Facility. On November 23, 2022 and December 29, 2022, we borrowed $5.0 million ($10.0 million in the aggregate) through an unsecured loan from Salvatore Galletti, our Chief Executive Officer and President. Total loans made by Mr. Galletti was $10.0 million as of December 31, 2022. The loans from Mr. Galletti are evidenced by promissory notes that bear interest at the same rate as our Credit Facility (i.e., the daily adjusting term SOFR rate + 3.0% per annum), mature on September 30, 2025, and are payable interest only, monthly, until their respective maturity dates. The loans are subordinated in right of payment to obligations to our Senior Creditor pursuant to the terms of the Subordination Agreement between us and the Senior Creditor.
In Italy, Ittella Italy entered into two promissory notes in the amount of €1.0 million each. The promissory notes do not contain any financial covenants. The balances on the promissory notes were €0.6 million ($0.7 million) and €1.0 million ($1.1 million) as of December 31, 2022.
Going concern
See Note 1 Basis of Presentation and Significant Accounting Policies under “— Going Concern” to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10‑K for details regarding our going concern consideration. Our recent financial performance has been adversely impacted by the inflationary pressures on labor, freight and material costs as well as marketing expenditures on the Tattooed Chef brand investment to raise brand awareness. In addition, our Credit Facility contains a financial covenant that requires us to maintain a minimum negative $30.0 million of consolidated adjusted EBITDA for the trailing 2-quarters period ended December 31, 2022. We were not in compliance with the adjusted EBITDA minimum requirement as of December 31, 2022 and as of the date these consolidated financial statements were issued. Further, $2.7 million note payable under NMFD and $1.8 million note payable under Ittella Properties, were not in compliance with the financial covenants as of December 31, 2022 and as of the date our consolidated financial statements were issued. As a result, the debt and notes payable have been classified as current
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liabilities within the consolidated balance sheet included the consolidated financial statements that appear elsewhere in this Annual Report on Form 10‑K. We do not have sufficient resources to meet our obligations as they come due for the 12 months after the date our consolidated financial statements are issued.
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 we are unable to (a) improve its operating results, (b) obtain additional outside capital on terms that are acceptable to us to fund our operations, and/or (c) secure a waiver or avoid forbearance from the lender if we are continually unable to remain in compliance with the financial covenants required by the Credit Facility and notes payable in the United States, we will have to make significant changes to its operating plan, such as delay and reduce marketing expenditures, reduce investments in new products, reduce our capital expenditures, reduce our sale and distribution infrastructure, reduce our workforce or otherwise significantly reduce the scope of its business. Moreover, if we fail to secure a waiver or avoid forbearance from our lender, the failure could accelerate the repayment of the outstanding borrowings under the Credit Facility and notes payable in the United States, or the exercise of other rights or remedies our lender may have under the loan documents and applicable law. While management believes we 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 us. Furthermore, given the inherent uncertainties associated with our growth strategy and as we are currently not in compliance with the financial covenants required by the Credit Facility and notes payable in the United States, management has concluded that substantial doubt exists regarding our ability to continue as a going concern for 12 months from the date of issuance of the consolidated financial statements that appear elsewhere in this Annual Report on Form 10‑K.
We have implemented and continue to implement plans to achieve operating profitability and positive cash flow, including various margin improvement initiatives, the optimization of our pricing strategy, and new product innovation. We will seek outside capital for the foreseeable future until such time that we can begin generating positive cash flow. However, there can be no assurances that we will be able to obtain additional capital on terms acceptable to us or at all. Our ability to raise additional capital may be adversely impacted by the potential worsening of global economic conditions, including, banking crisis, interest rate environment, inflationary pressures, and the recent disruptions to, and volatility in, the credit and financial markets in the United States.
Cash Flows
The following table presents the major components of net cash flows from and used in operating, investing and financing activities for Fiscal 2022 and 2021:
| (in thousands) | 2022 | 2021 | ||||||||||||
| Cash (used in) provided by: | ||||||||||||||
| Operating activities | $ | (82,726) | $ | (51,299) | ||||||||||
| Investing activities | (32,900) | (63,799) | ||||||||||||
| Financing activities | 29,414 | 75,822 | ||||||||||||
| Net decrease in cash | $ | (86,212) | $ | (39,276) | ||||||||||
Operating Activities
Net cash used in operating activities increased to $82.7 million in Fiscal 2022 from $51.3 million in Fiscal 2021. The increase of cash outflow from operating activities was primarily attributable to the increases in operating losses year over year, as discussed in “Results of Operations” above.
For Fiscal 2022, net cash used in operating activities was $82.7 million, primarily driven by the net loss of $141.5 million for the year, adjusted for non-cash items, which primarily included goodwill impairment of $25.6 million, stock compensation expense of $12.1 million, and depreciation expense of $6.5 million,. Working capital usage decreased by $11.7 million primarily driven by a $28.5 million increase in accounts payable, accrued expenses and other current liabilities, $3.4 million decrease in prepaid expenses and other assets, $3.3 million decrease in accounts receivable, partially offset by a $23.4 million increase in inventory. We managed our cash position by increasing the inflow and reducing the outflow, which resulted in the increase in accounts payable, accrued expenses and other current liabilities and the decrease in accounts receivable, as well as prepaid expenses and other assets. The increase of inventory was mainly as a
43
result of the increase of manufacturing capacity in NMFD and we produced more inventory on hand for the promotional sales in the coming quarter.
For Fiscal 2021, net cash used in operating activities was $51.3 million, primarily driven by the net loss of $87.0 million, adjusted for non-cash items, which included a net change in deferred taxes of $46.7 million, stock compensation expense of $5.2 million, depreciation expense of $3.6 million, unrealized forward contract loss of $1.8 million, and warrant liability revaluation gain of $0.6 million. Expenses increased for Fiscal 2021 primarily due to increased spending on sales, promotion and marketing programs to heavily invest in the Tattooed Chef brand and raise brand awareness, as well as the inflationary pricing on freight and container costs. Working capital usage increased largely due to a $3.8 million increase in accounts receivable resulting from increased revenue, a $10.2 million increase in inventory, a $2.6 million increase in prepaid expenses and other current assets due to the increase in prepaid advertising expense, and a $4.6 million decrease in accounts payable, accrued expenses and other current liabilities.
Investing Activities
Net cash used in investing activities relates to capital expenditures to support growth and investment in property, plant and equipment to expand production capacity, tenant improvements, and to a lesser extent, replacement of existing equipment.
For Fiscal 2022, net cash used in investing activities was $32.9 million as compared to $63.8 million in Fiscal 2021. In Fiscal 2022 and 2021, cash used in both periods consisted primarily of capital expenditures to improve efficiency and output from our current facilities and included the expansion of existing production capacity through the acquisitions of NMFD, Karsten, and BCI as well as asset acquisitions.
Financing Activities
For Fiscal 2022, net cash provided by financing activities was $29.4 million, primarily from $19.2 million of net borrowings under our line of credit, and $10.0 million of net borrowings under notes payable to related parties.
For Fiscal 2021, net cash provided by financing activities was $75.8 million, primarily due to $74.5 million proceeds from warrant exercises and $1.7 million of net borrowings under the Credit Facility and notes payable to support working capital requirements to fund continued growth.
We have no obligations, assets or liabilities that would be considered off-balance sheet arrangements as of December 31, 2022. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, that have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.
Critical Accounting Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with GAAP. In preparing our financial statements, we make estimates, assumptions, and judgments that can have a significant impact on our reported revenue, results of operations, and comprehensive net income or loss, as well as on the value of certain assets and liabilities on our balance sheet during, and as of, the reporting periods. These estimates, assumptions, and judgments are necessary and are made based on our historical experience, market trends and on other assumptions and factors that we believe to be reasonable under the circumstances because future events and their effects on our results of operations and value of our assets cannot be determined with certainty. These estimates may change as new events occur or additional information is obtained. We may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates or assumptions.
The critical accounting estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below.
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Revenue Recognition
We sell plant-based meals and snacks including, but not limited to, acai and smoothie bowls, zucchini spirals, riced cauliflower, vegetable bowls and cauliflower crust pizza primarily in the United States. All of our revenue relates to contracts with customers. Each shipped or delivered customer order is determined as a separate performance obligation. When control of the promised products and services are transferred to the Company’s customers, normally at the point when the promised products are delivered to customers or picked up by customers, the Company recognizes revenue in the amount that reflects the consideration the Company expects to receive in exchange for these products and services.
Some contracts also include some form of variable consideration. The most common forms of variable consideration include discounts, slotting fees, trade discounts, promotional programs, and demonstration costs. Variable consideration is treated as a reduction in revenue when product revenue is recognized. Depending on the specific type of variable consideration, we use either the expected value or most likely amount method to determine the variable consideration. We review and update our estimates and related accruals of variable consideration each period based on the terms of the agreements, historical experience, and any recent changes in the market. Differences between such estimated expenses and actual expenses for the variable consideration have historically been insignificant and are recognized in earnings in the period such differences are determined.
Valuation Allowances for Deferred Tax Assets
We establish an income tax valuation allowance when available evidence indicates that it is more likely than not that all or a portion of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we consider the amounts and timing of expected future deductions or carryforwards and sources of taxable income that may enable utilization. We maintain an existing valuation allowance until enough positive evidence exists to support its reversal. Changes in the amount or timing of expected future deductions or taxable income may have a material impact on the level of income tax valuation allowances. Our assessment of the realizability of the deferred tax assets requires judgment about our future results. Inherent in this estimation is the requirement for us to estimate future book and taxable income and possible tax planning strategies. These estimates require us to exercise judgment about our future results, the prudence and feasibility of possible tax planning strategies, and the economic environment in which we do business. It is possible that the actual results will differ from the assumptions and require adjustments to the allowance. Adjustments to the allowance would affect future net income. We have continued to incur pre-tax losses and, as such, there has been no change in the full valuation allowance since 2021.
Goodwill
Goodwill represents the excess of consideration paid over the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed in a business combination. The goodwill was recognized in the purchase price allocations for the acquisitions of NMFD and Belmont (see Note 9 Business Combinations and Asset Acquisitions for additional information). Goodwill is not subject to amortization, but is evaluated for impairment annually, or more frequently if circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
When testing goodwill for impairment, we first conduct a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of our single reporting unit is less than our carrying amount. In assessing the qualitative factors, we consider the impact of certain key factors including macroeconomic conditions, industry and market considerations, management turnover, changes in regulation, litigation matters, changes in enterprise value, and overall financial performance. If we determine that it is more likely than not that the fair value of the single reporting unit is less than its carrying amount, we test for impairment by comparing the estimated fair value of the single reporting unit with its carrying amount. We perform a quantitative impairment test using fair values derived either from our market capitalization (as we have a single reporting unit) or by using a combination of the guideline public company method under the market approach and the discounted cash flow analysis method under the income approach to determine the fair value. Any excess of the carrying amount of the reporting unit’s goodwill over our fair value is recognized as an impairment loss, and the carrying value of goodwill is written down. Under the income approach, we project our future cash flows and discounts those cash flows at an estimated weighted-average cost of capital which considers capital structure and risk premiums, including those reflected in our current market capitalization. Key assumptions in the estimate under the income approach include weighted-average cost of capital, future levels of revenue and operating profits, and projected capital expenditures. Under the market approach, we use valuation multiples to estimate the fair value of the reporting unit to similar publicly traded companies. We apply a weighting between the two approaches to determine the estimated fair value of the reporting unit. To further validate the fair value, we reconcile it to
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our market capitalization by estimating a control premium and other market factors. Changes in judgments, assumptions, and estimates could result in significantly different fair value estimates.
We conduct annual goodwill impairment tests as of September 30th or whenever an indicator of impairment arises. For the annual impairment tests conducted in 2022 and 2021, we determined that the fair value of our single reporting unit, based on our quantitative analysis using our market capitalization, which was significantly greater than the carrying value. However, during the fourth quarter of 2022, we experienced a sustained decline in our share price to $1.23 as of December 31, 2022 from $4.98 as of September 30, 2022, which resulted in a decline of market capitalization to approximately $100 million as of December 31,2022 from over $400 million as of September 30, 2022. We determined that it was more likely than not that an impairment may exist. We conducted an interim impairment test by estimating fair value using a combination of the market approach and income approach described above, and recognized a goodwill impairment charge of $25.6 million for the year ended December 31, 2022.
Warrant Liabilities
We account for warrants included in the private placement units issued at the time of our initial public offering to purchase up to 655,000 shares of common stock (“Private Placement Warrants”) in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging (“ASC 815”), whereby the Private Placement Warrants are recorded as liabilities as they do not meet the criteria for an equity classification. As the Private Placement Warrants meet the definition of a derivative as contemplated in ASC 815, they are measured at fair value at inception and subsequently remeasured at each reporting date, with changes in fair value recognized in the consolidated statements of operations and comprehensive income (loss) in the period of change. Due to the limited amount of outstanding warrants and decreased stock price, there were no material warrant liabilities during the year ended December 31, 2022 and this policy is not critical to Fiscal 2022.
Acquisitions and Purchase Price Allocation
We follow the guidance in ASC 805, Business Combinations, for determining whether an acquisition meets the definition of a business combination or asset acquisition. Based on the analysis and conclusion on an acquisition’s classification of a business combination or asset acquisition, the accounting treatment is determined. Acquisition costs are expensed for an acquisition of a business and capitalized for an acquisition of assets.
Business combinations are accounted for using the acquisition method of accounting, which requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. 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.
Fair value determinations are based on discounted cash flow analyses or other valuation techniques. In determining the fair value of the assets acquired and liabilities assumed in a material acquisition, we may utilize appraisals from 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. Although we believe that the assumptions and estimates we have made in these fair value determinations have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired company and are inherently uncertain. There were no business combinations during the year ended December 31, 2022, and no material measurement period adjustments recorded in the year ended December 31, 2022, so this policy is not critical for Fiscal 2022.
Foreign Currency Translation and Transactions
Our functional currency is the United States dollar for U.S. entities. Ittella Italy’s functional currency is the Euro. Transactions in currency other than the functional currency are recognized at the rates of exchange prevailing at the dates of the transaction. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency of each entity are included in the results of operations in income from operations as incurred. The consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K are expressed in United States dollars. Assets and liabilities of foreign operations are translated at period-end rates of exchange. Revenues, costs and expenses are translated at average rates of exchange prevailing during the period. Equity adjustments resulting from translating foreign currency financial statements are accumulated as a separate component of stockholders’ equity.
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We conduct business globally and are therefore exposed to adverse movements in foreign currency exchange rates, specifically the Euro to US dollar. To limit the exposure related to foreign currency changes, we entered into foreign currency exchange forward contracts starting in 2020. We do not enter into contracts for speculative purposes. We have 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. 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, which are denominated in currencies other than the functional currency of the reporting entity. These derivative instruments generally have maturities of up to twelve months. The fair values of these derivative instruments classified as Level 2 input financial instruments. Refer to Note 11 Derivative Instruments to our consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K for discussion related to the derivative instruments.
Item 7A. 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. Some of long-term debt is carried at amortized cost and thus fluctuations in interest rates do not impact our 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.
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.
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 year ended December 31, 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 $13.5 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.
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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 US 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 (expense) income, net. Transaction gains and losses on long-term intra-entity transactions are recorded as a component of other comprehensive (loss) income, net of tax on the consolidated statements of operations and comprehensive income (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 foreign currency translation adjustments through other comprehensive (loss) income, net of tax were $0.7 million for the year ended December 31, 2022. Foreign currency transaction losses included in other (expense) income, net were $2.9 million for the year ended December 31, 2022.
Based on the intercompany balances and outstanding forward contracts as of December 31, 2022, an assumed 5% or 10% adverse change to foreign exchange rates would result in a loss of approximately $5.5 million or $7.5 million, respectively, recorded in other (expense) income, net.
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 fiscal 2023. In addition, the ongoing war 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 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | |||||
F-2 | |||||
F-1
Report of Independent Registered Public Accounting Firm
To the stockholders and the Board of Directors of Tattooed Chef, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Tattooed Chef, Inc. and subsidiaries (the "Company") as of December 31, 2022, the related consolidated statements of operations and comprehensive loss, changes in stockholders' equity, and cash flows, for the year ended December 31, 2022, and the related notes and the schedule listed in the Index at Item 15(a)(2) (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 15, 2023, expressed an adverse opinion on the Company's internal control over financial reporting because of material weaknesses.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has an accumulated deficit, has a net loss, has net cash used in operating activities, is out of compliance with certain financial covenants related to its outstanding debt, and does not have sufficient resources to meet obligations as they come due that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F-2
Goodwill — Refer to Notes 1, 10, and 12 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of its single reporting unit to its carrying value. Any excess of the carrying amount of the reporting unit’s goodwill over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down. The Company estimates the fair value of its reporting unit by using a combination of the guideline public company method under the market approach and the discounted cash flow analysis method under the income approach. The Company’s fair value method involves the use of significant estimates and assumptions including future cash flow forecasts and discount rate, based on the Company’s weighted-average cost of capital, used in the income approach, and market multiples of revenue based on the multiples for comparable publicly traded companies used in the market approach. The Company identified indicators of impairment during the quarter ended December 31, 2022. Prior to identification of the impairment indicators, the goodwill balance was $25.6 million. As a result of testing goodwill for impairment, the Company fully impaired all recorded goodwill.
We identified goodwill as a critical audit matter because of the significant judgments made by management to estimate the fair value of the Company. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to future cash flow forecasts, selection of the discount rate, and selection of market multiples of revenue.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the future cash flow forecasts, discount rate, and market multiples of revenue used by management to estimate the fair value of the Company included the following, among others:
•We evaluated the inputs to management’s future cash flow forecast by obtaining an understanding of how management developed the inputs.
•We evaluated management’s ability to accurately forecast future cash flows by comparing actual results to management’s historical forecasts.
•We evaluated the sensitivity of changes to future cash flow forecast assumptions and the impact on the fair value of the Company.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rate based on the Company’s weighted-average cost of capital, including validating the underlying source information and the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing the range to the discount rate selected by management.
•With the assistance of our fair value specialists, we evaluated the market multiples of comparable publicly traded companies, including validating the underlying source information and mathematical accuracy of the calculations, and comparing the Company’s selected multiples of revenue applied to historical and forecasted revenue to the range of multiples of its guideline companies based on the size, growth, and profitability factors of its guideline companies.
/s/ Deloitte & Touche LLP
May 15, 2023
We have served as the Company's auditor since 2022.
F-3
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Tattooed Chef, Inc.
Paramount, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Tattooed Chef, Inc. (the “Company”) as of December 31, 2021, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years ended December 31, 2021 and 2020, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021, and the results of its operations and its cash flows for the years ended December 31, 2021 and 2020, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Method Related to Leases
As discussed in Notes 1 and 13 to the consolidated financial statements, the Company changed its method of accounting for leases in 2021 due to the adoption of the Accounting Standards Codification (“ASC”) Topic 842, Leases.
Restatement of Financial Statements
As discussed in Note 1 to the consolidated financial statements, the 2021 financial statements were restated to correct misstatements.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor from 2020 to 2022.
Costa Mesa, California
March 16, 2022, except for the impact of the restatement and revisions described in Note 1, as to which the date is November 16, 2022, and the financial statement schedule, as to which the date is May 15, 2023.
F-4
TATTOOED CHEF, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share and per share information)
| December 31, 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 assets, net | |||||||||||
| Finance lease right-of-use assets, 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 | |||||||||||
| Other current liabilities | |||||||||||
| TOTAL CURRENT LIABILITIES | |||||||||||
| Warrant liability | |||||||||||
| Operating lease liabilities, net of current portion | |||||||||||
| Notes payable, net of current portion | |||||||||||
| Notes payable to related parties, net of current portion | |||||||||||
| TOTAL LIABILITIES | |||||||||||
COMMITMENTS AND CONTINGENCIES (See Note 20) | |||||||||||
| STOCKHOLDERS’ EQUITY | |||||||||||
Preferred stock- $ | |||||||||||
Common stock- $ | |||||||||||
| Additional paid in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| TOTAL STOCKHOLDERS’ EQUITY ATTRIBUTABLE TO TATTOOED CHEF, INC. | |||||||||||
| Noncontrolling interest | |||||||||||
| TOTAL STOCKHOLDERS’ EQUITY | |||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
TATTOOED CHEF, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except for share and per share information)
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Net revenue | $ | $ | $ | ||||||||||||||
| Cost of goods sold | |||||||||||||||||
| Gross (loss) profit | ( | ||||||||||||||||
| Selling, general and administrative | |||||||||||||||||
| Goodwill impairment | |||||||||||||||||
| Total operating expenses | |||||||||||||||||
| Loss from operations | ( | ( | ( | ||||||||||||||
| Interest expense | ( | ( | ( | ||||||||||||||
| Other (expense) income, net | ( | ( | |||||||||||||||
| (Loss) income before provision for income taxes | ( | ( | |||||||||||||||
| Income tax expense (benefit) | ( | ||||||||||||||||
| Net (loss) income | ( | ( | |||||||||||||||
| Less: net income attributable to noncontrolling interest | |||||||||||||||||
| Net (loss) income attributable to Tattooed Chef, Inc. | $ | ( | $ | ( | $ | ||||||||||||
| Net (loss) income per common share | |||||||||||||||||
| Basic | $ | ( | $ | ( | $ | ||||||||||||
| Diluted | $ | ( | $ | ( | $ | ||||||||||||
| Weighted average common shares | |||||||||||||||||
| Basic | |||||||||||||||||
| Diluted | |||||||||||||||||
| Other comprehensive (loss) income, net of tax | |||||||||||||||||
| Foreign currency translation adjustments | ( | ( | |||||||||||||||
| Total other comprehensive (loss) income, net of tax | ( | ( | |||||||||||||||
| Comprehensive (loss) income | ( | ( | |||||||||||||||
| Less: comprehensive income attributable to the noncontrolling interest | |||||||||||||||||
| Comprehensive (loss) income attributable to Tattooed Chef, Inc. stockholders | $ | ( | $ | ( | $ | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
TATTOOED CHEF, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except for share and per share information)
| Redeemable Noncontrolling Interest Amount | Common Stock | Treasury Stock Shares | Additional Paid-In Capital | Accumulated Comprehensive Income (Loss) | Retained Earnings (Deficit) | Noncontrolling Interest | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2020 | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Accretion of redeemable noncontrolling interest to redemption value | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Capital contribution | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Reverse recapitalization | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash distribution to Myjojo (Delaware) stockholders | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Transaction costs, net of tax | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Release of holdback shares | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of warrants | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||