Q1 2023 Tattooed Chef Inc Earnings Call
Participants
Devin Sullivan; IR; The Equity Group, Inc.
Sam Galletti; President & CEO; Tattooed Chef, Inc.
Sarah Galletti; Chief Creative Director; Tattooed Chef Inc
Stephanie Dieckmann; CFO; Tattooed Chef, Inc.
Cody Ross; Analyst; UBS
JP Wollam; Analyst; ROTH Capital Partners, LLC
Presentation
Operator
Greetings and welcome to the Tattooed Chef first-quarter 2023 financial results conference call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the conference over to our host, Devin Sullivan of The Equity Group. Thank you. You may begin.
Devin Sullivan
Thank you, Diego. Good afternoon, everyone, and welcome to Tattooed Chef first-quarter 2023 financial results conference call. On the call today are Sam Galletti, President and Chief Executive Officer; Sarah Galletti, Chief Creative Officer and the Tattooed Chef; and Stephanie Dieckmann, Chief Financial Officer. By now, everyone should have access to the earnings release, which went out yesterday afternoon and is available at the company's website, www.tattooedchef.com.
Before we begin, I'd like to remind everyone that the prepared remarks being given today contain forward-looking statements within the meaning of the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Such statements involve a number of known and unknown uncertainties, many of which are outside the company's control and can cause future results, performance, or achievements to differ significantly from the results, performance, or achievements expressed or implied by such forward-looking statements.
Important factors and risks that could cause or contribute to such differences are detailed in the company's filings with the Securities and Exchange Commission. Except as required by law, the company undertakes no obligation to update any forward-looking or other statements herein, whether as a result of new information, future events, or otherwise.
In addition, within our earnings release and in today's prepared remarks, adjusted EBITDA is referenced. It is important to note that this is a non-GAAP financial measure, which the company believes is a useful metric that better reflects the performance of our business on an ongoing basis. A reconciliation of this non-GAAP financial measure to its most directly comparable GAAP financial measure is included in the company's press release, which is also available on its website.
With all that said, it is now my pleasure to turn the call over to Tattooed Chef's President and CEO, Sam Galletti. Sam, please go ahead.
Sam Galletti
Thank you, Devin, and thanks, everyone, for joining us today. It's great to be speaking with you all -- with all of you with our filings up to date and with a little bit of tailwind and progressing towards our goal of switching from growth to profitability. I feel I need to go off script here.
I want all of you to know we are determined to make this the plant-based company of the future. I want to thank everyone for their continued support of Tattooed Chef. I am encouraged by our results for the first quarter and by the factors that we believe separate Tattooed Chef from our competitors.
Our products are plant-based. We address a variety of tastes, and our options are expanding. We have invested in our brand, and our manufacturing capabilities provide us with control and opportunity. As promised, we are reducing the cost necessary to operate our business without compromising our quality or commitment to our clients.
We reduced total operating expenses in Q1 2023 compared to the first quarter of 2022 and narrowed our net losses and adjusted EBITDA losses. We also reduced our cash burn quarter over quarter. We now have greater confidence that we can meet our $40 million expense reduction target by year-end 2023. Our progress is more pronounced when comparing Q1 2023 to the fourth quarter ended December 31, 2022, with a reduction in total operating expenses and a continued narrowing of our losses.
Sarah and I have met with our customers, and we appreciate their support. We are continuing to introduce new products and break into new higher-margin categories. We expanded our distribution with Albertsons, Walmart, and CVS, and are reviewing all of our products for profitability and sell-through.
We are also taking actions to drive efficiencies in our operations and fine-tune our trade spend. We compete in the health and wellness category. And for SPINS data for 12 weeks ending 4/23/2023, of the top 20 brands, Tattooed Chef is one of seven brands that continues to show unit sales growth. The health and wellness category is down 10.6% in units, while Tattooed Chef is delivering 12% more units than this time last year and experiencing 4% growth in total MULO.
In addition, we have reduced the amount of time that our product spends on promotion in the store by 4.3%, which shows growth in both our base business and continuing brand loyalty. The dynamics of our markets have changed, and so too has our approach.
Make no mistake; the market has changed, and I know how to pivot our direction to profitability. Thank you for your attention, and I'll now turn things over to Sarah.
Sarah Galletti
Good afternoon, everyone. Tattooed Chef is a branded food product of the future for vegetarians, flexitarians; in fact, all the tarians. There is something very special about Tattooed Chef products.
They are nostalgic comfort foods made from blends of plant-based ingredients that create the delicious taste and texture that lets you eat vegetarian without compromising flavor. Our manufacturing base assures that we work with sustainable growing practices, which results in high-nutrient fruits and vegetables.
Tattooed Chef has a big future in the better-for-you food and the better-for-the-planet space. This message will be driven home on social media, where we are targeting our core consumers. I remain incredibly excited about the future of Tattooed Chef.
Thanks for your continued support. I'll now turn the conversation over to Stephanie for discussion of our results. Stephanie?
Stephanie Dieckmann
Good afternoon, everyone. We filed our 10-K for the year ended December 31, 2022, and 10-Q for the three months ended March 31, 2023, yesterday. We are once again a timely filer.
Our Q1 2023 net revenue declined by $8.6 million or 12.7% to $59.1 million from $67.7 million in last year's first quarter, due primarily to a $7.3 million decrease in Tattooed Chef-branded products with Walmart as previously mentioned during Q3 last year, and higher trade promotion spend that reflects our support of a seasonally higher focus by our customers on healthy eating products during Q1 2023, as compared to the same period in Q1 2022. As Sam mentioned, we are well diversified between [club] retail and private label.
Branded sales were $31.7 million, driven by the two promotions that we participate in during Q1, historically, with a club retailer. Private label and other revenues decreased 4.4% to $27.4 million quarter over quarter due to a decision made to discontinue certain foodservice items that were inherited with the New Mexico Food Distributor acquisition in 2021.
Cost of goods sold declined to $63.2 million from $63.6 million in Q1 2022, due primarily to inflationary pressure on raw materials and packaging costs that impacted some of our best-selling products, specifically Açaí Bowls; third-party services; and open capacity at the manufacturing sites. Gross loss was $4.1 million as compared to gross profit of $4.1 million in Q1 2022, which was primarily due to inflationary pressures on raw materials and packaging and the increase in trade spend.
Operating expenses declined by $8.6 million or 37% to $14.7 million from $23.3 million in Q1 2022, reflecting the initial impact of our cost reduction initiatives, driven by decreases of $6.9 million in marketing and advertising, $0.7 million in outside service expenses, and $0.4 million in stock-based compensation. We also expect to generate savings via enterprise-wide efficiency gains.
We are building more efficient distribution networks and product lines through automation, along with the integration of an ERP system throughout all of our facilities. Net loss narrowed to $19 million or negative $0.23 per share from a net loss of $20.2 million or negative $0.25 per share in Q1 2022. Adjusted EBITDA loss narrowed to $15.3 million from adjusted EBITDA loss of $16 million in Q1 2022.
Moving to our financial position. At December 31, 2022, cash was $3.5 million, and the net amount drawn against our line of credit was approximately $4 million. Net cash used in operating activities for the first quarter of 2023 was $5.7 million, a substantial decline from net cash used in operating activities of $26.4 million at March 31, 2022. The decline was due to several factors, including a reduction in inventory of $18.6 million.
Capital expenditures during the first quarter was approximately $500,000 and primarily reflected maintenance expenditures. We made considerable investments last year to complete our automation initiatives for 2023.
We have revised our 2023 outlook and our longer-term outlook to achieving breakeven adjusted EBITDA and cash flow neutrality. We expect sales for the year to be $200 million to $205 million compared to net revenue of $231 million in 2022. This is expected to be the result of several factors including our shift from growth to profitability, which will include the rationalization of certain underperforming SKUs, realignment of operational efficiencies, and gearing towards leaner operations.
Gross margin is expected to improve on consecutive quarterly basis throughout 2023. We expect to generate annual cost savings of approximately $40 million and had a good start towards this goal in the first quarter. Further details can be found in our press release from yesterday.
As we have also noted in our press release, we continue to pursue debt or equity capital and have provided disclosures in our filings regarding this subject. I thank you for your attention, and I'll turn the conversation back to Sam.
Sam Galletti
Thanks, Stephanie. Let's open the call for questions from our analysts.
Question and Answer Session
Operator
(Operator Instructions) Cody Ross, UBS.
Cody Ross
Good morning -- or good afternoon, I should say. Thank you for taking our questions. First question, I saw a note in your press release just about a vendor disruption, and that's going to impact your 2Q results. Can you just expand here on possibly the magnitude and exactly what is the nature of the vendor disruption?
Stephanie Dieckmann
We use a cold storage facility that is nationwide, and we are in several locations. And they have experienced an outage in their system. And basically, we have been unable to ship products now for a couple of weeks. We are waiting to hear back from that supplier, I guess, you could call them, as to when their system will be back up and running. But we do expect it to affect Q2.
We don't have the exact dollar amount yet. Our hope is that they will be back up and running this week. And everyone across the country who does business with this vendor is being affected. They are a well-known cold storage facility, and we are hanging in there with them. And I believe that they will have solutions for us in the next week or two. And once we can quantify that difference, we would be happy to remark on that.
Cody Ross
Thank you. I appreciate that. And I understand the sensitive nature. So I just have one last question on this topic, and then I have another question.
Just can you share with us the timeline of the disruption? Has this been going on for two weeks, three weeks, four weeks? Just to help -- try to help frame it for ourselves.
Stephanie Dieckmann
It's been about 2.5 weeks. And it doesn't affect all of our customers, but it does affect Walmart. It does affect the West Coast Kroger. It does affect all the -- and Whole Foods as well.
Cody Ross
That is super helpful. Thank you for that. And then just pivoting here. You're on a journey towards profit and positive cash flow. You're still investing in new products and retail expansion. Do you think you could achieve your financial goals if you hit the pause button on innovation and retail expansion?
Sam Galletti
Absolutely. We -- so the way that our products are -- we already have them all already vetted out. And our margins on these other items are -- all the new innovation that we have rolling out is 2.5 times what our typical frozen margins are.
So we are able to be a little bit more aggressive and flexible with our innovation. As you know, frozen has just the lowest margins in the whole -- in our host -- in the stores that we sell. So yes, we believe that -- we feel good that we're going to be able to meet our guidance that we're showing and hopefully, beat it.
Sarah Galletti
In addition, I'd like to add that because we're manufacturers, the cost of research and development on the new items has not been a costly item for us. Our research and development costs are not a large item on our profit and loss statement.
Cody Ross
That was actually really helpful. That's where I was going with this. And Sam, it sounds like these new products will actually enhance your ability to get to profit and positive cash flow. Any idea of stopping this would actually hinder your ability to hit it. Is that fair?
Sam Galletti
It is so -- it is spot on. It is exactly one of the ways that we're going to be increasing our gross margins and being able -- so it'll hit that pivot point that -- the point to where we're reducing our expenses, and we're increasing all of our new innovation. All has -- all these ambient items command such a higher margin.
So with both of these things happening at the same time, we're very optimistic that we'll be able to hit profitability. And we're just -- we're trying to be conservative because it's been very interesting how our whole market, the -- our competitors, our peers in the same market -- they've just continuously hit -- missed guidance so badly for two years now. And so I just think that we needed to take a step back and be a lot more realistic and really just now start building from a base to where we're very confident and comfortable with what we're doing.
Cody Ross
Got you. That is helpful. And then one last question from me, and I'll pass it on so I don't hog it here. You mentioned the potential for raising additional capital. You have about $3.5 million of cash on hand. You're still burning cash and will likely for the remainder of the year.
Can you just remind us how much borrowing flexibility you currently have and the potential avenues you would go to raise capital? Because I imagine the costs would be fairly high, given the current interest rate environment. Thank you.
Stephanie Dieckmann
So what we're looking at right now is we still have a good relationship with UMB that remains unchanged, as far as the status of our relationship. We have some things in the works that we're not quite ready to talk about yet. We've looked at every type of transaction there is out there. As you are aware, Cody, as I'm sure the market is aware, it's a much different world than it was a year ago or two years ago.
And so it's taken us a little bit longer than we originally planned. But as soon as we're ready to announce, as soon as we make sure that we've got everything lined up, press release will be first, and then the analyst phone calls will be second.
Cody Ross
Thank you. I'll pass it on.
Operator
(Operator Instructions) JP Wollam, ROTH MKM Capital Partners.
JP Wollam
Hi, everyone. Good afternoon and thanks for taking my questions. If we could maybe just start on the revenue line and thinking about guidance for the year, it looks like, if we think sequentially, we saw some strength in Q1. Maybe that was a function of some of the club promotion.
But I'm just curious to get your perspective on really what gives you confidence in that guidance figure and the -- it sounds like Q2 might be affected a little bit. But on that run rate sales number going forward, what really gives you confidence that we've found the right level?
Sam Galletti
Sure, JP. So the confidence we get from our numbers is that, first of all, as we stated in our earnings, this company is really kind of divided into three categories. There's a private label piece of it. There's a branded with club piece of it. And then there's our conventional retail business, which is a piece of it.
So it's like -- if somebody asked me the question and we were 100% in conventional retail, I would not be sure. But because we have the confidence from this company is really a very older -- it's a 20-year-old company. And we have great relations and history with our club business and our private label business that gives us the security -- the confidence that then when we take these guidance numbers -- and like we said, $200 million to $205 million this year -- we're not depending on such a -- the growth that -- because we're still -- when it comes to the products that we're just -- we're still just launching products into the market. So this is so fresh still.
So what we wanted to do is we wanted to be conservative, but we wanted to be realistic. Because as we know, the market in general in our categories are declining. I believe that our numbers this year are spot on. And then going forward, our upside could be very -- more aggressive than we are, but we want to take it a step at a time.
I hope I answered your question. Stephanie?
Stephanie Dieckmann
So what I want to take the time to remind everyone, JP, is when we do these promotions with Costco. And we've talked about it openly before in which we participate in two MBMs for -- one is for the Organic Riced Cauliflower Stir Fry, and the other is for Organic Açai Bowl.
We have a large contra revenue item that comes with this. And when we restated our financials for 2022, we stated that it was over $5 million. So whereas it does help us drive some revenue, and it does help us with products that, historically, are profitable and good-selling products.
For (technical difficulty) it's more about the marketing experience that we have by having Tattooed Chef in all eight regions of Costco at the same time for a two-month period. But there is a whole $5 million contra revenue that affects profitability just because it reduces revenue. So it's not quite the spike or the addition into the margin, not to mention that there was still a drop in OpEx, which has nothing to do with that. And that's what gives us confidence in being able to further expand upon our pathway to profitability.
JP Wollam
Okay, understood. And then maybe just -- maybe just thinking about gross margin. Can you just help us think about what you are expecting to see each quarter that should drive that incremental margin expansion through the remainder of the year? Anything concrete you can point to?
Sam Galletti
You.
Stephanie Dieckmann
Okay. So the first point is this: we've reduced our staff. We've turned around and looked at leaner operations, meaning, taking out some of the middle management and things of that nature within the plant and manufacturing itself, along with the automation, the SKU rationalization; gearing towards higher-margin products, some outside of the frozen section; and going through and really taking a product-by-product [stand] as to how to move to actually ship in the right direction while focused on having quality products that taste good, but also generating revenue, and where we can cut that, whether it be overhead in the plant itself or if it's actually looking at the product line and looking at how it's manufactured and what we can do to increase the margin on a per SKU basis.
Sam Galletti
JP, I agree with Stephanie. It's spot on. You have to remember that I've been in this industry for 40 years, and it always used to just be about -- every product stands on its own. It needs to be that product needs to be profitable.
And that's how I've always built my businesses, sold my businesses when we went public. And we had this complete new venture of building a brand as quickly as you can and just trying to get as much market share at any cost. It's a completely different game.
And obviously, when the market changed from a liquidity standpoint, we had to change. And so -- but if anybody knows how to get to that profitability, it's been my life history. So I know how to do it. It's in the works. It's in the process. It's hard to flip $100 million overnight, but it's going to happen.
JP Wollam
Okay. Yeah, that's great. Very helpful. And I'll pass it along. Thank you, guys, for the time. I appreciate it.
Sam Galletti
Thank you.
Stephanie Dieckmann
Thanks, JP.
Operator
Thank you. There are no further questions at this time. I'll hand the floor back to Sam Galletti for closing remarks.
Sam Galletti
Thanks so much, everybody, for joining us today. We really appreciate it. We appreciate all the support for Tattooed Chef, and we look forward to hearing from you in the future. Have a great day.
Operator
Thank you. This concludes today's call. All parties may disconnect.
