TTCF - Tattooed Chef: A Chapter 11 Filing Would Also Be Plant-Based

2023-05-03 17:27:10 ET

Summary

• Tattooed Chef faces being delisted for a failure to file its fiscal 2022 fourth-quarter earnings.
• The plant-based frozen food company has until the end of May to file its Form 10-K with the SEC.
• Cash is running low and likely provides a less than one-year cash runway against the current quarterly operational cash burn rate.

Tattooed Chef ( TTCF ) is in trouble. The plant-based frozen food company has yet to file its fiscal 2022 fourth-quarter earnings, is around $0.50 away from falling below the Nasdaq's minimum listing requirement, and held cash and equivalents of just $14.2 million at the end of its last reported fiscal 2022 third quarter. The company's average quarterly cash burn from operations also stood at $21.4 million for the 12 months from the end of September last year. Hence, Tattooed Chef now finds itself starved of liquidity as negative stock market sentiment for loss-making companies in high-growth industries deepens after a more than year-long rout. What's next for Tattooed Chef and its shareholders? Unfortunately, not much.

The commons are down 80% over the last year on the back of a marked collapse in profitability. Critically, the reversal of this will be built on the company's ability to arrest the decline of its core profitability, raise more funds, and reenergize flagging revenue growth. Indeed, the company's gross profit margins last came in at -7.2% , a sequential deterioration from -1.4% and an even greater fall from positive gross profit margins of 8.55% in the year-ago comp.

Plant-Based Food Sentiment Goes Dark

Tattooed Chef only went public in October 2020 on the back of the now-sputtered-out special purpose acquisition company boom. Initial euphoria around plant-based plays on the sustainability part of the ESG boom would drive its share price as high as $28 with a 12x price-to-sales multiple that seems remarkable when looked at now against the current 0.53x multiple. However, Tattooed Chef is not alone in this retrenchment with close peers Oatly ( OTLY ) and Beyond Meat ( BYND ) also seeing their sales multiple materially contract since the Fed started hiking interest rates.

That Tattooed Chef went public at a time when investors were relatively euphoric about the opportunities posed by the broadly secular growth of plant-based foods was always going to set up the company to compete against intense expectations. This market is set for growth as increased environmental conscientiousness drives US diets away from meat and towards the lower-carbon plant-based option. Against this secular growth story, Tattooed Chef's previous multiple could be justified. Indeed, the vegan food market is expected to reach $35.5 billion by 2027, an increase of 219% from 2019.

Bulls would be right to flag the divergence in sentiment between Tattooed Chef and its peers who both trade on sales multiples that sit just under 2x. This is around 3.5x Tattooed Chef's multiple. The bull case here is that with Tattooed Chef's multiple sitting 56% below its peer group median, there might be some room for more rapid share price growth if and when market sentiment improves. A further risk to the bears, who form the 31% short interest in the company, would also come from the company actually filing its fiscal 2022 fourth-quarter earnings. There is a possibility that actually filing the results would provide a short-term boost.

Critically, if Tattooed Chef fails to comply with the Nasdaq noncompliance letter's May 30, 2023 deadline to file a Form 10-K with the SEC, its common shares would move to over-the-counter trading. The medium to longer-term outlook for the company is cloudy with a constrained liquidity position as of the end of its third quarter only able to provide a less than one-year cash runway. This forms the core existential risk for Tattooed Chef as near-term liquidity can only be constructed on the back of equity sales from a stock price that's down by 95% from its all-time high.

A New Market Reality

The new stock market is brutally indifferent to loss-making companies still in pursuit of seemingly large total addressable markets with a good secular growth story behind them. Tattooed Chef is now chasing liquidity just as capital becomes ever more scarce and expensive in response to a still-rising Fed funds rate. The current market cap at $125 million is set against trailing 12-month revenue of $231.9 million as of the end of the third quarter, net losses of $98.5 million, and free cash outflow of $116.2 million . A 50% decline in free cash outflow through fiscal 2023 would fully consume existing cash and place the company on a path to raising equity capital that would amount to 35% of its current market cap.

In a March filing with the SEC, Tattooed Chef stated it will be taking more aggressive steps to reduce its cost footprint and is targeting $30 million in annual cost savings which it believes could result in positive adjusted EBITDA and cash flow by the middle of 2024. A $15 million cut to its marketing budget will form the bulk of these savings with a reduction in promotional programs set to facilitate another $7 million in cost savings. The cost cuts are necessary and it's now just a waiting game to see if the company is able to see it through before it runs out of funds. I'm rating this as a hold but I'd expect more volatility.

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