NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Nature of Operations – Traeger, Inc. and its wholly owned Subsidiaries (collectively "Traeger" or the "Company") design, source, sell, and support wood pellet fueled barbecue grills sold to retailers, distributors, and direct to consumers. The Company produces and sells the pellets used to fire the grills and also sells Traeger-branded rubs, spices, sauces and premium frozen meal kits, as well as grill accessories (including covers, barbecue tools, trays, liners, MEATER smart thermometers and merchandise). A significant portion of the Company’s sales are generated from customers throughout the United States ("U.S."), and the Company continues to develop distribution in Canada and Europe. The Company’s headquarters are in Salt Lake City, Utah.
In July 2021, the Company effected a forward split of its 10 common units into 108,724,422 common units. All unit, per unit and related information presented in the accompanying consolidated financial statements have been retroactively adjusted, where applicable, to reflect the impact of the split of common units.
Immediately prior to the effectiveness of the registration statement pertaining to the Company’s initial public offering ("IPO") on July 28, 2021, the Company converted from a Delaware limited liability company into a Delaware corporation, and changed its name from TGPX Holdings I LLC to Traeger, Inc. Pursuant to the statutory corporate conversion (the "Corporate Conversion"), all of the outstanding limited liability company interests of TGPX Holdings I LLC were converted into shares of common stock of Traeger, Inc., and TGP Holdings LP (the "Partnership") became the holder of such shares of common stock of Traeger, Inc. In connection with the Corporate Conversion, the Partnership liquidated and distributed these shares of common stock to the holders of partnership interests in the Partnership in direct proportion to their respective interests in the Partnership based upon the value of Traeger, Inc. at the time of the IPO, with a value implied by the initial public offering price of the shares of common stock sold in the IPO. Based on the IPO price of $18.00 per share, following the Partnership’s liquidation and distribution, including the elimination of any fractional shares resulting therefrom, and the Corporate Conversion, the Company had 108,724,387 shares of common stock outstanding immediately prior to the IPO.
Basis of Presentation and Principles of Consolidation – The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The balance sheet as of December 31, 2021 has been derived from the audited consolidated financial statements at that date but does not include all information and footnotes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 29, 2022 (the "Annual Report on Form 10-K"). In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to fairly present the consolidated financial position, results of operations and cash flows for the interim periods presented. Operating results for the three months ended March 31, 2022 are not necessarily indicative of results that may be expected for any other interim period or for the year ended December 31, 2022.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Emerging Growth Company Status – The Company is an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 ("JOBS Act"). Under the JOBS Act, emerging growth companies can delay adopting new or revised financial accounting standards until such time as those standards apply to private companies. The Company has elected to use the extended transition period for complying with the adoption of new or revised accounting standards and as a result of this election, its financial statements may not be comparable to companies that comply with public company effective dates. The Company will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of its common stock that is held by non-affiliates is at least $700 million as of the last business day of its most recently completed second fiscal quarter, (ii) the end of the fiscal year in which the Company has total annual gross revenues of $1.07 billion or more during such fiscal year, (iii) the date on which the Company issues more than $1.0 billion in non-convertible debt in a three-year period, or (iv) December 31, 2026.
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates – The preparation of these financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates and the assumptions made by management that present the greatest amount of estimation uncertainty include business combination accounting for the fair value of assets acquired, liabilities assumed, and contingent considerations, customer credits and returns, obsolete inventory reserves, valuation and impairment of intangible assets including goodwill, unrealized positions on derivatives and reserves for warranty. Actual results could differ from these estimates.
Concentrations – Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash in banks, trade accounts receivable, foreign currency contracts, and business activity with certain third-party contract manufacturers of our products. Credit is extended to customers based on an evaluation of the customer’s financial condition and collateral is not generally required in the Company’s sales transactions. Three customers (each large U.S. retailers) that accounted for a significant portion of net sales are as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Customer A | 17 | % | | 24 | % |
| Customer B | 23 | % | | 23 | % |
| Customer C | 14 | % | | 16 | % |
| | | |
As of March 31, 2022, customers A, B, and C accounted for a significant portion of trade accounts receivable of 22%, 25%, and 13%, compared to 45%, 13%, and 13% as of December 31, 2021. Concentrations of credit risk exist to the extent credit terms are extended with these three large customers. A business failure on the part of any one of the three customers could result in a material amount of exposure to the Company. No other single customer accounted for greater than 10% of the Company’s net sales for the three months ended March 31, 2022 and 2021, respectively. Additionally, no other single customer accounted for greater than 10% of trade accounts receivable as of March 31, 2022 and December 31, 2021.
The Company’s sales to dealers and distributors located outside the United States are generally denominated in U.S. dollars. The Company does have sales to certain dealers located in the European Union, the United Kingdom and Canada which are denominated in Euros, British Pounds and Canadian Dollars, respectively.
The Company relies on a limited number of suppliers for its contract manufacturing of grills and accessories. A significant disruption in the operations of certain of these manufacturers, or in the transportation of parts and accessories would impact the production of the Company’s products for a substantial period of time, which could have a material adverse effect on the Company’s business, financial condition and results of operations.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and the FASB has also certain subsequent related ASUs that supplement and amend Topic 842. The guidance in Topic 842 replaces the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize right of use assets related to the leases and lease liabilities on the balance sheet. For leases with terms of 12 months or less, the lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2021 and for interim periods within fiscal years beginning after December 15, 2022.
The Company has adopted this guidance effective January 1, 2022 and will present the impact of the new guidance in its annual statements as of December 31, 2022 and its interim statements thereafter. Management is currently in the process of evaluating its existing portfolio of operating leases for right of use assets and lease liabilities that would need be recognized upon implementation and the impact of this guidance on its consolidated financial statements and related disclosures.
There have been no material changes to the implementation or evaluation of “Recently Issued Accounting Standards” as described in the Company's annual audited financial statements for the period ended December 31, 2021.
3 – REVENUE
The following table disaggregates revenue by product category, geography, and sales channel for the periods indicated (in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| Revenue by product category | | 2022 | | 2021 |
| Grills | | $ | 150,431 | | | $ | 178,655 | |
| Consumables | | 39,651 | | | 40,813 | |
| Accessories | | 33,628 | | | 16,105 | |
| Total revenue | | $ | 223,710 | | | $ | 235,573 | |
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| Revenue by geography | | 2022 | | 2021 |
| North America | | $ | 207,339 | | | $ | 226,251 | |
| Rest of world | | 16,371 | | | 9,322 | |
| Total revenue | | $ | 223,710 | | | $ | 235,573 | |
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| Revenue by sales channel | | 2022 | | 2021 |
| Retail | | $ | 203,217 | | | $ | 229,827 | |
| Direct to consumer | | 20,493 | | | 5,746 | |
| Total revenue | | $ | 223,710 | | | $ | 235,573 | |
4 – BUSINESS COMBINATION
On July 1, 2021 (the "Acquisition Date"), pursuant to a share purchase agreement (the "Share Purchase Agreement"), the Company acquired all outstanding shares of Apption Labs Limited and its subsidiaries (collectively "Apption Labs"), a technology company that specializes in the manufacture and design of innovative hardware and software related to small kitchen appliances, including the MEATER smart thermometer and related technology. The total purchase consideration was approximately $78.3 million, net of cash acquired, which is comprised of cash paid, contingent consideration, net working capital adjustments, and escrow consideration. The acquisition of Apption Labs will help facilitate the Company's entry into the adjacent accessories markets with a highly complementary product that the Company believes will bolster our existing portfolio, create efficiencies for consumers and expose the Company to new growth channels.
The purchase consideration includes contingent cash consideration payable to the sellers based on achievement of certain revenue thresholds for fiscal years 2021 and 2022 as detailed in the Share Purchase Agreement. The acquisition date fair value of contingent consideration obligation of $21.5 million is estimated based on the probability assessments with respect to the likelihood of achieving the performance targets and discount rates consistent with the level of risk of achievement. In April 2022, the Company paid $12.6 million associated with the contingent cash consideration to the sellers based on achievement of certain revenue thresholds for fiscal year 2021. The range of the remaining undiscounted amounts the Company may be required to pay under the contingent consideration arrangement is between $0 and $27.4 million for fiscal year 2022. See Note 9 – Fair Value Measurement for subsequent measurements of this contingent liability as of March 31, 2022.
The Company recognized $1.8 million of acquisition-related costs during fiscal year 2021 that were recorded in general and administrative expense in the condensed consolidated statements of operations and comprehensive income (loss).
The operating results of Apption Labs have been included in the Company's condensed consolidated statements of operations and comprehensive income (loss) since the acquisition date. Actual and pro forma revenue and results of operations for the acquisition have not been presented because they do not have a material impact to the consolidated revenue and results of operations, either individually or in the aggregate.
Determination and allocation of the consideration transferred to net tangible and intangible assets is based upon preliminary estimates. These preliminary estimates and assumptions could change significantly during the measurement period as the Company finalizes the valuations of the net tangible and intangible assets acquired and liabilities assumed. Balances subject to adjustments include, but are not limited to, the valuation of contingent consideration, net working capital adjustments, fair value
of acquired inventory, net, fair value of identified intangible assets, goodwill, and the associated deferred tax implications. During the measurement period, the Company may record adjustments to the provisional amounts recognized in the Company’s initial accounting for the acquisition. The Company expects the allocation of the consideration transferred to be final within the measurement period (up to one year from the acquisition date). Any change could result in variances between our future financial results and the amounts recognized in the financial information presented below, including variances in fair values recorded, as well as expenses associated with these items.
The acquisition was accounted for under the acquisition method in accordance with ASC 805. The following table summarizes the preliminary estimated fair values of the consideration transferred, assets acquired and liabilities assumed as of the Acquisition Date (in thousands):
| | | | | | | | |
| Consideration Transferred | | Fair Value |
| Cash paid, net of cash acquired | | $ | 36,957 | |
| Contingent consideration | | 21,500 | |
| Other closing consideration | | 19,890 | |
| Total purchase consideration, net of cash acquired | | $ | 78,347 | |
| Assets acquired | | |
| Accounts receivable, net | | $ | 2,190 | |
| Inventory, net | | 5,431 | |
| Prepaid and other current assets | | 293 | |
| Property and equipment | | 1,357 | |
| Intangible Assets | | 53,100 | |
| Goodwill | | 40,200 | |
| Total assets acquired | | 102,571 | |
| Liabilities assumed | | |
| Accounts payable and accrued liabilities | | 8,474 | |
| Deferred tax liability | | 12,646 | |
| Other current liabilities | | 344 | |
| Other non-current liabilities | | 2,760 | |
| Total liabilities assumed | | 24,224 | |
| Total net assets, net of cash acquired | | $ | 78,347 | |
The excess purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill, none of which is expected to be deductible for tax purposes. The goodwill generated from these transactions is attributable to the expected synergies to be achieved upon consummation of the business combinations and the assembled workforce values.
The following table details the identifiable intangible assets acquired at their fair value and their corresponding useful lives at the Acquisition Date (amounts in thousands):
| | | | | | | | | | | | | | |
| Identifiable Intangible Assets | | Fair Value | | Estimated Useful Life (in years) |
| Technology | | $ | 32,300 | | | 5 |
| Trademarks | | 17,700 | | | 10 |
| Distributor relationships | | 2,400 | | | 8 |
| Non-compete arrangements | | 700 | | | 2.5 |
| | $ | 53,100 | | | |
Identifiable intangible assets acquired primarily include technology, trademarks, distributor relationship, and non-compete arrangements. The fair value of technology acquired in the acquisition was determined using the excess earnings model, the trademarks acquired was determined using a relief from royalty model, the distributor relationships acquired was determined using the distributor model, and the non-compete arrangements acquired were determined using the with and without model. These models utilize certain unobservable inputs, including discounted cash flows, historical and projected financial information, royalty rates, distributor attrition rates, and technology obsolescence rates, classified as Level 3 measurements as defined by Fair Value Measurement (Topic 820). Amortization of technology is recorded in cost of revenue and amortization of
trademarks, distributor relationships and non-compete arrangements are recorded in amortization of intangible assets in the condensed consolidated statements of operations and comprehensive income (loss).
5 – ACCOUNTS RECEIVABLES, NET
Accounts receivable consists of the following (in thousands):
| | | | | | | | | | | |
| March 31,
2022 | | December 31,
2021 |
| Trade accounts receivable | $ | 183,190 | | | $ | 108,620 | |
| Allowance for doubtful accounts | (1,140) | | | (1,090) | |
| Reserve for returns, discounts and allowances | (18,811) | | | (14,603) | |
| Total accounts receivable, net | $ | 163,239 | | | $ | 92,927 | |
6 – INVENTORIES
Inventories consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31,
2022 | | December 31,
2021 |
| Raw materials | $ | 1,743 | | | $ | 3,106 | |
| Work in process | 14,199 | | | 11,523 | |
| Finished goods | 148,185 | | | 130,409 | |
| Inventories | $ | 164,127 | | | $ | 145,038 | |
Included within inventories are adjustments of $0.9 million and $0.7 million at March 31, 2022 and December 31, 2021, respectively, to record inventory to net realizable value.
7 – ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31,
2022 | | December 31,
2021 |
| Accrual for inventories in-transit | $ | 31,370 | | | $ | 28,536 | |
| Warranty accrual | 8,731 | | | 8,326 | |
| Accrued compensation and bonus | 8,904 | | | 7,025 | |
| Build-to-suit lease liability | 8,823 | | | 4,273 | |
| Other | 41,141 | | | 21,613 | |
| Accrued expenses | $ | 98,969 | | | $ | 69,773 | |
The changes in the Company’s warranty accrual, included in accrued expenses on the accompanying condensed consolidated balance sheets, were as follows for the fiscal periods indicated (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Warranty accrual, beginning of period | $ | 8,326 | | | $ | 6,728 | |
| Warranty claims | (1,484) | | | (1,461) | |
| Warranty costs accrued | 1,889 | | | 2,804 | |
| Warranty accrual, end of period | $ | 8,731 | | | $ | 8,071 | |
8 – DERIVATIVES
Interest Rate Swap
On February 25, 2022, the Company entered into a floating-to-fixed interest rate swap agreement to hedge or otherwise protect against the Eurocurrency Base Rate (as defined in the First Lien Credit Agreement) fluctuations on a portion of the Company's variable rate debt. The agreement provides for a notional amount of $379.2 million, fixed rate of 2.08% and a maturity date of February 28, 2026. This agreement was designated as a cash flow hedge on the exposure of the variability of future cash flows subject to the variable monthly interest rates on $379.2 million of the term loan portion under the First Lien Term Loan Facility (as defined below). The Company assessed hedge effectiveness at the time of entering into the agreement, utilizing a regression analysis, and determined the hedge is expected to be highly effective.
As a cash flow hedge, the interest rate swap is revalued at current market rates, with the changes in valuation being recorded in other comprehensive income within the condensed consolidated statements of operations and comprehensive income (loss), to the extent that the hedge is effective. The gains or losses on the interest rate swaps are recorded in accumulated other comprehensive income (loss) within the condensed consolidated balance sheets and are reclassified into interest expense in the periods in which the interest rate swap affects earnings. The cash flows related to interest settlements and changes in valuation are classified consistent with the treatment of the hedged monthly interest payments generally as operating activities on the condensed consolidated statement of cash flows.
The Company evaluates hedge effectiveness of the interest rate swap quarterly, or more frequently if necessary, by verifying the critical terms of the interest rate swap continue to match the critical terms of the hedged monthly interest payments and the hedge was expected to be highly effective as of March 31, 2022. Thus, the change in fair value of the derivative instrument offsets the change in fair value on the hedged debt, and there is no ineffectiveness to be recorded in earnings.
As of March 31, 2022, the net asset balance derived from the monthly interest settlements related to the single cash flow hedge contract was $6.6 million.
Foreign Currency Contracts
The Company is exposed to foreign currency exchange rate risk related to its purchases and international operations. The Company utilizes foreign currency contracts to manage foreign currency risk in purchasing inventory and capital equipment, and future settlement of foreign denominated assets and liabilities. The volume of the Company’s foreign currency contract activity is limited by the amount of transaction exposure in each foreign currency and the Company’s election as to whether to hedge the transactions. There are no derivative instruments entered into for speculative purposes.
The Company had outstanding foreign currency contracts as of March 31, 2022 and December 31, 2021. The Company did not elect hedge accounting for any of these contracts. All outstanding contracts are with the same counterparty and thus the fair market value of the contracts in an asset position are offset by the fair market value of the contracts in a liability position to reach a net position. For periods where the net position is an asset balance, the balance is recorded within prepaid expenses and other current assets on the condensed consolidated balance sheets and for periods where the net position is a liability balance, the balance is recorded within derivative liabilities on the condensed consolidated balance sheets. Changes in the net fair value of contracts are recorded in other expense in the condensed consolidated statements of operations and comprehensive income (loss).
The gross and net balances from foreign currency contract positions were as follows (in thousands):
| | | | | | | | | | | |
| March 31,
2022 | | December 31,
2021 |
| Gross Asset Fair Value | $ | 869 | | | $ | 1,439 | |
| Gross Liability Fair Value | — | | | — | |
| Net Asset Fair Value | $ | 869 | | | $ | 1,439 | |
Gains (losses) from foreign currency contracts were recorded in other income (expense) within the accompanying condensed consolidated statements of operations and comprehensive income (loss) as follows (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Realized gains | $ | 1,165 | | | $ | 2,549 | |
| Unrealized losses | (570) | | | (3,349) | |
| Total gains (losses) | $ | 595 | | | $ | (800) | |
9 – FAIR VALUE MEASUREMENTS
Financial assets and liabilities valued using Level 1 inputs are based on unadjusted quoted market prices within active markets. Financial assets and liabilities valued using Level 2 inputs are based primarily on observable trades and/or prices for similar assets or liabilities in active or inactive markets. Financial assets and liabilities valued using Level 3 inputs are primarily valued using management’s assumptions about the assumptions market participants would utilize in pricing the asset or liability.
The following table presents information about the fair value measurement of the Company’s financial instruments (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Financial Instruments Recorded at Fair Value on a Recurring Basis: | | Fair Value
Measurement
Level | | As of March 31,
2022 | | As of December 31,
2021 |
| Assets: | | | | | | |
Derivative assets—foreign currency contracts (1) | | 2 | | $ | 869 | | | $ | 1,439 | |
Derivative assets—interest rate swap contract (2) | | 2 | | 7,590 | | | — | |
| Total assets | | | | $ | 8,459 | | | $ | 1,439 | |
| | | | | | |
| Liabilities: | | | | | | |
Contingent consideration—earn out (3) | | 3 | | $ | 27,000 | | | $ | 25,300 | |
Derivative liability—interest rate swap contract (4) | | 2 | | 1,002 | | | — | |
| Total liabilities | | | | $ | 28,002 | | | $ | 25,300 | |
(1)Included in prepaid expenses and other current assets in the condensed consolidated balance sheets
(2)Included in other long-term assets in the condensed consolidated balance sheets
(3)Included in current and long-term contingent consideration in the condensed consolidated balance sheets
(4)Included in other current liabilities in the condensed consolidated balance sheets
Transfers of assets and liabilities among Level 1, Level 2 and Level 3 are recorded as of the actual date of the events or change in circumstances that caused the transfer. As of March 31, 2022 and December 31, 2021, there were no transfers between levels of the fair value hierarchy of the Company’s assets or liabilities measured at fair value.
The fair value of the Company’s derivative assets through its foreign currency contracts is based upon observable market-based inputs that reflect the present values of the differences between estimated future foreign currency rates versus fixed future settlement prices per the contracts, and therefore, are classified within Level 2. The fair value of the Company's interest rate swap contracts held with financial institutions are classified as Level 2 financial instruments, which are valued using observable underlying interest rates and market-determined risk premiums at the reporting date.
The fair values of the Company's contingent consideration earn out obligation associated with the Apption Labs business combination is estimated using a Monte Carlo model. Key assumptions used in these estimates include probability assessments with respect to the likelihood of achieving the performance targets and discount rates of 11.41% and 11.47% for each respective earn out period, consistent with the level of risk of achievement. As these are significant unobservable inputs, the contingent consideration earn out obligation is included in Level 3 inputs.
At each reporting date, the Company revalues the contingent consideration obligation to its fair value and records increases and decreases in fair value in the revaluation of contingent consideration in our condensed consolidated statements of operations and comprehensive income (loss). Changes in the fair value of the contingent consideration obligation results from changes in discount periods and rates, and changes in probability assumptions with respect to the likelihood of achieving the performance targets.
The following table presents the fair value contingent consideration (in thousands):
| | | | | |
Balance at December 31, 2021 | $ | 25,300 | |
| Payments of contingent consideration | — | |
| Change in fair value of contingent consideration | 1,700 | |
Balance at March 31, 2022 | $ | 27,000 | |
The following financial instruments are recorded at their carrying amount (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2022 | | As of December 31, 2021 |
| Financial Instruments Recorded at Carrying Amount: | | Carrying
Amount | | Estimated
Fair Value | | Carrying
Amount | | Estimated
Fair Value |
| Liabilities: | | | | | | | | |
Debt—First Lien (1) | | $ | 426,200 | | | $ | 409,254 | | | $ | 388,195 | | | $ | 386,139 | |
| Total liabilities | | $ | 426,200 | | | $ | 409,254 | | | $ | 388,195 | | | $ | 386,139 | |
(1)Included in notes payable in the consolidated balance sheet. Due to the unobservable nature of the inputs these financial instruments are considered to be Level 3 instruments in the fair value hierarchy.
10 – DEBT AND FINANCING ARRANGEMENTS
Notes Payable
On June 29, 2021, the Company refinanced its existing credit facilities and entered into a new first lien credit agreement, as borrower, with Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, and other lenders party thereto as joint lead arrangers and joint bookrunners (the "First Lien Credit Agreement"). The First Lien Credit Agreement provides for a $560.0 million senior secured term loan facility (the "First Lien Term Loan Facility"), including a $50.0 million delayed draw term loan, and a $125.0 million revolving credit facility (the "Revolving Credit Facility" and, together with the First Lien Term Loan Facility, the "Credit Facilities").
The First Lien Term Loan Facility accrues interest at a rate per annum that considers both fixed and floating components. Following the completion of the Company's IPO in July 2021, the fixed component ranges from 3.00% to 3.25% per annum based on the Company's Public Debt Rating (as defined in the First Lien Credit Agreement). The floating component is based on the Eurocurrency Base Rate (as defined in the First Lien Credit Agreement) for the relevant interest period. The First Lien Term Loan Facility requires periodic principal payments from December 2021 through June 2028, with any remaining unpaid principal and any accrued and unpaid interest due on the maturity date of June 29, 2028. The delayed draw term loan includes a variable commitment fee, which is based on the fixed interest rate and ranges from 0% to the Applicable Rate (as defined in the First Lien Credit Agreement). As of March 31, 2022, the total principal amount outstanding on the First Lien Term Loan Facility was $379.2 million, and the Company had no outstanding principal balance under the delayed draw term loan. In April 2022, the Company borrowed $12.5 million under the delayed draw term loan for purposes of financing the earn out obligation associated with the acquisition of Apption Labs as described in Note 4 – Business Combinations.
Loans under the Revolving Credit Facility accrue interest at a rate per annum that considers both fixed and floating components. Following completion of the Company's IPO in July 2021, the fixed component ranges from 2.75% to 3.25% per annum based on the Company's most recently determined First Lien Net Leverage Ratio (as defined in the First Lien Credit Agreement). The floating component is based on the Eurocurrency Base Rate for the relevant interest period. The Revolving Credit Facility also has a variable commitment fee, which is based on the Company's most recently determined First Lien Net Leverage Ratio and ranges from 0.25% to 0.50% per annum on undrawn amounts. Letters of credit may be issued under the Revolving Credit Facility in an amount not to exceed $15.0 million which, when issued, lower the overall borrowing capacity of the facility. The Revolving Credit Facility expires on June 29, 2026 and no principal payments are due before such date. As of March 31, 2022, the Company had drawn down $47.0 million under the Revolving Credit Facility for general corporate and working capital purposes.
The First Lien Credit Agreement contains certain affirmative and negative covenants that limit the Company's ability to, among other things, incur additional indebtedness or liens (with certain exceptions), make certain investments, engage in fundamental changes or transactions including changes of control, transfer or dispose of certain assets, make restricted payments (including dividends), engage in new lines of business, make certain prepayments and engage in certain affiliate transactions. In addition, the Company is subject to a financial covenant and is required to maintain a First Lien Net Leverage Ratio (as defined in the
First Lien Credit Agreement) not to exceed 6.20 to 1.00. As of March 31, 2022, the Company was in compliance with the covenants under the Credit Facilities.
Accounts Receivable Credit Facility
On November 2, 2020, the Company entered into a receivables financing agreement (as amended, the "Receivables Financing Agreement"). Through the Receivables Financing Agreement, the Company participates in a trade receivables securitization program, administered on its behalf by MUFG Bank Ltd. ("MUFG"), using outstanding accounts receivable balances as collateral, which have been contributed by the Company to its wholly owned subsidiary and special purpose entity, Traeger SPE LLC (the "SPE"). While the Company provides operational services to the SPE, the receivables are owned by the SPE once contributed to it by the Company. The Company is the primary beneficiary and holds all equity interests of the SPE, thus the Company consolidates the SPE without any significant judgments.
On June 29, 2021, the Company entered into Amendment No. 1 to the Receivables Financing Agreement and increased the net borrowing capacity from the prior range of $30.0 million to $45.0 million up to $100.0 million. The borrowing capacity fluctuates at each month end based upon the amount of eligible outstanding domestic accounts receivables to be used as collateral. As of March 31, 2022, the Company had drawn down $49.2 million under this facility for general corporate and working capital purposes. The Company is required to pay an annual upfront fee for the facility, along with fixed interest on outstanding cash advances of 1.7%, a floating component based on the CP Rate (as defined in the Receivables Financing Agreement), and an unused capacity charge that ranges from 0.25% to 0.5%. The facility is set to terminate on June 29, 2024.
In connection with aged accounts receivable that resulted from a new payment program implemented by one of the Company's largest customers, the Company amended the covenants under the Receivables Financing Agreement with MUFG for the month of January 2022. By February 1, 2022, the Company had collected the majority of the aged accounts receivable balance and was in compliance with the covenants under the Receivables Financing Agreement. As of March 31, 2022, the Company was in compliance with the covenants under the Receivables Financing Agreement.
11 – COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is subject to various claims, complaints and legal actions in the normal course of business. The Company does not believe it has any currently pending litigation of which the outcome will have a material adverse effect on its operations or financial position.
12 – EQUITY-BASED COMPENSATION
Incentive Units
On September 25, 2017, AEA Investors LP, TCP Traeger Holdings SPV LLC, Ontario Limited, and other management and limited partners purchased a 100% equity stake (the "Transaction") in Traeger Pellet Grills Holdings LLC through a merger agreement in which TGP Holdings LP was formed. In connection with the Transaction, TGP Holdings LP established a management incentive equity pool, authorizing a maximum of 99,389 total units, or 15% of the total authorized units, for purposes of issuing compensatory awards to employees and certain directors of the Company, and its subsidiaries. Pursuant to the Amended and Restated Limited Partnership Agreement of TGP Holdings LP, dated as of September 25, 2017, eligible management employees and directors were granted a certain number of Class B Units of TGP Holdings LP which were intended to be treated as profit interests for tax purposes. The participation threshold of the Class B Units was historically established for each grant based on the fair market value of TGP Holdings LP membership units at the date of the grant.
On July 12, 2021, the board of directors of TGP Holdings GP Corp, a Delaware corporation and the then general partner of TGP Holdings LP, approved the acceleration of vesting of all unvested and outstanding Class B Units, subject to the successful completion of the Company's IPO. The approval for the acceleration of vesting was determined to be a modification. As a result, the Company evaluated each of the modified awards to determine the necessary accounting. At the time of the IPO, awards where vesting was probable prior to and after the modification, resulted in an acceleration of the remaining expense based on the original grant date fair value and awards where vesting was not probable, resulted in recognition of the fair value of the modified awards as of the modification date.
In connection with the completion of the Company’s IPO, Class B Units that were outstanding and vested were, as part of the Corporate Conversion, converted into shares of common stock of the Company. The Company recorded equity compensation expense of approximately $47.4 million as a result of the acceleration of vesting of the unvested Class B Units based on the IPO
price of $18.00. Given the proximity of the modification to the IPO, the expense recorded by the Company was based on the actual conversion of the Class B Unit into common stock and the valuation of the Company at time of the IPO.
Restricted Stock Unit Awards
The Traeger, Inc. 2021 Incentive Award Plan (the "2021 Plan"), became effective as of July 28, 2021, the day prior to the first public trading date of our common stock. The 2021 Plan provides for the grant of stock options, including incentive stock options, and nonqualified stock options, restricted stock, dividend equivalents, restricted stock units, stock appreciation rights, and other stock or cash awards to the Company’s employees and consultants and directors of the Company and its subsidiaries. Subject to the adjustment described in the following sentence, the initial number of shares of the Company's common stock available for issuance under awards granted pursuant to the 2021 Plan is equal to 14,105,750 shares, which shares may be authorized but unissued shares, treasury shares, or shares purchased in the open market. On January 1, 2022, an additional 5,877,395 shares of common stock became available for issuance under awards granted pursuant to the 2021 Plan, as a result of the operation of an automatic annual increase provision in the 2021 Plan. Notwithstanding anything to the contrary in the 2021 Plan, no more than 100,000,000 shares of our common stock may be issued pursuant to the exercise of incentive stock options under the 2021 Plan.
The Company's equity-based compensation was classified as follows in the condensed consolidated statements of operations and comprehensive income (loss) (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Cost of revenue | $ | 138 | | | $ | 6 | |
| Sales and marketing | 1,763 | | | 215 | |
| General and administrative | 13,582 | | | 735 | |
| Total equity-based compensation | $ | 15,483 | | | $ | 956 | |
On July 20, 2021, the Board approved grants of restricted stock units ("RSUs") covering 12,163,242 shares of common stock that became effective in connection with the completion of the Company’s IPO, which include RSUs covering 7,782,957 shares granted to the Company's Chief Executive Officer ("CEO") and RSUs covering 4,380,285 shares granted to other employees, directors, and certain non-employees.
CEO Awards
The awards include a combination of time-based and performance-based awards. Specifically, time-based RSUs covering 2,594,319 shares ("RSU CEO Award") and performance-based RSUs ("PSUs") covering 5,188,638 shares ("PSU CEO Award") were granted to the CEO.
RSU CEO Award
The RSU CEO Award will vest as to 20% of the underlying shares on each of the first, second, third, fourth and fifth anniversaries of the closing of the IPO, subject to continued service with the Company as its CEO or executive chairman of its Board.
Upon a termination of the CEO's service by the Company without cause, by the CEO for good reason, or due to the CEO's disability (each as defined in his award agreement) or due to his death (each, a "CEO Qualifying Termination"), then, subject to the CEO's (or his estate's) timely execution and non revocation of a general release of claims and continued compliance with the restrictive covenants to which the CEO is bound through the effective date of the general release of claims, any unvested portion of the RSU CEO Award will vest. To the extent any of the RSU CEO Award vests, the CEO must hold the vested and settled shares for two years following their vesting date, subject to certain exceptions set forth in the award agreement.
PSU CEO Award
The PSU CEO Awards will become earned based on the achievement of stock price goals (measured as a volume-weighted stock price over 60 consecutive trading days) at any time until the tenth anniversary of the closing of the IPO. The PSU CEO Award is divided into five tranches, with the first tranche having a stock price goal of 125% of the IPO price, and each of the next four stock prices goals equal to 125% of the immediately preceding stock price goal. As of March 31, 2022, the first vesting tranche of the PSU CEO Award has been earned based upon achievement of the applicable stock price goal and will vest based on the table below. The PSU CEO Award will vest on the applicable vesting date described in the following table or,
if later, the date on which the applicable stock price goal is achieved, subject to the CEO's continued service as our CEO or executive chairman of the Board:
| | | | | | | | |
| Earned PSUs’ Vesting Tranche | | Vesting Date |
| First Vesting Tranche | | 50% on the first anniversary and 50% on the second anniversary of the closing of the IPO |
| Second Vesting Tranche | | 50% on the second anniversary and 50% on the third anniversary of the closing of the IPO |
| Third Vesting Tranche | | 50% on the third anniversary and 50% on the fourth anniversary of the closing of the IPO |
| Fourth Vesting Tranche | | 50% on the fourth anniversary and 50% on the fifth anniversary of the closing of the IPO |
| Fifth Vesting Tranche | | 50% on the fifth anniversary and 50% on the sixth anniversary of the closing of the IPO |
Upon a CEO Qualifying Termination, then, subject to the CEO’s (or his estate's) timely execution and non-revocation of a general release of claims and continued compliance with the restrictive covenants to which the CEO is bound, any previously earned PSUs subject to the CEO PSU Award will vest, and any remaining PSUs that were not previously earned will be forfeited and terminated without consideration. To the extent any of the PSUs subject to the CEO PSU Award vest, the CEO must hold such vested shares for two years following their vesting date, subject to certain exceptions set forth in the award agreement. If the CEO experiences a termination of service other than a CEO Qualifying Termination, all PSUs (including earned PSUs) subject to the PSU CEO Award which have not become vested will be automatically forfeited and terminated as of the termination date without consideration.
In the event the Company incurs a change in control, then any previously-earned PSUs will vest and any remaining PSUs will vest based on the price per share received by or payable with respect to the common stockholders in connection with the transaction, pro-rated to reflect a price per share that falls between two stock price goals.
PSUs that remain unvested as of the expiration date automatically will be forfeited and terminated without consideration.
Other IPO Awards
The RSUs granted to other employees, directors, and certain non-employees, included 3,635,287 time-based RSUs ("IPO RSUs") and 744,998 performance-based RSUs ("IPO PSUs") granted to certain senior level executives of the Company.
IPO RSUs
The IPO RSUs vest based on certain time-based conditions set forth in the applicable award agreement. IPO RSUs granted to certain senior executives of the Company vest as to 50% of the underlying shares on each of the third and fourth anniversaries of the closing of the IPO, subject to continued employment with the Company or one of its subsidiaries.
IPO PSUs
The IPO PSUs consist of two equal tranches, with the first tranche having a stock price goal of 200% of the IPO price and the second tranche having a stock price goal of 300% of the IPO price. Once earned, the applicable IPO PSU will vest as to (i) 50% of the earned PSU upon the later of the first anniversary of the closing of the IPO or the achievement of the applicable stock price goal and (ii) 50% of the earned PSUs upon the later of the second anniversary of the closing of the IPO or the first anniversary of when the respective stock price goal is achieved with respect to the applicable vesting tranche, in each case, subject to continued employment with the Company or one of its subsidiaries.
Upon a termination of employment due to an executive’s disability (each defined in the applicable award agreement) or due to his or her death, then, subject to such executive’s (or his or her estate’s) timely execution and non-revocation of a general release of claims and continued compliance with the restrictive covenants to which such executive is bound, any previously earned PSUs subject to the IPO PSUs will vest, and any remaining PSUs subject to the IPO PSU award that were not previously earned will be automatically forfeited and terminated as of the termination date without consideration.
In the event the Company incurs a change in control, then any previously-earned PSUs will vest and any remaining PSUs will vest based on the price per share received by or payable with respect to the common stockholders in connection with the transaction, pro-rated to reflect a price per share that falls between two stock price goals.
PSUs that remain unvested as of the expiration date automatically will be forfeited and terminated without consideration.
For RSUs and PSUs, the compensation expense is recognized on a straight-line basis over the vesting schedule and on an accelerated basis over the tranche's requisite service period, respectively. In addition, when an award is forfeited prior to the
vesting date, the Company will recognize an adjustment for the previously recognized expense in the period of the forfeiture, with the exception of performance-based awards for which the requisite service period has been provided.
The Company uses the Monte Carlo pricing model to estimate the fair value of its PSUs as of the grant date, and uses various simulations of future stock prices through the Stochastic model to estimate the fair value over the remaining term of the performance period as of the grant date.
A summary of the time-based restricted stock unit activity during the three months ended March 31, 2022 was as follows:
| | | | | | | | | | | |
| Units | | Weighted Average Grant Date Fair Value |
Outstanding at December 31, 2021 | 6,274,860 | | | $ | 18.08 | |
| Granted at fair value | 4,814 | | | 9.97 | |
| Vested | (529,907) | | | 18.00 | |
| Forfeited | (53,759) | | | 18.14 | |
Outstanding at March 31, 2022 | 5,696,008 | | | $ | 18.08 | |
As of March 31, 2022, the Company had $84.1 million of unrecognized equity-based compensation expense related to unvested time-based restricted stock units that is expected to be recognized over a weighted-average period of 3.88 years.
A summary of the performance-based restricted stock unit activity during the three months ended March 31, 2022 was as follows:
| | | | | | | | | | | |
| Units | | Weighted Average Grant Date Fair Value |
Outstanding at December 31, 2021 | 5,933,636 | | | $ | 13.25 | |
| Granted at fair value | — | | | — | |
| Vested | — | | | — | |
| Forfeited | — | | | — | |
Outstanding at March 31, 2022 | 5,933,636 | | | $ | 13.25 | |
As of March 31, 2022, the Company had $60.0 million of unrecognized equity-based compensation expense related to unvested performance-based units that is expected to be recognized over a weighted-average period of 3.48 years.
13 – INCOME TAXES
For the three months ended March 31, 2022 and 2021, the Company recorded an income tax expense of $0.2 million and $0.7 million, respectively.
The Company regularly evaluates the realizability of its deferred tax assets and establishes a valuation allowance if it is more likely than not that some or all the deferred tax assets will not be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, loss carryback and tax planning strategies. Generally, more weight is given to objectively verifiable evidence, such as the cumulative loss in recent years, as a significant piece of negative evidence to overcome. As of March 31, 2022, the Company's U.S. operations have resulted in losses, and as such, the Company maintains a valuation allowance against substantially all its U.S. deferred tax assets.
14 – RELATED PARTY TRANSACTIONS
The Company outsources a portion of its customer service and support through a third party who is an affiliate of the Company through common ownership. The total amount of expenses the Company recorded associated with such services totaled $1.7 million and $1.8 million for the three months ended March 31, 2022 and 2021, respectively. Amounts payable to the third party as of March 31, 2022 and December 31, 2021 was $1.2 million and $1.2 million, respectively.
15 – EARNINGS (LOSS) PER SHARE
The Company computes basic earnings (loss) per share ("EPS") attributable to common stockholders by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is calculated by adjusting weighted average shares outstanding for the dilutive effect of potential common shares, determined using the treasury-stock method. For purposes of the diluted EPS calculation, restricted stock units are considered to be potential common shares.
The following table sets forth the computation of the Company’s basic and diluted EPS attributable to common stockholders for the fiscal periods indicated (in thousands, except share and per share amounts):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Net income (loss) | $ | (8,432) | | | $ | 38,929 | |
| | | |
Weighted-average common shares outstanding—basic (1) | 117,889,233 | | | 108,724,387 | |
| Effect of dilutive securities: | | | |
| Restricted stock units | — | | | — | |
Weighted-average common shares outstanding—diluted (1) | 117,889,233 | | | 108,724,387 | |
| | | |
| Earnings (loss) per share | | | |
| Basic and diluted | $ | (0.07) | | | $ | 0.36 | |
(1)For the three months ended March 31, 2021, the Company retrospectively applied shares of common stock outstanding upon the Corporate Conversion, immediately prior to the IPO. Refer to Note 1 – Description of Business and Basis of Presentation for a description of the Corporate Conversion.
The following table includes the number of units that may be dilutive common shares in the future, and were not included in the computation of diluted earnings (loss) per share because the effect was anti-dilutive for the fiscal periods indicated:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Restricted stock units | 11,629,644 | | | — | |