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May 12, 2022, 4:59 p.m. EDT

10-Q: TRAEGER, INC.

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021 (our "Annual Report on Form 10-K"), filed with the Securities and Exchange Commission (the "SEC"), on March 29, 2022. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. As a result of many important factors, such as those set forth in Part I, Item 1A. "Risk Factors" of our Annual Report on Fo rm 10-K , our actual results may differ materially from those anticipated in these forward-looking statements. For convenience of presentation, some of the numbers have been rounded in the text below.

Overview

Traeger is the creator and category leader of the wood pellet grill, an outdoor cooking system that ignites all-natural hardwoods to grill, smoke, bake, roast, braise, and barbecue. Our grills are versatile and easy to use, empowering cooks of all skill sets to create delicious meals with a wood-fired flavor that cannot be replicated with gas, charcoal, or electric grills. Grills are at the core of our platform and are complemented by Traeger wood pellets, rubs, sauces, premium frozen meal kits and accessories.

Our marketing strategy has been instrumental in building our brand and driving customer advocacy and revenue. We have disrupted the outdoor cooking market and created a passionate community, the Traegerhood, which includes foodies, pitmasters, backyard heroes, moms and dads, professional athletes, outdoorsmen and outdoorswomen, and world-class chefs. This community, together with our various marketing initiatives, has helped to promote our brand and products to the wider consumer population and supported our efforts to redefine outdoor cooking as an experience accessible to everyone. We have an active online and social media presence and a content-rich website that drives significant customer engagement and brings our Traegerhood together. We also directly engage with our current and target customers by sponsoring and participating in a variety of events, including live shows, outdoor festivals, rodeos, music and film festivals, barbecue competitions, fishing tournaments, and retailer events. We believe the style and authenticity of our customer engagement reinforces our brand and drives new and existing customer interest in our products and community.

Our revenue is primarily generated through the sale of our wood pellet grills, consumables and accessories. We currently offer three series of grills - Pro, Ironwood and Timberline - as well as a selection of smaller, portable grills. Our grills are available in a number of different sizes and can be upgraded through a variety of accessories. A growing number of our grills feature WiFIRE technology, which allows users to monitor and adjust their grills remotely using our Traeger app. Our consumables include our wood pellets, which are made from natural, virgin hardwood and are available in a variety of flavors, as well as rubs, sauces and our premium frozen meal kits consisting of high-quality ingredients, supplies and easy-to-follow instructions. Our accessories include grill covers, liners, tools, MEATER smart thermometers, apparel and other ancillary items.

We sell our grills using an omnichannel distribution strategy that consists primarily of retail and direct to consumer ("DTC") channels. Our retail channel covers brick-and-mortar retailers, e-commerce platforms, and multichannel retailers, who, in turn, sell our grills to their end customers. Our retailers include Ace Hardware, Amazon.com, Costco, The Home Depot, and William Sonoma, among others, as well as a significant number of independent retailers that cater to local communities and specific categories, such as hardware, camping, outdoor, farm, ranch, barbecue and other categories. Our DTC channel covers sales directly to customers through our website and Traeger app, as well as certain country- and region-specific Traeger or distributor websites. Our consumables and accessories are available through the same channels as our grills, except that our "Traeger Provisions" product line is only available through our DTC channel.

Over the last several years, we have made significant investments in our supply chain and manufacturing operations. Our supply chain includes third party manufacturers for our grills and accessories and pellet production facilities for our wood pellets that we own or lease. We work closely with our manufacturers to evolve on design, manufacturing process and product quality. Our grills are currently manufactured in China and Vietnam, and we expect that they will also be manufactured in Mexico beginning later this year, and our wood pellets are produced at facilities located in New York, Oregon, Georgia, Virginia, and Texas. We have entered into manufacturing agreements covering the supply of substantially all of our grills and accessories, pursuant to which we make purchases on a purchase order basis. We rely on several third-party suppliers for the components used in our grills, including integrated circuits, processors, and system on chips.







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Our revenue decreased by 5.0% for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, and was $223.7 million for the three months ended March 31, 2022, down from $235.6 million for the three months ended March 31, 2021. We recorded a net loss of $8.4 million for the three months ended March 31, 2022, compared to net income of $38.9 million for the three months ended March 31, 2021.

Impact of COVID-19

The COVID-19 pandemic has caused various elements of disruption to economies, businesses, markets and communities around the globe. In the interest of public health, many governments closed physical stores and business locations deemed to be non-essential, which drove higher unemployment levels and resulted in the closure of certain businesses. The COVID-19 pandemic has had a variety of impacts to the businesses of our retailers and suppliers, as well as customer behavior and discretionary spending. Although we cannot predict when the United States and global economy will fully recover from the COVID-19 pandemic, we believe that our business is well positioned to attract new customers, capitalize on existing and growing trends in our industry and benefit from the revival of the economy and discretionary spending. Nevertheless, we do not have certainty that a full economic recovery will happen in the near future, and it is possible that the prolonging of the COVID-19 pandemic could have certain adverse effects on our business, financial condition, and results of operations. Furthermore, our growth in the past year may obscure the extent to which seasonality and other trends have affected our business and may continue to affect our business. For more information regarding the potential impact of the COVID-19 pandemic on our business, refer to Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10- K .

In response to the COVID-19 pandemic, we have focused on business continuity across our value chain and operations, and made strategic pivots and reprioritized key initiatives to focus on our immediate response to the COVID-19 pandemic and maintain a nimble approach to our long-term strategy as we continued to monitor the situation.

Components of Results of Operations

Revenue

We derive substantially all of our revenue from the sale of grills, consumables and accessories in North America, which includes the United States and Canada. We recognize revenue, net of product returns, for our grills, consumables and accessories generally at the time of delivery to retailers through our retail channel and to customers through our DTC channel. Estimated product returns are recorded as a reduction of revenue at the time of recognition and are calculated based on product returns history, observable changes in return behavior, and expected returns based on sales volume and mix. We also have certain contractual programs that can give rise to elements of variable consideration, such as volume incentive rebates, with estimated amounts of credits recorded as a reduction to revenue.

Although we experience demand for our products throughout the year, we believe there can be certain seasonal fluctuations in our revenue. We have typically experienced moderately higher levels of sales of our grills in the first and second quarters of the year as our retailers purchase inventory in advance of warmer weather, when demand for outdoor cooking products is the highest across our key markets. Higher sales also coincide with social events and national holidays, which occur during the same warm weather timeframe.

Gross Profit

Gross profit reflects revenue less cost of revenue. Cost of revenue consists of product costs, including the costs of components, costs of products from our third-party manufacturers, direct and indirect manufacturing costs across all products, packaging, inbound freight and duties, warehousing and fulfillment, warranty costs, product quality testing and inspection costs, excess and obsolete inventory write-downs, cloud-hosting costs for our WiFIRE connected grills, depreciation of tooling and manufacturing equipment, amortization of internal use software and patented technology, and certain employee-related expenses.

We calculate gross margin as gross profit divided by revenue. Gross margin can be impacted by several factors, including, in particular, product mix and sales channel mix. For example, gross margin on sales through our DTC channel is generally higher than gross margin on sales through our retail channel. If our DTC sales grow faster than sales from our retail channel, and if we are able to realize greater economies of scale or product cost improvements through engineering and sourcing, we would expect a favorable impact to overall gross margin over time. Additionally, gross margin on sales of certain of our products is higher than for others. If revenue from sales of wood pellets increased as a percentage of total revenue, we would expect to see an increase in overall gross margin. These favorable anticipated gross margin impacts may not be realized, or may be offset by other unfavorable gross margin factors. Additionally, any new products that we develop, or our planned Table of Contents

expansion into new geographies, may impact our future gross margin. External factors beyond our control, such as duties and tariffs and costs of doing business in certain geographies can also impact gross margin.

Sales and Marketing

Sales and marketing expense consists primarily of the costs associated with advertising and marketing of our products and employee-related expenses, including salaries, benefits, and equity-based compensation expense, as well as sales incentives and professional services. These costs can include print, internet and television advertising, travel-related expenses, direct customer acquisition costs, costs related to conferences and events, and broker commissions. We expect our sales and marketing expense to increase on an absolute dollar basis for the foreseeable future as we continue to increase the scope of outreach to potential new customers to drive our revenue growth. We also anticipate that sales and marketing expense as a percentage of revenue will fluctuate from period to period based on revenue for such period and the timing of the expansion of our sales and marketing functions, as these activities may vary in scope and scale over future periods.

General and Administrative

General and administrative expense consists primarily of employee-related expenses and facilities for our executive, finance, accounting, legal, human resources, information technology and other administrative functions. General and administrative expense also includes fees for professional services, such as external legal, accounting, and information and technology services, and insurance.

In addition, general and administrative expense includes research and development expenses incurred to develop and improve our future products and processes, which primarily consist of employee and facilities-related expenses, including salaries, benefits and equity-based compensation expense, as well as fees for professional services, costs related to prototype tooling and materials, and software platform costs. Research and development expense was $4.9 million and $2.0 million for the three months ended March 31, 2022 and 2021, respectively.

We expect general and administrative expense, including our research and development expenses and external legal and accounting expenses, to increase on an absolute dollar basis for the foreseeable future as we continue to increase investments to support our growth and develop new and enhance existing products and interactive software. We also anticipate increased administrative and compliance costs as a result of being a public company. We anticipate that general and administrative expense as a percentage of revenue will vary from period to period, but we expect to leverage these expenses over time as we grow our revenue.

Amortization of Intangible Assets

Amortization of intangible assets primarily consists of amortization of identified finite-lived customer relationships, distributor relationships, non-compete arrangements and trademark assets that were allocated a considerable portion of the purchase price from the corporate reorganization and acquisition of our business in 2017, as well as the July 2021 acquisition of Apption Labs Limited and its subsidiaries (collectively, "Apption Labs") pursuant to a share purchase agreement (the "Share Purchase Agreement"). These costs are amortized on a straight-line basis over 2.5 to 25 year useful lives and, as a result, amortization expense on these assets is expected to remain stable over the coming years. Future business acquisitions may result in incremental amortization of intangible assets acquired in any such transactions.

Change in Fair Value of Contingent Consideration

The fair values of our contingent consideration earn out obligation associated with the Apption Labs business combination is estimated based on probability adjusted present values of the consideration expected to be transferred using significant inputs. At each reporting date, we revalue the contingent consideration obligation to its fair value and records increases and decreases in fair value in the general and administrative expenses 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 in the Share Purchase Agreement.

Total Other Income (Expense)

Total other income (expense) consists of interest expense and other income (expense). Interest expense includes interest and other fees associated with our Credit Facilities and Receivables Financing Agreement (each as defined below). Other







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income (expense) also consists of any gains (losses) on the sale of long-lived assets and from the foreign currency contracts that we use to manage our exposure to foreign currency exchange rate risk related to our purchases and international operations.







        Results of Operations
        The following tables summarize key components of our results of operations for
        the periods presented. The period-to-period comparisons of our historical
        results are not necessarily indicative of the results that may be expected in
        the future.
                                                              Three Months Ended
                                                                   March 31,                                Change
                                                            2022               2021              Amount                 %
                                                                                       (unaudited)
                                                                                 (dollars in thousands)
        Revenue                                         $ 223,710          $ 235,573          $ (11,863)                  (5.0) %
        Cost of revenue                                   140,145            134,942              5,203                    3.9  %
        Gross profit                                       83,565            100,631            (17,066)                 (17.0) %
        Operating expenses:
        Sales and marketing                                33,094             30,851              2,243                    7.3  %
        General and administrative                         42,869             13,556             29,313                  216.2  %
        Amortization of intangible assets                   8,889              8,301                588                    7.1  %
        Change in fair value of contingent
        consideration                                       1,700                  -              1,700                  100.0  %
        Total operating expense                            86,552             52,708             33,844                   64.2  %
        Income (loss) from operations                      (2,987)            47,923            (50,910)                (106.2) %
        Other income (expense):
        Interest expense                                   (5,837)            (7,812)            (1,975)                 (25.3) %
        Other income (expense), net                           544               (458)             1,002                  218.8  %
        Total other expense                                (5,293)            (8,270)            (2,977)                 (36.0) %
        Income (loss) before provision for income taxes    (8,280)            39,653            (47,933)                (120.9) %
        Provision for income taxes                            152                724               (572)                 (79.0) %
        Net income (loss)                               $  (8,432)         $  38,929          $ (47,361)                (121.7) %
        








        Comparison of the Three Months Ended March 31, 2022 and 2021
        Revenue
                            Three Months Ended
                                March 31,                      Change
                           2022           2021          Amount           %
                                        (dollars in thousands)
        Revenue:
        Grills          $ 150,431      $ 178,655      $ (28,224)      (15.8) %
        Consumables        39,651         40,813         (1,162)       (2.8) %
        Accessories        33,628         16,105         17,523       108.8  %
        Total Revenue   $ 223,710      $ 235,573      $ (11,863)       (5.0) %
        


Revenue decreased by $11.9 million, or 5.0%, to $223.7 million for the three months ended March 31, 2022 compared to $235.6 million for the three months ended March 31, 2021. The decrease was driven by lower unit volume for grills and consumables, partially offset by higher selling prices. Accessories revenue benefited from incremental revenue due to sales of MEATER smart thermometers following the July 2021 acquisition of Apption Labs.

Revenue from our grills decreased by $28.2 million, or 15.8%, to $150.4 million for the three months ended March 31, 2022 compared to $178.7 million for the three months ended March 31, 2021. The decrease was primarily driven by lower unit volume, partially offset by a higher average selling price resulting from price increases taken in the second half of 2021 and early 2022.







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Revenue from our consumables decreased by $1.2 million, or 2.8%, to $39.7 million for the three months ended March 31, 2022 compared to $40.8 million for the three months ended March 31, 2021. The decrease was driven by reduced unit volume of wood pellets and other consumables, partially offset by higher average selling prices of wood pellets.

Revenue from our accessories grew by $17.5 million, or 108.8%, to $33.6 million for the three months ended March 31, 2022 compared to $16.1 million for the three months ended March 31, 2021. The increase was driven primarily by incremental revenue due to sales of MEATER smart thermometers following the July 2021 acquisition of Apption Labs combined with high demand for Traeger-branded accessories.







        Gross Profit
                                                     Three Months Ended
                                                          March 31,                                Change
                                                   2022               2021              Amount                 %
                                                                        (dollars in thousands)
        Gross profit                           $  83,565          $ 100,631          $ (17,066)                (17.0) %
        Gross margin (Gross profit as a
        percentage of revenue)                      37.4  %            42.7  %
        


Gross profit decreased by $17.1 million, or 17.0%, to $83.6 million for the three months ended March 31, 2022 compared to $100.6 million for the three months ended March 31, 2021. Gross margin decreased to 37.4% for the three months ended March 31, 2022 from 42.7% for the three months ended March 31, 2021. The decrease in gross margin was driven primarily by higher inbound shipping costs, partially offset by increased selling prices.







        Sales and Marketing
                                          Three Months Ended
                                              March 31,                    Change
                                         2022           2021         Amount         %
                                                    (dollars in thousands)
        Sales and marketing           $ 33,094       $ 30,851       $ 2,243       7.3  %
        As a percentage of revenue        14.8  %        13.1  %
        


Sales and marketing expense increased by $2.2 million, or 7.3%, to $33.1 million for the three months ended March 31, 2022 compared to $30.9 million for the three months ended March 31, 2021. As a percentage of revenue, sales and marketing expense increased to 14.8% for the three months ended March 31, 2022 from 13.1% for the three months ended March 31, 2021. The increase in sales and marketing expense was driven by an increase in advertising costs to drive brand awareness, demand and conversion, higher equity-based compensation expense, and higher travel expenses.







        General and Administrative
                                          Three Months Ended
                                              March 31,                     Change
                                         2022           2021          Amount          %
                                                     (dollars in thousands)
        General and administrative    $ 42,869       $ 13,556       $ 29,313       216.2  %
        As a percentage of revenue        19.2  %         5.8  %
        


General and administrative expense increased by $29.3 million, or 216.2%, to $42.9 million for the three months ended March 31, 2022 compared to $13.6 million for the three months ended March 31, 2021. As a percentage of revenue, general and administrative expense increased to 19.2% for the three months ended March 31, 2022 from 5.8% for the three months ended March 31, 2021. The increase in general and administrative expense was driven by higher equity-based compensation expense of $13.6 million, as well as personnel-related expenses associated with an increase in headcount in our marketing, customer experience, and sales functions, increased professional services fees primarily related to consulting, and expenses related to Apption Labs that are not reflected in the comparable period results.

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        Amortization of Intangible Assets
                                                Three Months Ended
                                                    March 31,                   Change
                                                2022           2021        Amount        %
                                                         (dollars in thousands)
        Amortization of intangible assets   $   8,889       $ 8,301       $  588       7.1  %
        As a percentage of revenue                4.0  %        3.5  %
        


Amortization of intangible assets, substantially attributable to the 2017 corporate reorganization and acquisition of the Company and the July 2021 acquisition of Apption Labs, increased $0.6 million, or 7.1%, to $8.9 million for the three months ended March 31, 2022 compared to $8.3 million for the three months ended March 31, 2021.







        Change in Fair Value of Contingent Consideration
                                                             Three Months Ended
                                                                  March 31,                                    Change
                                                        2022                      2021              Amount                 %
                                                                                (dollars in thousands)
        Change in fair value of contingent
        consideration                              $     1,700                $       -          $   1,700                 100.0  %
        As a percentage of revenue                         0.8   %                    -  %
        


Change in fair value of contingent consideration, attributable to the revalued earn out obligation associated with the Apption Labs business combination, increased $1.7 million, or 100.0%, to $1.7 million for the three months ended March 31, 2022 compared to $0 for the three months ended March 31, 2021. The change in fair value was primarily driven by the increase in the likelihood of achieving the revenue performance targets in the Share Purchase Agreement, and a shorter discount period.







        Total Other Expense
                                          Three Months Ended
                                              March 31,                     Change
                                         2022           2021          Amount          %
                                                     (dollars in thousands)
        Interest expense              $ (5,837)      $ (7,812)      $ (1,975)      (25.3) %
        Other income (expense), net        544           (458)         1,002       218.8  %
        Total other expense           $ (5,293)      $ (8,270)      $ (2,977)      (36.0) %
        As a percentage of revenue        (2.4) %        (3.5) %
        


Total other expense decreased by $3.0 million, or 36.0%, to $5.3 million for the three months ended March 31, 2022 compared to $8.3 million for the three months ended March 31, 2021. This decrease was primarily due to a lower applicable interest rate on our First Lien Term Loan Facility (as defined below) as a result of refinancing of our long-term debt in June 2021 and a favorable change from our derivative instruments.

Liquidity and Capital Resources

Historically, our cash requirements have principally been for working capital purposes, capital expenditures, and debt service payments. We have funded our operations through cash flows from operating activities, cash on hand, and . . .

May 12, 2022

COMTEX_407113725/2041/2022-05-12T16:58:51

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