The Real Good Food Company, Inc. (NASDAQ:RGF) Q2 2023 Earnings Conference Call August 11, 2023 9:30 AM ET Company Participants Shamari Benton - Vice President of Financial Planning and Analysis Bryan Freeman - Executive Chairman, Chairperson of Board of Directors Gerard Law - Chief Executive Officer and Director Akshay Jagdale - Chief Financial Officer Conference Call Participants Jon Andersen - William Blair John-Paul Wollam - ROTH MKM William Chappell - Truist Securities Robert Dickerson - Jefferies Opera ...

Rec 1120 NASDAQ: RGF Disclaimer Forward-Looking Statements In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this presentation may not occur and actual results could differ materially from those anticipated in or implied by the forward-looking statements, including as a result of the following factors: our limited operating history and significant operating losses; our ability to (i) increase our net sales from existing customers and acquire new customers; ...

Financial Performance - Net sales for Q1 2023 decreased by $7.8 million, or 20.7%, to $29.8 million compared to $37.6 million in Q1 2022, primarily due to the timing of promotional events [127]. - Cost of sales decreased by $8.5 million, or 25.6%, to $24.8 million in Q1 2023, attributed to lower sales volume and decreases in certain raw material costs [129]. - Gross profit increased by $0.7 million to $5.0 million in Q1 2023, compared to $4.2 million in the prior year period, due to the decrease in cost of sales [130]. - Loss from operations increased by $2.1 million, or 24.0%, to $10.7 million in Q1 2023, with a loss margin of (36.1)% compared to (23.1)% in Q1 2022 [134]. - Net loss increased by $4.1 million, or 43.1%, to $13.7 million for the three months ended March 31, 2023, compared to a net loss of $9.6 million in the prior year period [137]. Expenses - Administrative expenses rose by $2.9 million, or 49.5%, to $8.7 million in Q1 2023, driven by research and development costs for new product development [133]. - Interest expense increased by $2.4 million to $3.3 million in Q1 2023, primarily due to higher debt levels and increased interest rates [135]. - Selling and distribution expenses were $5.4 million in Q1 2023, a slight increase of 1.8% from $5.3 million in Q1 2022, with a percentage of net sales rising to 18.2% [131]. - Marketing expenses decreased by $152,000, or 8.5%, to $1.6 million in Q1 2023, representing 5.5% of net sales [132]. Cash Flow and Financing - Net cash used in operating activities was $15.9 million for the three months ended March 31, 2023, compared to $6.2 million for the same period in 2022, primarily due to increased working capital and net loss [142]. - Cash and cash equivalents at the end of the period were $2.9 million, down from $14.4 million in the prior year [141]. - Net cash provided by financing activities totaled $11.8 million during the three months ended March 31, 2023, compared to a net cash used of $5.5 million in the same period last year [145]. - As of March 31, 2023, long-term debt obligations amounted to $87.4 million [140]. - The company amended its debt agreement to decrease the outstanding balance of the revolving credit facility by $10.0 million, increasing availability by the same amount [139]. Future Outlook - The company expects to fulfill sales shortfalls from Q1 2023 in the second quarter and more fully in the second half of 2023 [128]. - The company anticipates lower raw material costs to continue throughout 2023 compared to the prior year [129]. - Future capital expenditures are expected to be approximately $2.0 million to $5.0 million to enhance production capabilities during the remainder of 2023 [140]. Internal Controls and Systems - The increase in working capital was driven by higher inventory levels to support new product introductions and an increase in accounts payable and accrued expenses [143]. - The company is in the process of remediating a material weakness in internal controls over financial reporting and disclosure controls [154]. - The company plans to implement a new ERP system to address identified weaknesses in the current accounting system, with an intent to complete this by the end of 2023 [155].

1148 0 Rec NASDAQ: RGF First Quarter 2023 Earnings Presentation May 2023 Disclaimer 1 Forward-Looking Statements This presentation contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securitie ...

The Real Good Food Company, Inc. (NASDAQ:RGF) Q1 2023 Earnings Conference Call May 12, 2023 8:30 AM ET Company Participants Shamari Benton - Vice President of FP&A and Investor Relations Bryan Freeman - Executive Chairman Gerard Law - Chief Executive Officer Akshay Jagdale - Chief Financial Officer Conference Call Participants Jon Andersen - William Blair & Company John-Paul Wollam - ROTH Capital Partners LLC Robert Dickerson - Jefferies LLC Operator Greetings, and welcome to The Real Good Food Company Firs ...

[FORM 10-K Filing Information](index=1&type=section&id=Form%2010-K%20Filing%20Information) The Real Good Food Company, Inc. filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as a Delaware corporation trading on Nasdaq under RGF, classified as a non-accelerated, smaller reporting, and emerging growth company [Registrant Information](index=1&type=section&id=Registrant%20Information) The Real Good Food Company, Inc. filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as a Delaware corporation, trading on the Nasdaq Global Market under the symbol RGF, and classified as a non-accelerated filer, smaller reporting company, and emerging growth company - The Real Good Food Company, Inc. is a Delaware corporation, trading on the Nasdaq Global Market under the symbol 'RGF' - The company is classified as a non-accelerated filer, a smaller reporting company, and an emerging growth company Key Stock Information (as of March 24, 2023) | Metric | Value | | :----- | :---- | | Class A Common Stock Outstanding | 7,187,951 shares | | Class B Common Stock Outstanding | 18,677,681 shares | - The aggregate market value of Class A common stock held by non-affiliates as of June 30, 2022, was approximately **$42,902,466**[3](index=3&type=chunk) [Cautionary Note Regarding Forward-Looking Statements](index=3&type=section&id=Cautionary%20Note%20Regarding%20Forward-Looking%20Statements) This report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from expectations [Forward-Looking Statements Disclaimer](index=3&type=section&id=Forward-Looking%20Statements%20Disclaimer) This section highlights that the Annual Report contains forward-looking statements about the company's financial condition, results of operations, plans, and future performance, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations, including the impact of COVID-19, ability to implement growth strategy, production capabilities, cash flow generation, loss of key management or customers, competition, and commodity price volatility - All statements in the report, other than historical facts, are forward-looking and discuss current expectations and projections related to financial condition, results of operations, plans, objectives, future performance, and business[11](index=11&type=chunk) - Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from expectations[11](index=11&type=chunk) - Key risks include: the impact of COVID-19 on the economy, employees, suppliers, customers, and consumers[12](index=12&type=chunk) - Ability to successfully implement growth strategy and maximize production capabilities[12](index=12&type=chunk) - Ability to generate sufficient cash flow or raise capital on acceptable terms[12](index=12&type=chunk) - Loss of key senior management members or significant customers[12](index=12&type=chunk) - Entrance of new competitors, effectiveness of marketing, and ability to introduce new products[12](index=12&type=chunk) - Impact of government regulation, potential price increases and shortages of inputs, and supply chain management[12](index=12&type=chunk) [Item 1: Business](index=5&type=section&id=Item%201%3A%20Business) The Real Good Food Company, founded in 2016, is a high-growth, health and wellness-focused frozen food company specializing in high-protein, low-sugar, gluten- and grain-free comfort foods, sold nationwide and online, operating in a competitive market [Our Company and Industry](index=5&type=section&id=Our%20Company%20and%20Industry) The Real Good Food Company, Inc., founded in 2016, is an innovative, high-growth, health and wellness-focused frozen food company specializing in high-protein, low-sugar, gluten- and grain-free comfort foods, available in approximately 15,000 stores nationwide and online, operating in the highly competitive U.S. frozen food and health & wellness industries, competing with both conventional and specialized brands - The company was founded in 2016 as an innovative, high-growth, branded, health and wellness (H&W) focused frozen food company[16](index=16&type=chunk) - Products are designed to be high in protein, low in sugar, and made from gluten- and grain-free ingredients, sold in approximately **15,000 stores** and directly from its website[16](index=16&type=chunk) - The company operates in multiple large subcategories within the U.S. frozen food category and competes in a highly competitive market with numerous conventional and H&W brands[19](index=19&type=chunk) - Strategic advantages include a mission-focused approach, craveable products, a large consumer community, innovative product-development, self-manufacturing capabilities, product positioning, and management expertise[20](index=20&type=chunk) [Our Products](index=5&type=section&id=Our%20Products) The company primarily sells products under its 'Realgood Foods Co.' brand, with a limited number of private label offerings, focusing on core products like breakfast sandwiches and entrées designed to be gluten-free, sugar-free, higher in protein, and lower in carbohydrates than conventional alternatives, including entrée bowls, enchiladas, stuffed chicken, Asian chicken, breaded chicken, snacks, and pizza - The company primarily sells products under its 'Realgood Foods Co.' brand, with a limited number of private label products[21](index=21&type=chunk) - Core products, breakfast sandwiches and entrées, are the chief drivers of growth, designed to be gluten-free, sugar-free, higher in protein, and lower in carbohydrates[23](index=23&type=chunk) - Entrée Bowls: Lasagna bowl contains **11g carbohydrates** and **32g protein** per serving, compared to a competitor's **40g carbohydrates** and **16g protein**[25](index=25&type=chunk) - Enchiladas: Made with chicken and cheese 'tortilla', fewer than **4g carbohydrates** and **20g protein** per serving[26](index=26&type=chunk) - Stuffed Chicken: Bacon-wrapped, grain-free, gluten-free, **3g carbohydrates** and **32g protein**, compared to a conventional version with **16g carbohydrates** and **20g protein**[27](index=27&type=chunk) - Breakfast Sandwiches: Grain-free, gluten-free bun, **18-20g protein** and **4g carbohydrates** per serving, compared to a conventional counterpart with **29g carbohydrates** and **13g protein**[33](index=33&type=chunk) [Manufacturing and Quality Control](index=7&type=section&id=Manufacturing%20and%20Quality%20Control) The company self-manufactures over 80% of its products at USDA and FDA-registered facilities in City of Industry, California, and Bolingbrook, Illinois, which are also GFCO-certified for gluten-free products, maintaining a robust food safety and quality management program compliant with FSP, FSMA, and Global Food Safety Initiative standards - Over **80% of products** were self-manufactured in 2022 at facilities in City of Industry, California, and Bolingbrook, Illinois, and through a co-manufacturing partner in Missouri[24](index=24&type=chunk)[36](index=36&type=chunk) - Manufacturing facilities are USDA and FDA registered and certified by the Gluten-Free Certification Organization (GFCO) for 'gluten free' labeling[24](index=24&type=chunk)[37](index=37&type=chunk) - A food safety and quality management program is utilized, compliant with FSMA, Global Food Safety Initiative, and Safe Quality Food Institute standards, involving manufacturing procedures, expert knowledge, employee training, and auditing[39](index=39&type=chunk)[40](index=40&type=chunk)[41](index=41&type=chunk) [Mission, Sales, and Marketing](index=8&type=section&id=Mission%20%26%20Sales%20and%20Marketing) The company's mission is to make nutritious comfort foods accessible, targeting consumers seeking healthier options due to dietary restrictions or health conditions, with sales primarily direct to retailers supported by a sales team and broker network, and in-house marketing focusing on direct consumer engagement through social media, SMS, and influencers - The company's mission is to make craveable, nutritious comfort foods accessible to consumers seeking healthier food choices, including those reducing sugar/carbohydrate intake, or managing diabetes and obesity[43](index=43&type=chunk) - Sales are led by a Senior Vice President, Head of Sales, utilizing an extensive network of brokers, with the vast majority of net revenue derived from direct shipments to retailer customers' warehouses[45](index=45&type=chunk) - Marketing activities are managed in-house by a Chief Marketing Officer, engaging with consumers directly through social media, SMS text, and the company website, and indirectly through influencers[46](index=46&type=chunk)[47](index=47&type=chunk) [Corporate Culture and Human Capital](index=9&type=section&id=Corporate%20Culture%20and%20Human%20Capital) The company fosters a culture of 'Keeping it REAL' based on trust, respect, innovation, transparency, accountability, and ownership, which is crucial for growth and employee retention, employing 130 full-time and approximately 495 contract employees as of December 31, 2022, while prioritizing competitive wages, benefits, and a safe, diverse, equitable, and inclusive workplace - The corporate culture, 'Keeping it REAL,' emphasizes trust, respect, relentless product innovation, continuous improvement, transparency, accountability, and ownership, which are key to growth and success[48](index=48&type=chunk) Employee Count (as of December 31, 2022) | Employee Type | Count | | :------------ | :---- | | Full-time employees | 130 | | Contract employees (via PEOs) | 495 | - The company provides competitive wages, benefits, holidays, recognition programs, and career-development opportunities, focusing on creating a safe, diverse, equitable, and inclusive workplace[52](index=52&type=chunk) [Facilities and Intellectual Property](index=10&type=section&id=Facilities%20and%20Intellectual%20Property) The company leases its principal executive office in Cherry Hill, NJ, and manufacturing facilities in City of Industry, CA, and Bolingbrook, IL, along with a warehouse in La Verne, CA, relying on copyrights, trademarks, trade dress, and trade secret laws to protect its intellectual property, considering its 'Real Good Food Company' and 'Realgood Foods Co.' logo trademarks as valuable assets, holding 16 U.S. trademark registrations and a registered domain name - Principal executive office: Cherry Hill, NJ (**5,800 sq ft**, lease expires Oct 2026)[55](index=55&type=chunk) - Manufacturing facilities: City of Industry, CA (**45,000 sq ft**, lease expires June 2024) and Bolingbrook, IL (**81,406 sq ft**, lease Jan 2022-April 2029, fully operational H2 2022)[56](index=56&type=chunk)[57](index=57&type=chunk) - Warehouse: La Verne, CA (**19,500 sq ft**, lease expires March 2026)[58](index=58&type=chunk) - The company relies on copyright, trademark, trade dress, and trade secret laws to protect its intellectual property, with 'Real Good Food Company' and its 'Realgood Foods Co.' logo being among its most valuable assets[60](index=60&type=chunk)[61](index=61&type=chunk) - As of December 31, 2022, the company held **16 U.S. trademark registrations**, one pending U.S. application, two foreign registrations, and one pending foreign application, along with the registered domain name www.realgoodfoods.com[63](index=63&type=chunk) [Information Systems and Government Regulation](index=11&type=section&id=Information%20Systems%20and%20Government%20Regulation) The company uses legacy systems for various functions and plans to implement a comprehensive ERP system, facing a demanding regulatory environment for information security and privacy with measures like data encryption and access controls, while the food industry is highly regulated by federal (FDA, USDA, FTC), state, and local authorities, covering manufacturing, labeling, and safety, requiring continuous compliance in an evolving legal framework - The company operates using legacy systems for finance, accounting, supply chain, inventory control, and sales, with a long-term strategy to implement a comprehensive Enterprise Resource Planning (ERP) system[64](index=64&type=chunk) - The regulatory environment for information security and privacy is demanding, requiring compliance with complex laws and regulations regarding data collection, storage, use, and protection, with measures such as data encryption, network security, and access controls[65](index=65&type=chunk)[66](index=66&type=chunk) - The food industry is highly regulated by federal (FDA, USDA, FTC), state, and local authorities, covering aspects like manufacturing, packaging, labeling, distribution, advertising, quality, and safety of products[67](index=67&type=chunk)[68](index=68&type=chunk) [Item 1A: Risk Factors](index=13&type=section&id=Item%201A%3A%20Risk%20Factors) The company's success is subject to numerous risks, including its limited operating history, significant operating losses, customer acquisition, COVID-19 impact, indebtedness, and intense competition [Summary of Risk Factors](index=13&type=section&id=Summary%20of%20Risk%20Factors) The company's success is subject to numerous risks, including its limited operating history as a public company, significant operating losses, the need to attract and retain customers, the impact of the COVID-19 pandemic, substantial indebtedness, and intense competition, alongside other key risks involving consumer preferences, product innovation, supply chain disruptions, and regulatory compliance - Limited operating history as a public company and significant operating losses[76](index=76&type=chunk) - Need to increase net sales from existing customers and acquire new customers to execute growth strategy[76](index=76&type=chunk) - Short and long-term effects of the COVID-19 pandemic on business and industry[76](index=76&type=chunk) - Indebtedness and associated financial restrictions and operating covenants[76](index=76&type=chunk) - Substantial customer concentration risk and potential consolidation of customers[76](index=76&type=chunk) - Ability to compete successfully in a highly competitive market and rapidly changing consumer preferences[76](index=76&type=chunk) - Volatile price of food commodities and packaging materials[76](index=76&type=chunk) - Brand and reputation risk from quality or food safety issues[76](index=76&type=chunk) - Reliance on third-party delivery and warehousing companies[76](index=76&type=chunk) - Requirements and challenges of being a public company[76](index=76&type=chunk) [Risks Related to Our Business, Brand, Products, and Industry](index=14&type=section&id=Risks%20Related%20to%20Our%20Business%2C%20Brand%2C%20Products%2C%20and%20Industry) The company faces risks such as persistent operating losses, dependence on customer acquisition and retention, and vulnerability to economic downturns, with significant customer concentration and intense competition posing threats to sales and market share, while supply chain disruptions, volatile commodity prices, and the need for additional financing are critical challenges, and food safety incidents, brand reputation, and reliance on digital marketing also present substantial risks Net Losses (2021-2022) | Year Ended December 31, | Net Loss (in millions) | | :---------------------- | :--------------------- | | 2022 | $(44.5) | | 2021 | $(67.1) | - The company is subject to substantial customer concentration risk, with Costco and Walmart collectively accounting for approximately **70% of net sales in 2022** (**51%** and **18%**, respectively) and **71% in 2021** (**51%** and **21%**, respectively)[84](index=84&type=chunk) - The company operates in a highly competitive market, facing large conventional food companies and other H&W brands, with competition based on product quality, brand reputation, nutritional content, pricing, and marketing[89](index=89&type=chunk)[90](index=90&type=chunk)[91](index=91&type=chunk) - The price of food commodities (e.g., poultry, dairy) and packaging materials is volatile due to factors like inflation, demand, disease, and natural disasters, which could significantly increase cost of sales and reduce profitability[108](index=108&type=chunk) - As of December 31, 2022, the company owed **$55.2 million** under a revolving line of credit, and its credit agreements contain financial restrictions and operating covenants that may reduce financial flexibility[115](index=115&type=chunk) [Risks Related to Our Structure](index=27&type=section&id=Risks%20Related%20to%20Our%20Structure) The company's 'Up-C' structure means its ability to pay taxes and expenses, including substantial payments under the Tax Receivable Agreement (TRA), is linked to RGF's income, with TRA payments potentially accelerated or exceeding actual tax benefits, and no reimbursement for disallowed benefits, while Class B common stock holders control approximately 76% of voting power, potentially leading to conflicts of interest with public stockholders - The company's principal asset is a controlling equity interest in Real Good Foods, LLC (RGF), which is treated as a partnership for U.S. federal income tax purposes, meaning the company incurs income taxes on its allocable share of RGF's net taxable income[147](index=147&type=chunk) - Under the Tax Receivable Agreement (TRA), the company is required to pay certain Class B unit holders for **85% of net cash savings** from tax benefits, with payments expected to be substantial and potentially accelerated or exceeding actual benefits[148](index=148&type=chunk)[151](index=151&type=chunk) - The company will not be reimbursed for any payments made under the TRA if tax benefits are disallowed by the IRS[153](index=153&type=chunk) - Holders of Class B common stock controlled approximately **76% of the combined voting power** as of December 31, 2022, allowing them to exert significant influence over management and affairs, and potentially leading to conflicting interests with public stockholders[155](index=155&type=chunk)[156](index=156&type=chunk) [Risks Related to Our Regulatory Environment](index=30&type=section&id=Risks%20Related%20to%20Our%20Regulatory%20Environment) The company's operations are extensively regulated by federal, state, and local authorities, including the FDA and USDA, covering all aspects from manufacturing to labeling, where non-compliance, even inadvertent, can lead to civil or criminal penalties, product recalls, and reputational damage, and changes in regulations, particularly concerning product claims and advertising, could increase costs and adversely affect the business, with the company also facing risks from co-manufacturer and supplier non-compliance for which it may be held liable - Operations are subject to extensive regulation by the FDA, USDA, and other federal, state, and local authorities, with non-compliance potentially leading to adverse inspectional findings, enforcement actions, or product recalls[159](index=159&type=chunk)[160](index=160&type=chunk) - The manufacture, labeling, distribution, and marketing of food products are highly regulated, with detailed requirements for product claims and advertising, which can be subject to subjective regulatory evaluation and legal challenges[161](index=161&type=chunk)[164](index=164&type=chunk) - Inadvertent or unknowing violations of federal, state, or local regulatory requirements, such as the FDCA, can expose the company to civil and criminal penalties[168](index=168&type=chunk) - The company may be responsible or held liable for the activities and compliance of its co-manufacturers and suppliers, despite having limited visibility into their operations, which could disrupt supply or increase costs[169](index=169&type=chunk)[170](index=170&type=chunk) [Risks Related to Our Intellectual Property, Information Technology, and Privacy](index=32&type=section&id=Risks%20Related%20to%20Our%20Intellectual%20Property%2C%20Information%20Technology%2C%20and%20Privacy) The company relies on various legal means to protect its intellectual property, but these offer limited protection against disclosure or independent discovery, especially for trade secrets and co-developed formulations, and is highly dependent on information technology systems, which are vulnerable to cybersecurity risks like breaches and attacks, potentially causing disruptions and data loss, while also complying with numerous and evolving federal, state, and international data privacy regulations, such as CCPA, CPRA, and PCI-DSS, with non-compliance risking reputational harm, legal actions, and significant costs - The company relies on copyrights, trademarks, trade dress, trade secrets, and confidentiality agreements to protect its intellectual property, but these methods offer limited protection, and trade secrets are difficult to safeguard[173](index=173&type=chunk)[175](index=175&type=chunk) - The company is dependent on various information technology systems, which are subject to cybersecurity risks including security breaches, system disruption, theft, and inadvertent release of sensitive information, despite implemented mitigation measures[177](index=177&type=chunk)[178](index=178&type=chunk)[179](index=179&type=chunk)[180](index=180&type=chunk) - The company is subject to numerous federal, state, local, and foreign laws and regulations relating to the collection, processing, storing, sharing, disclosure, use, and security of personal information and other data, including CCPA, CPRA, and PCI-DSS[182](index=182&type=chunk)[183](index=183&type=chunk)[184](index=184&type=chunk)[185](index=185&type=chunk) [Risks Related to Being a Public Company](index=35&type=section&id=Risks%20Related%20to%20Being%20a%20Public%20Company) Operating as a public company significantly increases expenses, strains resources, and diverts management's attention due to compliance with SEC, Sarbanes-Oxley, Dodd-Frank, and Nasdaq regulations, with the management team having limited public company experience, which could hinder the transition, and while benefiting from reduced disclosure requirements as an 'emerging growth company' and 'smaller reporting company,' this status may make the stock less attractive to some investors, and the company has also identified material weaknesses in its internal control over financial reporting, which, if not remediated, could lead to financial misstatements and loss of investor confidence - Being a public company increases accounting, legal, and other expenses, strains resources, and diverts management's attention due to compliance with various regulations and listing standards[189](index=189&type=chunk) - The management team has limited experience managing a public company, which could impact the efficient management of reporting obligations and regulatory oversight[192](index=192&type=chunk) - As an 'emerging growth company' and 'smaller reporting company,' the company benefits from reduced disclosure requirements, but this may make its Class A common stock less attractive to some investors, potentially affecting trading activity and price volatility[193](index=193&type=chunk)[194](index=194&type=chunk)[195](index=195&type=chunk)[196](index=196&type=chunk) - Management concluded that the company did not maintain effective internal control over financial reporting as of December 31, 2022, due to material weaknesses, including a lack of sufficient resources, inadequate formal accounting policies, insufficient segregation of duties, incomplete testing, and inadequate access controls[197](index=197&type=chunk)[434](index=434&type=chunk) [Risks Related to Ownership of Our Class A Common Stock](index=38&type=section&id=Risks%20Related%20to%20Ownership%20of%20Our%20Class%20A%20Common%20Stock) The trading price of the company's Class A common stock is highly volatile due to numerous factors, including financial performance, market conditions, and competitive announcements, with the stock being thinly traded, limiting liquidity for large volume transactions, and future sales by existing stockholders, particularly those converting Class B shares, or additional issuances under equity incentive plans, could cause significant dilution and a decline in share price, while charter documents and Delaware law contain provisions that could deter takeovers, and analyst coverage can significantly influence stock price and trading volume - The trading price of the Class A common stock may be volatile due to fluctuations in financial condition, market trends, competition, economic conditions, and other factors beyond the company's control[202](index=202&type=chunk)[203](index=203&type=chunk)[205](index=205&type=chunk) - The company's stock is thinly traded, which may limit the ability of investors to acquire or sell large volumes of shares in a given trading session[207](index=207&type=chunk) - Substantial future sales of Class A common stock, including shares issuable upon redemption or exchange of Class B units (**19,377,681 shares** as of Dec 31, 2022), or future issuances under equity incentive plans, could result in additional dilution and cause the share price to fall[209](index=209&type=chunk)[210](index=210&type=chunk)[211](index=211&type=chunk) - Charter documents and Delaware law contain provisions that could delay or prevent a change of control, potentially reducing the price investors might be willing to pay for Class A common stock[212](index=212&type=chunk)[213](index=213&type=chunk)[214](index=214&type=chunk) [Item 1B: Unresolved Staff Comments](index=41&type=section&id=Item%201B%3A%20Unresolved%20Staff%20Comments) There are no unresolved staff comments from the Securities and Exchange Commission [Unresolved Staff Comments](index=41&type=section&id=Unresolved%20Staff%20Comments) There are no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[218](index=218&type=chunk) [Item 2: Properties](index=41&type=section&id=Item%202%3A%20Properties) The company leases its principal executive office in Cherry Hill, NJ, and manufacturing facilities in City of Industry, CA, and Bolingbrook, IL, along with a warehouse in La Verne, CA [Company Facilities](index=41&type=section&id=Company%20Facilities) The company's principal executive office is a **5,800 sq ft** leased space in Cherry Hill, New Jersey, with a lease expiring in October 2026, while manufacturing operations are conducted in leased facilities: a **45,000 sq ft** facility in City of Industry, California (lease expires June 2024) and an **81,406 sq ft** facility in Bolingbrook, Illinois (lease from January 2022 to April 2029), and additionally, a **19,500 sq ft** industrial building in La Verne, California, is leased for warehousing and distribution, with its lease expiring in March 2026 - Corporate headquarters: Cherry Hill, New Jersey (**5,800 sq ft** office space, lease expires October 2026)[219](index=219&type=chunk) - Manufacturing facilities: City of Industry, California (**45,000 sq ft**, lease expires June 30, 2024) and Bolingbrook, Illinois (**81,406 sq ft**, lease from January 1, 2022, to April 1, 2029)[220](index=220&type=chunk) - Warehouse: La Verne, California (**19,500 sq ft** industrial building for packaging and distribution, lease expires March 31, 2026)[221](index=221&type=chunk) [Item 3: Legal Proceedings](index=41&type=section&id=Item%203%3A%20Legal%20Proceedings) The company is involved in various legal proceedings and disputes in the ordinary course of business, with no expected material adverse effect [Legal Proceedings Overview](index=41&type=section&id=Legal%20Proceedings%20Overview) The company is involved in various legal proceedings and disputes in the ordinary course of business, and while the outcomes are uncertain, management believes no current matters, individually or in aggregate, would have a material adverse effect on the business, though such proceedings can still negatively impact the company due to defense and settlement costs and diversion of management resources - The company is involved in various legal proceedings and disputes arising from or related to matters incident to the ordinary course of business activities[222](index=222&type=chunk) - Management believes that no current matters, individually or in the aggregate, would have a material adverse effect on the company's business, operating results, financial condition, or prospects[222](index=222&type=chunk) - Legal proceedings and disputes may generally have an adverse impact due to defense and settlement costs and diversion of management resources[222](index=222&type=chunk) [Item 4: Mine Safety Disclosures](index=41&type=section&id=Item%204%3A%20Mine%20Safety%20Disclosures) This item is not applicable to the company [Mine Safety Disclosures](index=41&type=section&id=Mine%20Safety%20Disclosures) This item is not applicable to the company - This item is not applicable[224](index=224&type=chunk) [Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=42&type=section&id=Item%205%3A%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's Class A common stock trades on NASDAQ under 'RGF', with no cash dividends declared or anticipated [Market and Shareholder Information](index=42&type=section&id=Market%20and%20Shareholder%20Information) The company's Class A common stock trades on the NASDAQ Global Market under the symbol 'RGF', with approximately **2,490 record holders** as of March 24, 2023, and the company did not sell any unregistered securities or purchase any of its equity securities during the fiscal year ended December 31, 2022, with no cash dividends declared or paid, nor are they anticipated in the foreseeable future, with future decisions at the discretion of the board based on financial conditions and contractual restrictions - The company's Class A common stock is traded on the NASDAQ Global Market under the symbol 'RGF'[226](index=226&type=chunk) - As of March 24, 2023, there were approximately **2,490 record holders** of the company's Class A common stock[226](index=226&type=chunk) - During the fiscal year ended December 31, 2022, the company did not sell any unregistered securities nor purchase any of its equity securities[227](index=227&type=chunk)[229](index=229&type=chunk) - The company has not declared or paid any cash dividends on its Class A common stock since inception and does not anticipate doing so in the foreseeable future[228](index=228&type=chunk) [Item 6: [Reserved]](index=42&type=section&id=Item%206%3A%20%5BReserved%5D) This item is reserved and contains no information [Reserved](index=42&type=section&id=Reserved) This item is reserved and contains no information - This item is reserved[231](index=231&type=chunk) [Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations](index=42&type=section&id=Item%207%3A%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section discusses the company's financial condition, results of operations, and liquidity, highlighting net sales growth, cost pressures, and critical accounting policies [Overview of Business and Trends](index=43&type=section&id=Overview%20of%20Business%20and%20Trends) The company is a frozen food company specializing in high-protein, low-sugar, gluten- and grain-free products, primarily sold to U.S. retailers and through e-commerce, operating within the **$210 billion** U.S. health and wellness industry, benefiting from trends like healthy eating and increased in-home consumption, but facing economic and supply chain challenges, including persistent cost pressures in 2022, with potential for recurrence in 2023 - The company develops, markets, and manufactures high-protein, low-sugar, gluten- and grain-free frozen foods, primarily sold to U.S. retailers and through e-commerce channels[234](index=234&type=chunk) - It competes within the **$210 billion** U.S. health and wellness industry, benefiting from increased focus on healthy eating and in-home consumption trends[237](index=237&type=chunk) - Cost challenges due to supply and supply chain disruptions were persistent during 2022, with potential for certain cost pressures to return in 2023, such as for poultry due to avian flu outbreaks[237](index=237&type=chunk)[238](index=238&type=chunk) [Components of Our Results of Operations](index=44&type=section&id=Components%20of%20Our%20Results%20of%20Operations) The company's financial results are driven by net sales (gross sales less discounts and allowances), gross profit (net sales minus cost of goods sold), and operating expenses (selling and distribution, marketing, and administrative), with cost of goods sold including ingredients, labor, and manufacturing overhead, while operating expenses cover freight, sales personnel, advertising, R&D, and public company costs, operating as a single segment with all assets and sales in the U.S., and experiencing mild seasonality with higher sales typically in Q1 and Q2 - Net sales are primarily derived from direct sales to retail customers, recorded net of discounts, allowances, coupons, slotting fees, and trade advertising[240](index=240&type=chunk) - Gross profit is net sales less cost of goods sold, which includes ingredient costs, direct and indirect labor, co-manufacturing fees, plant and equipment costs, and depreciation[241](index=241&type=chunk) - Selling and Distribution Expense: Includes third-party freight, warehousing, and personnel costs[242](index=242&type=chunk) - Marketing Expense: Covers marketing personnel, website costs, advertising, consumer promotions, and influencer agreements[243](index=243&type=chunk) - Administrative Expense: Encompasses management and administrative salaries, R&D, non-manufacturing depreciation, professional fees, and ERP system implementation costs[244](index=244&type=chunk) - The company is managed as a single operating segment, with all sales and assets primarily within the United States[246](index=246&type=chunk) - The company experiences mild seasonal earning characteristics, with lower sales in warm-weather months and the highest percentage of net sales typically occurring in the first and second quarters[247](index=247&type=chunk) [Results of Operations](index=46&type=section&id=Results%20of%20Operations) In 2022, net sales increased by **68.4%** to **$141.6 million**, driven by strong sales volumes and reduced promotions, however, cost of sales rose by **73.9%** due to higher sales volume, raw material costs, and Bolingbrook facility start-up, leading to a **2.9% decrease** in gross profit margin, while operating expenses decreased by **18.6%** primarily due to lower equity compensation in marketing and administrative expenses, and the net loss decreased by **31.9%** to **$45.7 million**, reflecting improved operating loss despite increased interest expense Key Financial Results (Year Ended December 31, in thousands) | Metric | 2022 | 2021 | $ Change | % Change | | :--------------------------------------- | :----- | :----- | :------- | :------- | | Net sales | $141,588 | $84,085 | $57,503 | 68.4% | | Cost of sales | $128,339 | $73,791 | $54,549 | 73.9% | | Gross profit | $13,249 | $10,294 | $2,955 | 28.7% | | Total operating expenses | $51,638 | $63,406 | $(11,767) | -18.6% | | Loss from operations | $(38,389) | $(53,112) | $14,722 | -27.7% | | Interest expense | $7,421 | $5,365 | $2,056 | 38.3% | | Net Loss | $(45,666) | $(67,093) | $21,426 | -31.9% | - Net sales increased by **$57.5 million** (**68.4%**) in 2022, primarily due to strong growth in sales volumes from existing and new retail/club customers and decreased sales promotions[250](index=250&type=chunk) - Cost of sales increased by **$54.5 million** (**73.9%**) in 2022, driven by higher sales volume, raw material costs, and start-up expenses for the Bolingbrook manufacturing facility[251](index=251&type=chunk) - Gross profit as a percentage of sales decreased by **2.9%** in 2022 due to increased manufacturing and raw material costs[252](index=252&type=chunk) - Marketing expense decreased by **$14.6 million** (**70.8%**) in 2022, mainly due to a **$15.8 million** equity compensation expense recognized in 2021[254](index=254&type=chunk) - Administrative expense decreased by **$2.8 million** (**10.0%**) in 2022, primarily due to a **$12.3 million** equity compensation expense in 2021 versus **$6.4 million** in 2022[257](index=257&type=chunk) [Liquidity and Capital Resources](index=48&type=section&id=Liquidity%20and%20Capital%20Resources) The company's primary cash uses are working capital, operating expenses, promotions, debt service, and capital expenditures, with **$7.6 million** in cash, **$0.4 million** in current debt, and **$69.5 million** in long-term debt as of December 31, 2022, and a **$75 million** revolving credit facility, while net cash used in operating activities increased to **$57.3 million** in 2022, mainly due to higher inventory and accounts receivable, and net cash provided by financing activities decreased to **$38.9 million**, primarily due to IPO proceeds in the prior year, with the company expecting **$3.0 million to $7.0 million** in capital expenditures for 2023 and believing its current cash, operations, and credit facilities will provide sufficient liquidity - Primary uses of cash include funding working capital, operating expenses, promotional activities, debt service, and capital expenditures related to manufacturing facilities[263](index=263&type=chunk) Liquidity Position (as of December 31, 2022, in millions) | Metric | Amount | | :-------------------------------- | :----- | | Cash | $7.6 | | Current debt obligations | $0.4 | | Long-term debt obligations | $69.5 | | Credit facility maximum borrowing | $75.0 | - Net cash used in operating activities increased to **$57.3 million** in 2022 from **$26.8 million** in 2021, primarily due to increases in inventory and accounts receivable[268](index=268&type=chunk) - Net cash provided by financing activities decreased to **$38.9 million** in 2022 from **$61.2 million** in 2021, mainly due to cash received from the IPO in the previous year, partially offset by increased borrowings from the revolving credit line[271](index=271&type=chunk) - The company expects to make future capital expenditures of approximately **$3.0 million to $7.0 million** during 2023 for enhancing production capabilities[265](index=265&type=chunk) [Critical Accounting Policies and Estimates](index=50&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) The company's critical accounting policies involve significant management judgment and estimates, particularly for net sales recognition (including variable consideration for discounts and allowances), inventory costing (including obsolescence reserves), and contingent consideration in business combinations, with other key policies including equity-based compensation, convertible debt valuation, and income taxes, where a full valuation allowance was applied against deferred tax assets in 2022 and 2021 due to uncertainty of realization - Net Sales Recognition: Revenue is recognized upon transfer of control, net of variable consideration (discounts, allowances, coupons, slotting fees) estimated using the 'most likely amount' approach[276](index=276&type=chunk)[278](index=278&type=chunk) - Inventories: Stated at the lower of cost or net realizable value (FIFO method), with write-downs for estimated excess and obsolescence based on management judgment (no write-down in 2022/2021)[280](index=280&type=chunk)[281](index=281&type=chunk) - Contingent Consideration: Recognized at fair value at the acquisition date, remeasured each reporting period with changes included in current operations, based on probability-adjusted present values and discount rates[282](index=282&type=chunk)[283](index=283&type=chunk) - Equity-Based Compensation: Measured at grant date fair value (closing stock price) and recognized on a straight-line basis over the vesting period[285](index=285&type=chunk) - Income Taxes: Accounted for using the asset and liability method, with a full valuation allowance applied against all recognized deferred tax assets in 2022 and 2021 due to the uncertainty of their realization[354](index=354&type=chunk) [Item 7A: Quantitative and Qualitative Disclosures About Market Risk](index=52&type=section&id=Item%207A%3A%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, the company is not required to provide quantitative and qualitative disclosures about market risk [Market Risk Disclosures](index=52&type=section&id=Market%20Risk%20Disclosures) As a smaller reporting company, the company is not required to provide quantitative and qualitative disclosures about market risk - The company is a 'smaller reporting company' and is not required to provide quantitative and qualitative disclosures about market risk[286](index=286&type=chunk) [Item 8: Financial Statements and Supplementary Data](index=53&type=section&id=Item%208%3A%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the audited consolidated financial statements, including balance sheets, statements of operations, cash flows, and comprehensive notes, with an unqualified opinion from Grant Thornton LLP [Report of Independent Registered Public Accounting Firm](index=54&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) Grant Thornton LLP provided an unqualified opinion on the consolidated financial statements of The Real Good Food Company, Inc. and its subsidiary for the years ended December 31, 2022 and 2021, stating they are presented fairly in all material respects in conformity with U.S. GAAP, but the audit did not include an opinion on the effectiveness of internal control over financial reporting - Grant Thornton LLP issued an unqualified opinion on the consolidated financial statements for the years ended December 31, 2022 and 2021, affirming they present fairly the financial position, results of operations, and cash flows in conformity with U.S. GAAP[291](index=291&type=chunk) - The audit did not include an opinion on the effectiveness of the company's internal control over financial reporting[293](index=293&type=chunk) [Consolidated Financial Statements](index=55&type=section&id=Consolidated%20Financial%20Statements) This section presents the company's Consolidated Balance Sheets, Statements of Operations, Statements of Cash Flows, and Statements of Stockholders' Equity/Deficit for the fiscal years ended December 31, 2022, and 2021, providing a comprehensive overview of the company's financial position, performance, and cash movements Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Total current assets | $66,100 | $62,952 | | Total assets | $131,439 | $102,144 | | Total current liabilities | $33,224 | $31,645 | | Total Liabilities | $139,541 | $71,159 | | Total stockholders' equity/deficit | $(8,102) | $30,985 | Consolidated Statements of Operations Highlights (in thousands) | Metric | 2022 | 2021 | | :--------------------------------------- | :----- | :----- | | Net sales | $141,588 | $84,085 | | Gross profit | $13,249 | $10,294 | | Loss from operations | $(38,389) | $(53,112) | | Net Loss | $(45,666) | $(67,093) | | Net loss attributable to The Real Good Food Company, Inc. | $(10,983) | $(10,143) | | Net loss per common share/unit (basic and diluted) | $(1.77) | $(1.64) | Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 2022 | 2021 | | :-------------------------------- | :----- | :----- | | Net cash used in operating activities | $(57,282) | $(26,755) | | Net cash used in investing activities | $(3,725) | $(4,739) | | Net cash provided by financing activities | $38,859 | $61,211 | | Net (decrease)increase in cash and cash equivalents | $(22,148) | $29,717 | | Cash and cash equivalents at end of period | $7,597 | $29,745 | [Notes to Consolidated Financial Statements](index=59&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes provide detailed information on the company's organization, significant accounting policies, and financial statement line items, including its 'Up-C' structure post-IPO, critical accounting estimates, liquidity challenges, and the full valuation allowance on deferred tax assets, also detailing business combination, debt arrangements (including the PMC Credit Facility and convertible notes), equity structure, and related-party transactions, with subsequent events including an amendment to the PMC Credit Facility in February 2023, converting revolving credit to a term loan and consolidating equipment loans - The company completed an IPO on November 9, 2021, and a reorganization, becoming a holding company and the sole managing member of Real Good Foods, LLC (RGF), with pre-IPO members holding Class B units in RGF and Class B common stock in the company, controlling approximately **76% of voting interest**[310](index=310&type=chunk)[311](index=311&type=chunk) - As of December 31, 2022, the company had an accumulated deficit of **$21.1 million** and negative cash flows from operations of **$57.3 million**, but management believes it has sufficient cash and borrowing capacity to fund operations for the next twelve months[317](index=317&type=chunk)[318](index=318&type=chunk) Net Sales by Revenue Source (in thousands) | Revenue Source | 2022 | 2021 | | :--------------- | :----- | :----- | | Entrees | $126,564 | $67,174 | | Breakfast | $10,760 | $7,744 | | Pizza and Snacks | $4,264 | $9,167 | | Total Net Sales | $141,588 | $84,085 | - The company acquired a co-manufacturing business in March 2021, including equipment and inventory, for a total consideration of **$16.8 million**, resulting in **$12.5 million** in deferred payments and contingent consideration, and recording **$12.486 million** in goodwill[370](index=370&type=chunk)[371](index=371&type=chunk)[373](index=373&type=chunk)[374](index=374&type=chunk)[375](index=375&type=chunk) - As of December 31, 2022, long-term debt totaled **$69.5 million**, primarily from the PMC Credit Facility, which includes a **$55.2 million** revolver and a **$10.0 million** term loan, with an amendment in February 2023 converting **$10.0 million** of revolving credit to a term loan and consolidating equipment loans[387](index=387&type=chunk)[388](index=388&type=chunk)[428](index=428&type=chunk) - The company recorded equity compensation expense of **$6.9 million** in 2022 and **$0.6 million** in 2021, with **$11.8 million** of unrecognized compensation expense remaining as of December 31, 2022[417](index=417&type=chunk) [Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=81&type=section&id=Item%209%3A%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) There are no changes in or disagreements with accountants on accounting and financial disclosure matters [Changes in and Disagreements with Accountants](index=81&type=section&id=Changes%20in%20and%20Disagreements%20with%20Accountants) There are no changes in or disagreements with accountants on accounting and financial disclosure matters - There are no changes in and disagreements with accountants on accounting and financial disclosure[430](index=430&type=chunk) [Item 9A: Controls and Procedures](index=81&type=section&id=Item%209A%3A%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were not effective as of December 31, 2022, due to identified material weaknesses [Evaluation of Disclosure Controls and Procedures](index=81&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were not effective as of December 31, 2022, due to identified material weaknesses in internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were not effective as of December 31, 2022, due to material weaknesses in internal controls over financial reporting[431](index=431&type=chunk) [Management's Report on Internal Control over Financial Reporting](index=81&type=section&id=Management%27s%20Report%20on%20Internal%20Control%20over%20Financial%20Reporting) Management concluded that the company's internal controls over financial reporting were not effective as of December 31, 2022, citing material weaknesses including insufficient resources, inadequate formal accounting policies, lack of segregation of duties, incomplete testing, and inadequate access controls, with remediation efforts underway focusing on designing new policies and restricting system access, though success and timeline are not yet assured - Management concluded that the company's internal controls over financial reporting were not effective as of December 31, 2022[432](index=432&type=chunk) - Identified material weaknesses include: lack of sufficient resources with appropriate knowledge, experience, and training[434](index=434&type=chunk) - Absence of sufficient formal accounting policies and procedures for transaction initiation, recording, processing, reporting, authorization, and approval[434](index=434&type=chunk) - Insufficient segregation of duties between significant business processes[434](index=434&type=chunk) - Incomplete necessary testing over certain business processes and cycles[434](index=434&type=chunk) - Inadequate access controls over accounting systems and financial information[434](index=434&type=chunk) - Remediation efforts are underway, including designing and implementing additional formal accounting policies and procedures and restricting access to key financial systems and records[435](index=435&type=chunk) [Item 9B: Other Information](index=82&type=section&id=Item%209B%3A%20Other%20Information) There is no other information to report under this item [Other Information](index=82&type=section&id=Other%20Information) There is no other information to report under this item - There is no other information to report[437](index=437&type=chunk) [Item 9C: Disclosure Regarding Foreign Jurisdictions that Prevent Inspections](index=82&type=section&id=Item%209C%3A%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspections) This item is not applicable to the company [Disclosure Regarding Foreign Jurisdictions that Prevent Inspections](index=82&type=section&id=Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspections) This item is not applicable to the company - This item is not applicable[438](index=438&type=chunk) [Part III](index=83&type=section&id=Part%20III) This part incorporates by reference information regarding directors, executive compensation, security ownership, related transactions, and principal accountant fees from the 2023 Proxy Statement [Item 10: Directors, Executive Officers and Corporate Governance](index=83&type=section&id=Item%2010%3A%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) The information required for this item is incorporated by reference from the company's definitive Proxy Statement for the 2023 annual meeting of stockholders - Information for this item is incorporated by reference from the definitive Proxy Statement for the 2023 annual meeting of stockholders[440](index=440&type=chunk) [Item 11: Executive Compensation](index=83&type=section&id=Item%2011%3A%20Executive%20Compensation) The information required for this item is incorporated by reference from the company's definitive Proxy Statement for the 2023 annual meeting of stockholders - Information for this item is incorporated by reference from the 2023 Proxy Statement[441](index=441&type=chunk) [Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=83&type=section&id=Item%2012%3A%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) The information required for this item is incorporated by reference from the company's definitive Proxy Statement for the 2023 annual meeting of stockholders - Information for this item is incorporated by reference from the 2023 Proxy Statement[442](index=442&type=chunk) [Item 13: Certain Relationships and Related Transactions and Director Independence](index=83&type=section&id=Item%2013%3A%20Certain%20Relationships%20and%20Related%20Transactions%20and%20Director%20Independence) The information required for this item is incorporated by reference from the company's definitive Proxy Statement for the 2023 annual meeting of stockholders - Information for this item is incorporated by reference from the 2023 Proxy Statement[443](index=443&type=chunk) [Item 14: Principal Accountant Fees and Services](index=83&type=section&id=Item%2014%3A%20Principal%20Accountant%20Fees%20and%20Services) The information required for this item is incorporated by reference from the company's definitive Proxy Statement for the 2023 annual meeting of stockholders - Information for this item is incorporated by reference from the 2023 Proxy Statement[444](index=444&type=chunk) [Part IV](index=84&type=section&id=Part%20IV) This part lists exhibits and financial statement schedules, including various agreements and certifications, and notes that no 10-K summary is provided [Item 15: Exhibits and Financial Statement Schedules](index=84&type=section&id=Item%2015%3A%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists all exhibits and financial statement schedules filed as part of, or incorporated by reference into, the Annual Report on Form 10-K, including various agreements, plans, and certifications, providing supporting documentation for the financial and operational disclosures - This section includes a comprehensive list of exhibits and financial statement schedules, such as the Plan of Conversion, Amended and Restated Certificate of Incorporation, Tax Receivable Agreement, Registration Rights Agreement, and various employment and lease agreements[447](index=447&type=chunk)[449](index=449&type=chunk) - The exhibits also include certifications from the Chief Executive Officer and Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002[449](index=449&type=chunk) [Item 16: 10-K Summary](index=86&type=section&id=Item%2016%3A%2010-K%20Summary) This item indicates that no 10-K summary is provided - No 10-K Summary is provided[452](index=452&type=chunk) [Signatures](index=87&type=section&id=Signatures) The Annual Report on Form 10-K is duly signed by the company's officers and directors, with a Power of Attorney granted for filings [Signatures and Power of Attorney](index=87&type=section&id=Signatures%20and%20Power%20of%20Attorney) The Annual Report on Form 10-K is duly signed on behalf of The Real Good Food Company, Inc. by its Chief Executive Officer and Chief Financial Officer, and other directors, as of March 31, 2023, and a Power of Attorney grants Gerard G. Law and Akshay Jagdale the authority to sign amendments and file related documents with the SEC - The Annual Report on Form 10-K is signed by the Chief Executive Officer, Chief Financial Officer, and other directors of The Real Good Food Company, Inc. as of March 31, 2023[455](index=455&type=chunk)[459](index=459&type=chunk) - A Power of Attorney grants Gerard G. Law and Akshay Jagdale the authority to sign any amendments to this Annual Report and file related documents with the Securities and Exchange Commission[457](index=457&type=chunk)

The Real Good Food Company, Inc. (NASDAQ:RGF) Q4 2022 Earnings Conference Call March 27, 2023 8:30 AM ET Corporate Participants Bryan Freeman - Executive Chairman Jerry Law - Chief Executive Officer Akshay Jagdale - Chief Financial Officer Conference Call Participants Jon Andersen - William Blair Bill Chappell - Truist Securities Rob Dickerson - Jefferies George Kelly - ROTH MKM Operator Greetings, and welcome to The Real Good Food Company Fourth Quarter 2022 Earnings Conference Call. At this all participan ...

[PART I—FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%E2%80%94FINANCIAL%20INFORMATION) [Item 1. Financial Statements (unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20%28unaudited%29) This section presents the unaudited consolidated financial statements for The Real Good Food Company, Inc. for the three and nine months ended September 30, 2022 and 2021, including balance sheets, statements of operations, changes in stockholders' equity, and cash flows, along with comprehensive notes detailing accounting policies and specific financial items Consolidated Balance Sheet (September 30, 2022 vs. December 31, 2021) | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Change | | :----------------------------- | :-------------------------- | :-------------------------- | :----- | | Total Assets | $123,459 | $102,144 | +$21,315 | | Total Liabilities | $121,054 | $71,159 | +$49,895 | | Total Stockholders' Equity | $2,405 | $30,985 | -$28,580 | | Cash | $3,040 | $27,435 | -$24,395 | | Inventories | $35,118 | $16,622 | +$18,496 | | Revolving line of credit/capex line | $47,515 | $17,501 | +$30,014 | | Term Loan | $10,000 | — | +$10,000 | Consolidated Statements of Operations (Nine Months Ended Sep 30, 2022 vs. 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | Change | % Change | | :------------------------------------ | :------------------ | :------------------ | :----- | :------- | | Net sales | $105,935 | $58,477 | +$47,458 | +81.2% | | Cost of sales | $97,569 | $49,447 | +$48,122 | +97.3% | | Gross profit | $8,366 | $9,030 | -$664 | -7.4% | | Total operating expenses | $37,477 | $21,087 | +$16,390 | +77.7% | | Loss from operations | $(29,111) | $(12,057) | $(17,054) | +141.4% | | Net Loss | $(33,761) | $(22,170) | $(11,591) | +52.3% | | Net loss attributable to The Real Good Food Company, Inc. | $(8,102) | $(22,608) | +$14,506 | -64.2% | | Net loss per common share/unit (basic and diluted) | ($1.31) | ($2.57) | +$1.26 | -49.0% | Consolidated Statements of Cash Flows (Nine Months Ended Sep 30, 2022 vs. 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | Change | | :-------------------------------- | :------------------ | :------------------ | :----- | | Net cash used in operating activities | $(49,512) | $(7,483) | $(42,029) | | Net cash used in investing activities | $(3,737) | $(4,629) | +$892 | | Net provided by financing activities | $28,857 | $13,734 | +$15,123 | | Net (decrease) increase in cash and restricted cash | $(24,392) | $1,622 | $(26,014) | | Cash and cash equivalents at beginning of period | $29,745 | $28 | | Cash and cash equivalents at end of period | $5,353 | $1,650 | +$3,703 | [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) This section provides a snapshot of the company's assets, liabilities, and equity at specific points in time, highlighting changes in financial position - Total assets increased by **$21.3 million** to **$123.5 million** as of September 30, 2022, from $102.1 million at December 31, 2021[8](index=8&type=chunk) - Total liabilities significantly increased by **$49.9 million** to **$121.1 million**, primarily due to increased borrowings under the revolving line of credit/capex line and a new term loan[8](index=8&type=chunk) - Total stockholders' equity decreased by **$28.6 million** to **$2.4 million**, largely due to accumulated deficit and non-controlling interest[8](index=8&type=chunk) [Consolidated Statements of Operations](index=4&type=section&id=Consolidated%20Statements%20of%20Operations) This section details the company's revenues, expenses, and net loss over specific periods, reflecting operational performance - Net sales for the three months ended September 30, 2022, increased by **63.2%** to **$37.6 million**, and for the nine months ended September 30, 2022, increased by **81.2%** to **$105.9 million**[10](index=10&type=chunk) - Gross profit decreased by **24.9%** for the three months and **7.4%** for the nine months ended September 30, 2022, primarily due to higher manufacturing and raw material costs[10](index=10&type=chunk) - Net loss for the three months ended September 30, 2022, was **$13.1 million** (up 10.8% YoY), and for the nine months was **$33.8 million** (up 52.3% YoY)[10](index=10&type=chunk) - Net loss attributable to The Real Good Food Company, Inc. decreased significantly for both periods, from **$(11.981) million** to **$(3.148) million** for the three months, and from **$(22.608) million** to **$(8.102) million** for the nine months, due to the allocation of net loss to non-controlling interest[10](index=10&type=chunk) [Consolidated Statements of Changes in Stockholders' Equity/Members' Deficit](index=5&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders%27%20Equity%2FMembers%27%20Deficit) This section outlines the changes in the company's equity accounts, including accumulated deficit and non-controlling interest, over specific periods - Total stockholders' equity decreased from **$30.985 million** at December 31, 2021, to **$2.405 million** at September 30, 2022[12](index=12&type=chunk) - The accumulated deficit increased from **$(10.143) million** to **$(18.246) million** during the nine months ended September 30, 2022[12](index=12&type=chunk) - Non-controlling interest increased significantly from **$(8.568) million** to **$(34.263) million**, reflecting the portion of net loss attributable to other members of RGF[12](index=12&type=chunk) - Equity-based compensation added **$5.218 million** to additional paid-in capital during the nine months ended September 30, 2022[12](index=12&type=chunk) [Consolidated Statements of Cash Flows](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section reports the cash generated and used by the company across operating, investing, and financing activities, showing liquidity changes - Net cash used in operating activities increased substantially to **$(49.5) million** for the nine months ended September 30, 2022, from $(7.5) million in the prior year, driven by increased working capital and net loss[14](index=14&type=chunk)[172](index=172&type=chunk) - Net cash provided by financing activities increased to **$28.9 million** for the nine months ended September 30, 2022, from $13.7 million in the prior year, primarily due to increased line of credit borrowings[14](index=14&type=chunk)[174](index=174&type=chunk) - The company experienced a net decrease in cash and restricted cash of **$(24.4) million** for the nine months ended September 30, 2022, ending the period with **$5.4 million**[14](index=14&type=chunk)[171](index=171&type=chunk) [Notes to Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed explanations of the accounting policies, estimates, and specific financial items presented in the consolidated financial statements - Financial statements are prepared in accordance with GAAP, consolidating The Real Good Food Company, Inc. and its subsidiaries, with intercompany transactions eliminated[22](index=22&type=chunk) - The company operates as a single operating segment, with all assets located in the United States[26](index=26&type=chunk) - Significant accounting estimates include allowances for credit losses, inventory write-downs, and revenue recognition (variable consideration)[25](index=25&type=chunk) - New accounting standards (ASU No. 2022-04, 2022-02, 2021-08) are not expected to have a material impact on financial statements or disclosures, and early adoption is not planned[66](index=66&type=chunk)[67](index=67&type=chunk)[68](index=68&type=chunk) [NOTE 1. ORGANIZATION AND DESCRIPTION OF BUSINESS](index=7&type=section&id=NOTE%201.%20ORGANIZATION%20AND%20DESCRIPTION%20OF%20BUSINESS) This note describes the company's formation, business activities, and corporate structure, including its IPO and holding company status - The Real Good Food Company, Inc. was formed in June 2021, completed an IPO on November 9, 2021, and reorganized to become a holding company for Real Good Foods, LLC (RGF)[17](index=17&type=chunk)[18](index=18&type=chunk)[21](index=21&type=chunk) - The company develops, markets, and manufactures frozen foods high in protein, low in sugar, and gluten- and grain-free, sold primarily through retailers and e-commerce[19](index=19&type=chunk) - Post-IPO, former RGF members hold Class B common stock, representing approximately **76% of voting interest** but no economic interest in The Real Good Food Company, Inc.[18](index=18&type=chunk) [NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING STANDARDS](index=7&type=section&id=NOTE%202.%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES%20AND%20NEW%20ACCOUNTING%20STANDARDS) This note outlines the key accounting principles and methods used in preparing the financial statements, along with recent accounting pronouncements [Basis of Presentation](index=7&type=section&id=Basis%20of%20Presentation) This subsection explains the framework and principles used for presenting the unaudited consolidated financial information - Unaudited consolidated financial information for Q3 and 9M 2022 and 2021 is presented consistently with the 2021 Annual Report on Form 10-K[20](index=20&type=chunk) - The financial statements include all necessary adjustments for fair statement, which are normal and recurring[20](index=20&type=chunk) - Post-IPO, the financial statements consolidate The Real Good Food Company, Inc. and RGF; prior to IPO, RGF was the predecessor[23](index=23&type=chunk) [Use of Estimates](index=8&type=section&id=Use%20of%20Estimates) This subsection discusses the role of management judgment and estimates in preparing financial statements and their potential impact on results - Preparation of financial statements requires management judgment and estimates for assets, liabilities, and revenue/expenses[25](index=25&type=chunk) - Significant estimates include allowance for credit losses, inventory write-downs for obsolescence, and variable consideration in revenue recognition[25](index=25&type=chunk) - Actual results may differ materially from estimates due to inherent uncertainties[25](index=25&type=chunk) [Segment Reporting and Geographical Information](index=8&type=section&id=Segment%20Reporting%20and%20Geographical%20Information) This subsection clarifies the company's operating segments and the geographical location of its assets - The company is managed as a single operating segment, with the CEO reviewing financial information on an aggregate basis[26](index=26&type=chunk) - All of the company's assets are maintained in the United States[26](index=26&type=chunk) [Cash and Cash Equivalents](index=8&type=section&id=Cash%20and%20Cash%20Equivalents) This subsection defines cash equivalents and reports the company's holdings of cash and highly liquid investments - Cash equivalents are highly liquid investments with maturities of three months or less when acquired[27](index=27&type=chunk) - No cash equivalents were held as of September 30, 2022, and December 31, 2021[27](index=27&type=chunk) [Restricted Cash](index=8&type=section&id=Restricted%20Cash) This subsection details cash balances that are not freely available for immediate use, held for specific purposes or subject to restrictions - Restricted cash is not freely available for immediate use and is held for specific purposes, classified as noncurrent if restricted beyond twelve months[28](index=28&type=chunk) - As of September 30, 2022, the company had **$2.3 million** in restricted cash, all noncurrent, related to a letter of credit for a new manufacturing facility in Bolingbrook, IL[28](index=28&type=chunk) - Amounts will be released proportionately over a three-year period starting January 2023[28](index=28&type=chunk) [Accounts Receivable](index=9&type=section&id=Accounts%20Receivable) This subsection describes the accounting treatment for amounts owed to the company by customers, including allowances for credit losses - Accounts receivable are recorded net of allowances for estimated variable consideration and slotting fees[30](index=30&type=chunk) - Management assesses collectability and maintains an allowance for credit losses, considering historical experience, creditworthiness, and economic conditions[30](index=30&type=chunk) - Reserves for credit losses were de minimis for the three months ended September 30, 2022 and 2021[30](index=30&type=chunk) [Inventories](index=9&type=section&id=Inventories) This subsection explains the valuation methods for inventories and reports any write-downs for obsolescence - Inventories are valued at the lower of cost or net realizable value, using the first-in, first-out (FIFO) method[31](index=31&type=chunk) - Finished goods cost includes ingredients, direct labor, freight-in, and indirect production/overhead[31](index=31&type=chunk) - No inventory write-downs occurred during the three and nine months ended September 30, 2022; **$0.9 million** was written down for the nine months ended September 30, 2021[31](index=31&type=chunk) [Property and Equipment](index=9&type=section&id=Property%20and%20Equipment) This subsection details the accounting for tangible assets, including acquisition cost, depreciation, and recoverability assessments - Stated at acquisition cost, net of accumulated depreciation and amortization, calculated using the straight-line method over estimated useful lives (3-10 years)[32](index=32&type=chunk) - Recoverability is reviewed when circumstances indicate carrying value may not be recoverable, requiring significant management judgment[33](index=33&type=chunk) [Leases](index=9&type=section&id=Leases) This subsection describes the recognition and measurement of right-of-use assets and lease liabilities for various lease agreements - Leases for office space, warehouse, and equipment are recognized as right-of-use (ROU) assets and corresponding lease liabilities on the balance sheet[34](index=34&type=chunk) - ROU assets and lease liabilities are measured at the present value of future lease payments, using the incremental borrowing rate[34](index=34&type=chunk) - Short-term leases (12 months or less) are not recorded on the balance sheet; payments are expensed as incurred[36](index=36&type=chunk) - Operating lease expense is recognized straight-line; finance lease amortization is over the shorter of useful life or lease term, with interest expense using the effective interest method[37](index=37&type=chunk) [Fair Value of Financial Instruments](index=10&type=section&id=Fair%20Value%20of%20Financial%20Instruments) This subsection defines fair value and explains how it is applied to the company's financial instruments - Fair value is defined as an exit price in an orderly transaction between market participants[41](index=41&type=chunk) - Carrying values of short-term instruments (cash, receivables, payables) approximate fair value due to immediate/short-term maturity[42](index=42&type=chunk) - Variable interest rates on secured credit facilities reflect market rates, so carrying value approximates fair value[42](index=42&type=chunk) [Product Placement Agreement](index=10&type=section&id=Product%20Placement%20Agreement) This subsection details a specific agreement involving equity issuance for distribution and sales targets, and its accounting treatment - In February 2018, the company entered a PPA with Divario Ventures, LLC (Albertsons subsidiary), issuing RGF common units for achieving distribution and sales targets[43](index=43&type=chunk) - **5,240 RGF common units** were converted into **999,082 Class B common stock** during the IPO[43](index=43&type=chunk) - The grant date fair value of these awards was recognized as a reduction of net sales over the relevant term[44](index=44&type=chunk) [Revenue Recognition](index=10&type=section&id=Revenue%20Recognition) This subsection outlines the principles for recognizing revenue from product sales, including variable consideration and performance obligations - Revenue is primarily from selling goods to retailers, recognized when performance obligations are satisfied and control transfers (upon shipment)[46](index=46&type=chunk) - Variable consideration (trade promotions, discounts, allowances) is included in revenue, estimated using the expected value method and constrained by a reserve[47](index=47&type=chunk)[72](index=72&type=chunk) - The company applies a practical expedient to exclude disclosure of performance obligations with expected durations of one year or less, as all contracts are short-term[48](index=48&type=chunk)[74](index=74&type=chunk) [Contract Assets](index=11&type=section&id=Contract%20Assets) This subsection explains the accounting for costs incurred to obtain customer contracts and their capitalization or expensing - Costs to obtain contracts with a duration of one year or less are expensed as incurred[49](index=49&type=chunk) - For contracts longer than one year, costs are capitalized and amortized[49](index=49&type=chunk) - No contract assets were recognized as of September 30, 2022, and December 31, 2021[49](index=49&type=chunk)[75](index=75&type=chunk) [Shipping and Handling Costs](index=11&type=section&id=Shipping%20and%20Handling%20Costs) This subsection clarifies the classification of inbound, internal, and outbound freight costs within the financial statements - Inbound freight on ingredients is included in cost of sales[50](index=50&type=chunk) - Internal freight costs (moving products through distribution) and outbound freight are included in selling and distribution expenses[50](index=50&type=chunk)[51](index=51&type=chunk) - Total internal freight costs were **$1.1 million** (3M 2022) and **$3.2 million** (9M 2022); outbound freight costs were **$2.6 million** (3M 2022) and **$7.9 million** (9M 2022)[50](index=50&type=chunk)[51](index=51&type=chunk) [Marketing Expenses](index=11&type=section&id=Marketing%20Expenses) This subsection details the accounting treatment and amounts of costs incurred for marketing and promotional activities - Marketing costs are expensed as incurred and recorded in Operating expenses[52](index=52&type=chunk) - Incurred **$1.7 million** for both three months ended September 30, 2022 and 2021[52](index=52&type=chunk) - Incurred **$4.6 million** (9M 2022) vs. **$3.1 million** (9M 2021)[52](index=52&type=chunk) [Research and Development Expenses](index=11&type=section&id=Research%20and%20Development%20Expenses) This subsection describes the expensing of research and development costs and reports their amounts - Expensed as incurred and recorded in administrative expense[53](index=53&type=chunk) - Increased significantly to **$1.3 million** (3M 2022) from $0.1 million (3M 2021)[53](index=53&type=chunk) - Increased to **$3.0 million** (9M 2022) from $1.6 million (9M 2021)[53](index=53&type=chunk) [Business Combination](index=11&type=section&id=Business%20Combination) This subsection outlines the accounting method for business acquisitions, including the recognition of acquired assets, liabilities, and goodwill - Accounts for business combinations using the acquisition method (ASC Topic 805), recognizing acquired assets and assumed liabilities at fair value[54](index=54&type=chunk) - Goodwill is the excess of consideration transferred over identifiable net assets acquired[54](index=54&type=chunk) - Adjustments to acquired assets/liabilities can be made during the measurement period (up to one year)[54](index=54&type=chunk) [Acquisition-Related Contingent Consideration](index=12&type=section&id=Acquisition-Related%20Contingent%20Consideration) This subsection explains the recognition and remeasurement of contingent payments related to business acquisitions - Contingent consideration is recognized at fair value as part of purchase consideration at the acquisition date[56](index=56&type=chunk) - Fair value is estimated using probability-adjusted present values, considering milestone likelihood and discount rates[56](index=56&type=chunk) - Liabilities are remeasured each reporting period, with changes impacting current operations[56](index=56&type=chunk) [Goodwill](index=12&type=section&id=Goodwill) This subsection defines goodwill, describes its impairment testing, and reports any impairment charges - Goodwill represents the excess of purchase consideration over identifiable net assets acquired[57](index=57&type=chunk) - Annual impairment tests are performed as of the first day of the fourth quarter, or more frequently if indicators arise[57](index=57&type=chunk) - The company's goodwill is in a single reporting unit; impairment testing involves qualitative (Step zero) or quantitative (Step one) assessment. No goodwill impairment charges were recorded during the periods presented[58](index=58&type=chunk)[59](index=59&type=chunk) [Income Taxes](index=12&type=section&id=Income%20Taxes) This subsection details the company's income tax structure, accounting for deferred taxes, and valuation allowances - Prior to IPO, the company was a pass-through entity; post-IPO, it adopted an 'Up-C' structure, subject to federal and state taxes on its **24% controlling interest** in RGF[60](index=60&type=chunk) - Income taxes are accounted for using the asset and liability method, recognizing deferred tax assets and liabilities for temporary differences[61](index=61&type=chunk) - A full valuation allowance was applied against all recognized deferred tax assets as of September 30, 2022, resulting in a zero balance. No amounts were provided for current income taxes during Q3 and 9M 2022 due to net losses[62](index=62&type=chunk)[124](index=124&type=chunk) [Loss per Share/Unit](index=13&type=section&id=Loss%20per%20Share%2FUnit) This subsection explains the calculation of loss per share/unit, including adjustments for dilutive securities and the two-class method - Computed by dividing net loss (after preferred dividends) by weighted-average common shares/units outstanding, adjusted for dilutive securities[65](index=65&type=chunk) - Prior to IPO, the two-class method was used for participating Series Seed preferred units; post-IPO, Class B common stock does not share in earnings/losses[65](index=65&type=chunk) - RSUs were excluded from diluted net loss per unit computation as they were anti-dilutive due to the net loss position[107](index=107&type=chunk) [NEW ACCOUNTING STANDARDS](index=13&type=section&id=NEW%20ACCOUNTING%20STANDARDS) This subsection discusses recently issued accounting pronouncements and their expected impact on the company's financial statements - ASU No. 2022-04 (Supplier Financed Programs): Requires disclosure of qualitative and quantitative information; effective for fiscal years after Dec 15, 2022. Not expected to significantly impact disclosures[66](index=66&type=chunk) - ASU No. 2022-02 (Credit Losses): Updates guidance on troubled debt restructuring and gross write-offs; effective for fiscal years after Dec 15, 2022. Not expected to impact financial statements[67](index=67&type=chunk) - ASU No. 2021-08 (Business Combinations): Provides guidance for accounting of revenue contracts acquired in business combinations; effective for fiscal years after Dec 15, 2022. Not expected to materially impact financial statements[68](index=68&type=chunk) [NOTE 3. REVENUE RECOGNITION](index=14&type=section&id=NOTE%203.%20REVENUE%20RECOGNITION) This note provides a detailed breakdown of net sales by revenue source and explains the company's approach to variable consideration Net Sales by Revenue Source (in thousands) | Revenue Source | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Entrees | $33,967 | $19,703 | $93,937 | $47,113 | | Breakfast | $2,565 | $2,089 | $8,412 | $5,290 | | Pizza and snacks | $1,018 | $1,222 | $3,586 | $6,074 | | Total net sales | $37,550 | $23,014 | $105,935 | $58,477 | - The company uses the expected value method for variable consideration (discounts, promotions) and applies a reserve to constrain revenue[72](index=72&type=chunk) - No contract assets or liabilities were recognized as of September 30, 2022, and December 31, 2021[75](index=75&type=chunk) [NOTE 4. BUSINESS COMBINATIONS](index=14&type=section&id=NOTE%204.%20BUSINESS%20COMBINATIONS) This note details the acquisition of SSRE Holdings, LLC's co-manufacturing business, including purchase consideration and goodwill recognized - The company acquired the co-manufacturing business of SSRE Holdings, LLC, through a transfer agreement with LO Entertainment, LLC, and a term loan from PMC, closing on March 10, 2021[76](index=76&type=chunk)[78](index=78&type=chunk) - Total purchase consideration was **$16.8 million**, including a **$4.5 million** term loan and **$12.3 million** in deferred/contingent payments[81](index=81&type=chunk) - Goodwill of **$12.486 million** was recorded, which is deductible for income tax purposes and remained unchanged as of September 30, 2022[82](index=82&type=chunk) - Acquisition-related expenses of **$34 thousand** were recorded for the nine months ended September 30, 2021[83](index=83&type=chunk) [NOTE 5. INVENTORIES](index=16&type=section&id=NOTE%205.%20INVENTORIES) This note provides a breakdown of inventory categories and their values at specific reporting dates Inventories (in thousands) | Category | Sep 30, 2022 | Dec 31, 2021 | | :------------------ | :----------- | :----------- | | Ingredients and supplies | $14,767 | $6,646 | | Finished goods | $20,351 | $9,976 | | Total inventories | $35,118 | $16,622 | - Total inventories increased significantly to **$35.1 million** as of September 30, 2022, from $16.6 million at December 31, 2021[85](index=85&type=chunk) [NOTE 6. PROPERTY AND EQUIPMENT](index=16&type=section&id=NOTE%206.%20PROPERTY%20AND%20EQUIPMENT) This note presents a detailed breakdown of property and equipment, net of accumulated depreciation, and construction in progress Property and Equipment, Net (in thousands) | Category | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Computer equipment | $122 | $106 | | Vehicles | $164 | $69 | | Machinery and equipment | $26,315 | $8,826 | | Leasehold improvements and office equipment | $748 | $519 | | Total property and equipment | $27,349 | $9,520 | | Less: accumulated depreciation | $(4,365) | $(2,571) | | Subtotal | $22,984 | $6,949 | | Construction in progress | $12,229 | $3,340 | | Property and equipment, net | $35,213 | $10,289 | - Net property and equipment increased to **$35.2 million** as of September 30, 2022, from $10.3 million at December 31, 2021[86](index=86&type=chunk) - Depreciation and amortization expense for the nine months ended September 30, 2022, was **$1.8 million**, up from $0.8 million in the prior year[86](index=86&type=chunk) [NOTE 7. LEASES](index=16&type=section&id=NOTE%207.%20LEASES) This note provides details on the company's lease costs, lease liabilities, and weighted-average remaining lease terms Total Lease Costs (in thousands) | Period | 2022 | 2021 | | :------------------------------ | :----- | :----- | | Three Months Ended Sep 30 | $1,553 | $399 | | Nine Months Ended Sep 30 | $2,874 | $1,014 | Total Lease Liabilities (in thousands) | Category | Sep 30, 2022 | Dec 31, 2021 | | :----------------------- | :----------- | :----------- | | Total lease liabilities | $28,540 | $12,641 | - The weighted-average remaining term for operating leases is approximately **6.25 years** and for finance leases is approximately **6.50 years** as of September 30, 2022[90](index=90&type=chunk) [NOTE 8. DEBT](index=19&type=section&id=NOTE%208.%20DEBT) This note details the company's long-term debt, including credit facilities, term loans, and their associated interest rates Long-term Debt (in thousands) | Debt Type | Sep 30, 2022 | Dec 31, 2021 | | :---------------------- | :----------- | :----------- | | PMC Revolver | $43,276 | $14,227 | | PMC CapEx Line | $4,598 | $3,602 | | PMC Term Loan | $10,000 | — | | PMC Lease Line of Credit | $10,213 | $7,258 | | Total | $68,087 | $25,087 | | Less: current maturities | $(359) | $(328) | | Long-term debt | $67,728 | $24,759 | - The PMC Credit Facility was amended in August 2022 to increase the Revolver capacity to **$75.0 million** and introduce a new **$10.0 million** Term Loan[93](index=93&type=chunk) Weighted Average Interest Rates (Nine Months Ended Sep 30, 2022) | Loan Type | Interest Rate | | :---------------------- | :------------ | | PMC Revolver | 8.2% | | PMC CapEx Line | 12.4% | | PMC Term Loan | 13.35% | | PMC Lease Line of Credit | 12.0% | [NOTE 9. EQUITY](index=20&type=section&id=NOTE%209.%20EQUITY) This note describes the company's equity structure post-IPO, including Class A and Class B common stock, and prior period adjustments - Post-IPO, equity consists of Class A and Class B common stock; Class B shares have voting rights but no economic interest[101](index=101&type=chunk) - Prior period unit amounts were retroactively adjusted for the Reorganization and IPO, reflecting a **139.78-for-one exchange ratio**[102](index=102&type=chunk) - All pre-IPO units (common, Series A, Series Seed preferred) were converted into **14,422,924 Class B common stock** upon IPO[103](index=103&type=chunk) [NOTE 10. LOSS PER SHARE/UNIT](index=21&type=section&id=NOTE%2010.%20LOSS%20PER%20SHARE%2FUNIT) This note presents the calculation of net loss per common share/unit for various periods Loss Per Share/Unit (in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net loss attributable to common share/unitholders | $(3,148) | $(11,981) | $(8,102) | $(22,608) | | Weighted-average shares/units outstanding | 6,180,592 | 8,800,132 | 6,173,454 | 8,800,132 | | Loss per common share/unit | $(0.51) | $(1.36) | $(1.31) | $(2.57) | - RSUs were anti-dilutive and excluded from diluted EPS calculation due to the net loss position[107](index=107&type=chunk) [NOTE 11. RELATED-PARTY TRANSACTIONS](index=21&type=section&id=NOTE%2011.%20RELATED-PARTY%20TRANSACTIONS) This note discloses transactions and agreements with related parties, including loans and the Tax Receivable Agreement - A **$1.2 million** related-party loan from a member (over 20% equity interest) was paid in full during 2021[108](index=108&type=chunk) - The Executive Chairman holds over **20% beneficial ownership**[109](index=109&type=chunk) - A Tax Receivable Agreement (TRA) with continuing RGF Members grants them **85% of net cash savings** from tax basis increases; no amounts were due as of September 30, 2022, due to net loss[110](index=110&type=chunk) [NOTE 12. COMMITMENTS AND CONTINGENCIES](index=21&type=section&id=NOTE%2012.%20COMMITMENTS%20AND%20CONTINGENCIES) This note outlines the company's purchase commitments and ongoing legal claims, assessing their potential financial impact - The company has various short-term purchase commitments for ingredients (cheese, chicken, etc.) in the normal course of business, none exceeding one year[111](index=111&type=chunk) - The company is involved in ordinary course legal claims and litigation, but management believes the outcomes will not have a material adverse effect[113](index=113&type=chunk) - No accruals for pending litigation were deemed necessary as of September 30, 2022, and December 31, 2021[113](index=113&type=chunk) [NOTE 13. RISKS OF UNCERTAINTIES AND CONCENTRATION OF CREDIT RISK](index=22&type=section&id=NOTE%2013.%20RISKS%20OF%20UNCERTAINTIES%20AND%20CONCENTRATION%20OF%20CREDIT%20RISK) This note identifies significant business risks and details customer concentration in net sales and accounts receivable - Significant risks include the need to increase net sales, ability to introduce new products, intense competition, dependence on key personnel/suppliers, customer concentration, regulatory compliance, and indebtedness[114](index=114&type=chunk)[115](index=115&type=chunk) - Two customers comprised **56%** and **15%** of net sales for the three months ended September 30, 2022, and **53%** and **20%** for the nine months ended September 30, 2022[116](index=116&type=chunk) - Two customers accounted for **63%** of accounts receivable as of September 30, 2022 (**36%** and **26%** respectively), but this is not considered a significant risk due to customers being major U.S. retailers[117](index=117&type=chunk) [NOTE 14. EQUITY-BASED COMPENSATION](index=22&type=section&id=NOTE%2014.%20EQUITY-BASED%20COMPENSATION) This note describes the company's stock incentive plan, RSU grants, and the associated equity compensation expense - The 2021 Stock Incentive Plan authorizes up to **3,700,000 shares** of Class A common stock for equity grants (stock options, RSUs, SARS, ESPP)[118](index=118&type=chunk) - **1,393,395 RSUs** were granted during the nine months ended September 30, 2022, with a grant date fair value of **$6.26 per share**[121](index=121&type=chunk) - Equity compensation expense for the nine months ended September 30, 2022, was **$5.2 million**. Unrecognized compensation expense was **$13.7 million** as of September 30, 2022, to be recognized over approximately **2.08 years**[123](index=123&type=chunk) [NOTE 15. INCOME TAXES](index=23&type=section&id=NOTE%2015.%20INCOME%20TAXES) This note explains the company's income tax accounting, including deferred tax assets, valuation allowances, and effective tax rate - No current income taxes were provided for the three and nine months ended September 30, 2022, due to net losses[124](index=124&type=chunk) - A full valuation allowance was applied to deferred tax assets, resulting in no income tax amounts recognized in the consolidated statement of operations[124](index=124&type=chunk) - The effective tax rate on the portion of loss attributable to the company is **25.0%** before the valuation allowance[125](index=125&type=chunk) [NOTE 16. NON-CONTROLLING INTEREST](index=23&type=section&id=NOTE%2016.%20NON-CONTROLLING%20INTEREST) This note clarifies the accounting for non-controlling interests in RGF and future changes in ownership - The Real Good Food Company, Inc. consolidates RGF's financial results and reports a non-controlling interest representing continuing Member interests in RGF[126](index=126&type=chunk) - Future changes in ownership interest in RGF, while retaining control, will be accounted for as equity transactions[126](index=126&type=chunk) [NOTE 17. SUBSEQUENT EVENTS](index=23&type=section&id=NOTE%2017.%20SUBSEQUENT%20EVENTS) This note reports on events occurring after the balance sheet date but before the financial statements were issued - The company evaluated subsequent events up to the financial statement issuance date[127](index=127&type=chunk) - No subsequent events were identified[127](index=127&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=24&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition, results of operations, and cash flows for the three and nine months ended September 30, 2022, compared to the prior year. It highlights significant growth in net sales driven by increased demand and new customers, alongside challenges from higher manufacturing and raw material costs, leading to decreased gross profit and increased net losses. The discussion also covers liquidity, capital resources, and key factors affecting the business - The company is a frozen food company specializing in high-protein, low-sugar, gluten- and grain-free products, primarily sold in the U.S. frozen food category through retailers and e-commerce[130](index=130&type=chunk)[131](index=131&type=chunk) - Net sales for the nine months ended September 30, 2022, increased by **81.2%** to **$105.9 million**, driven by strong sales volumes and reduced discounts[157](index=157&type=chunk) - Gross profit decreased by **7.4%** for the nine months, primarily due to higher raw material and manufacturing costs, including start-up costs for the new Bolingbrook facility[160](index=160&type=chunk) - Net cash used in operating activities significantly increased to **$(49.5) million** for the nine months, mainly due to increased working capital (inventory and accounts receivable) and net loss[172](index=172&type=chunk) - The company amended its debt agreement in August 2022, increasing its revolving credit facility to **$75.0 million** and adding a **$10.0 million** term loan, to support liquidity and capital expenditures[169](index=169&type=chunk) [Overview of Our Business](index=24&type=section&id=Overview%20of%20Our%20Business) This section provides a general description of the company's core business, products, and market focus within the frozen food industry - The company develops, markets, and manufactures high-protein, low-sugar, gluten- and grain-free frozen foods, including breakfast sandwiches, entrées, and other products[130](index=130&type=chunk)[131](index=131&type=chunk) - Products are sold through natural and conventional grocery, drug, club, and mass merchandise stores, as well as e-commerce channels[130](index=130&type=chunk) - The company focuses on health and wellness (H&W) products in the frozen food aisle, competing in frozen entrée and breakfast subcategories[131](index=131&type=chunk) [Trends and Other Factors Affecting Our Business and Industry](index=24&type=section&id=Trends%20and%20Other%20Factors%20Affecting%20Our%20Business%20and%20Industry) This section discusses key market trends, such as healthy eating and e-commerce growth, and challenges like commodity costs and supply chain disruptions impacting the company - Benefited from increased focus on healthy eating and rise in at-home consumption due to the COVID-19 pandemic[133](index=133&type=chunk) - Experiencing increased costs for ingredients due to commodity cost challenges and supply chain disruptions, negatively impacting gross profit margins[133](index=133&type=chunk) - Avian flu adversely impacted chicken and egg costs and sourcing[133](index=133&type=chunk) - Expects sourcing and supply chain challenges to diminish in Q4 2022 as market dynamics normalize[133](index=133&type=chunk) - Anticipates continued growth in e-commerce utilization and in-home consumption due to changing work patterns[134](index=134&type=chunk) [Components of Our Results of Operations](index=25&type=section&id=Components%20of%20Our%20Results%20of%20Operations) This section defines and explains the primary financial line items that constitute the company's operating results - This section defines the key components of the company's financial results: Net Sales, Gross Profit, Operating Expenses (Selling and Distribution, Marketing, Administrative), Non-Controlling Interest, and Segment Overview[135](index=135&type=chunk)[136](index=136&type=chunk)[137](index=137&type=chunk)[138](index=138&type=chunk)[139](index=139&type=chunk)[140](index=140&type=chunk)[141](index=141&type=chunk) - Net sales are gross sales less discounts, allowances, coupons, slotting fees, and trade advertising[135](index=135&type=chunk) - Cost of sales includes ingredients, labor, co-manufacturing fees, plant/equipment costs, and manufacturing overhead[136](index=136&type=chunk) - Operating expenses cover freight, warehousing, sales personnel, marketing, advertising, administrative salaries, R&D, and professional fees[137](index=137&type=chunk)[138](index=138&type=chunk)[139](index=139&type=chunk) [Net Sales](index=25&type=section&id=Net%20Sales) This subsection defines net sales and outlines the various deductions from gross sales, such as discounts and allowances - Primarily derived from selling products to retail customers through various channels (grocery, drug, club, mass merchandise stores)[135](index=135&type=chunk) - Also sells through e-commerce (direct-to-consumer and retail online platforms)[135](index=135&type=chunk) - Recorded as gross sales net of discounts, allowances, coupons, slotting fees, and trade advertising[135](index=135&type=chunk) [Gross Profit](index=25&type=section&id=Gross%20Profit) This subsection explains the calculation of gross profit and the factors influencing its margin, including cost of sales components - Calculated as net sales less cost of sales[136](index=136&type=chunk) - Cost of sales includes ingredients, direct/indirect labor, co-manufacturing fees, plant/equipment costs, manufacturing overhead, and depreciation/amortization[136](index=136&type=chunk) - Gross profit margin is influenced by ingredient costs, labor availability/cost, and manufacturing efficiency (including capacity and automation investments)[136](index=136&type=chunk) [Operating Expense](index=25&type=section&id=Operating%20Expense) This subsection categorizes and describes the various operating expenses, including selling, distribution, marketing, and administrative costs - Selling and Distribution Expense: Includes third-party freight, warehousing, and salaries/commissions for distribution and sales personnel[137](index=137&type=chunk) - Marketing Expense: Covers salaries for marketing personnel, website costs, advertising, consumer promotions, influencer agreements, and product samples[138](index=138&type=chunk) - Administrative Expense: Includes salaries for management/administrative personnel, R&D costs, non-manufacturing depreciation, professional fees, ERP system costs, and insurance[139](index=139&type=chunk) [Non-Controlling Interest](index=25&type=section&id=Non-Controlling%20Interest) This subsection clarifies the nature of the non-controlling interest and its impact on the consolidated financial results - The Real Good Food Company, Inc. consolidates RGF's financial results and reports a non-controlling interest representing the portion of net income or loss attributable to other RGF members[140](index=140&type=chunk) - The company, as the sole managing member, controls RGF despite having a minority economic interest[140](index=140&type=chunk) [Segment Overview](index=25&type=section&id=Segment%20Overview) This subsection confirms the company's single operating and reportable segment, with all assets located in the U.S - The Chief Executive Officer, as the chief operating decision maker, reviews financial information on an aggregate basis[141](index=141&type=chunk) - The company has one operating segment and one reportable segment[141](index=141&type=chunk) - All assets are located within the U.S[141](index=141&type=chunk) [Seasonality](index=26&type=section&id=Seasonality) This section discusses the mild seasonal patterns in the company's sales and production, particularly influenced by consumer health trends and agricultural cycles - Experiences mild seasonal earning characteristics, with lower sales volume for some products (e.g., bacon wrapped stuffed chicken) in warm-weather months[143](index=143&type=chunk) - Highest percentage of net sales typically occurs in Q1 and Q2, driven by consumer focus on health and wellness brands[143](index=143&type=chunk) - Seasonal production cycles for agricultural ingredients (e.g., cauliflower, artichoke hearts) also contribute[143](index=143&type=chunk) - Historically, seasonality has not materially impacted net sales due to strong distribution point growth, but its impact is expected to increase over time[143](index=143&type=chunk) [Results of Operations — Comparison of the Three Months Ended September 30, 2022 and 2021](index=26&type=section&id=Results%20of%20Operations%20%E2%80%94%20Comparison%20of%20the%20Three%20Months%20Ended%20September%2030%2C%202022%20and%202021) This section provides a detailed comparative analysis of the company's financial performance for the three-month periods ended September 30, 2022 and 2021 - Net sales increased by **63.2%** to **$37.6 million**, driven by strong sales volumes and decreased discounts[145](index=145&type=chunk) - Cost of sales increased by **73.2%** to **$35.8 million**, due to higher sales volume, raw material costs, and Bolingbrook facility start-up costs[146](index=146&type=chunk) - Gross profit decreased by **24.9%** to **$1.8 million**, impacted by higher manufacturing and raw material costs[148](index=148&type=chunk) - Operating expenses increased by **56.6%** to **$12.4 million**, primarily due to administrative expenses (public company costs, equity compensation, R&D)[144](index=144&type=chunk)[151](index=151&type=chunk) - Loss from operations increased by **91.0%** to **$(10.6) million**[153](index=153&type=chunk) - Interest expense increased by **194.3%** to **$2.5 million** due to higher debt levels[154](index=154&type=chunk) - Net loss increased by **10.8%** to **$(13.1) million**[155](index=155&type=chunk) [Net Sales](index=26&type=section&id=Net%20Sales%20%283M%29) This subsection analyzes the changes in net sales for the three-month period, attributing growth to sales volumes and reduced discounts - Net sales for the three months ended September 30, 2022, increased by **$14.5 million** (**63.2%**) to **$37.6 million** from $23.0 million in the prior year[145](index=145&type=chunk) - Increase primarily attributed to strong growth in sales volumes from existing retail and club customers, new customers, and decreased sales discounts[145](index=145&type=chunk) [Cost of Sales](index=26&type=section&id=Cost%20of%20Sales%20%283M%29) This subsection examines the increase in cost of sales for the three-month period, driven by higher volumes, raw materials, and facility start-up costs - Cost of sales increased by **$15.1 million** (**73.2%**) to **$35.8 million** for the three months ended September 30, 2022, from $20.7 million in the prior year[146](index=146&type=chunk) - Increase driven by higher sales volume, raw material costs, and plant manufacturing costs related to the Bolingbrook facility start-up[146](index=146&type=chunk) - Expected cost pressures to diminish as the Bolingbrook facility reaches peak efficiency and commodity costs normalize[146](index=146&type=chunk) [Gross Profit](index=27&type=section&id=Gross%20Profit%20%283M%29) This subsection discusses the decrease in gross profit for the three-month period, primarily due to elevated manufacturing and raw material costs - Gross profit decreased by **$0.6 million** (**24.9%**) to **$1.8 million** for the three months ended September 30, 2022, from $2.4 million in the prior year[148](index=148&type=chunk) - Decrease primarily due to higher manufacturing and raw material costs[148](index=148&type=chunk) [Operating Expenses](index=27&type=section&id=Operating%20Expenses%20%283M%29) This subsection details the changes in selling, distribution, marketing, and administrative expenses for the three-month period - Total operating expenses increased by **$4.5 million** (**56.6%**) to **$12.4 million** for the three months ended September 30, 2022[144](index=144&type=chunk) - Selling and distribution expense increased by **6.8%** to **$4.6 million**, but decreased as a percentage of net sales (from 18.8% to **12.3%**) due to economies of scale and lower freight costs[149](index=149&type=chunk) - Marketing expense remained relatively unchanged at **$1.7 million**, decreasing as a percentage of net sales (from 7.5% to **4.4%**) due to leveraging previous market penetration efforts[150](index=150&type=chunk) - Administrative expense significantly increased by **227.6%** to **$6.1 million**, driven by public company costs, equity compensation, personnel expenses, and increased R&D[151](index=151&type=chunk) [Loss from Operations](index=28&type=section&id=Loss%20from%20Operations%20%283M%29) This subsection analyzes the increase in operating loss for the three-month period and its percentage of net sales - Loss from operations increased by **$5.1 million** (**91.0%**) to **$(10.6) million** for the three months ended September 30, 2022, from $(5.6) million in the prior year[153](index=153&type=chunk) - Loss from operations as a percentage of sales was **(28.4)%** for the current period, compared to (24.2)% for the prior year[153](index=153&type=chunk) [Interest Expense](index=28&type=section&id=Interest%20Expense%20%283M%29) This subsection explains the significant increase in interest expense for the three-month period due to higher debt levels - Interest expense increased by **$1.6 million** (**194.3%**) to **$2.5 million** for the three months ended September 30, 2022, from $0.8 million in the prior year[154](index=154&type=chunk) - Increase primarily due to higher levels of interest-bearing debt[154](index=154&type=chunk) [Net Loss](index=28&type=section&id=Net%20Loss%20%283M%29) This subsection reports the overall net loss for the three-month period and its year-over-year change - Net loss increased by **$1.3 million** (**10.8%**) to **$(13.1) million** for the three months ended September 30, 2022, from $(11.8) million in the prior year[155](index=155&type=chunk) [Results of Operations — Comparison of the Nine months ended September 30, 2022 and 2021](index=28&type=section&id=Results%20of%20Operations%20%E2%80%94%20Comparison%20of%20the%20Nine%20months%20ended%20September%2030%2C%202022%20and%202021) This section provides a detailed comparative analysis of the company's financial performance for the nine-month periods ended September 30, 2022 and 2021 - Net sales increased by **81.2%** to **$105.9 million**, driven by strong sales volumes and decreased sales promotions[157](index=157&type=chunk) - Cost of sales increased by **97.3%** to **$97.6 million**, due to higher sales volume and manufacturing costs from the Bolingbrook facility start-up[159](index=159&type=chunk) - Gross profit decreased by **7.4%** to **$8.4 million**, impacted by increased manufacturing and raw material costs[160](index=160&type=chunk) - Operating expenses increased by **77.7%** to **$37.5 million**, primarily due to administrative expenses (public company costs, equity compensation, Bolingbrook facility operations)[156](index=156&type=chunk)[163](index=163&type=chunk) - Loss from operations increased by **141.4%** to **$(29.1) million**[165](index=165&type=chunk) - Interest expense increased by **7.6%** to **$4.7 million** due to higher debt levels[166](index=166&type=chunk) - Net loss increased by **52.3%** to **$(33.8) million**[167](index=167&type=chunk) [Net Sales](index=28&type=section&id=Net%20Sales%20%289M%29) This subsection analyzes the substantial increase in net sales for the nine-month period, driven by sales volumes and reduced promotions - Net sales for the nine months ended September 30, 2022, increased by **$47.5 million** (**81.2%**) to **$105.9 million** from $58.5 million in the prior year[157](index=157&type=chunk) - Increase primarily due to strong growth in sales volumes from existing retail and club customers, new customers, and a decrease in sales promotions[157](index=157&type=chunk) [Cost of Sales](index=29&type=section&id=Cost%20of%20Sales%20%289M%29) This subsection examines the significant increase in cost of sales for the nine-month period, primarily due to higher volumes and facility start-up costs - Cost of sales increased by **$48.1 million** (**97.3%**) to **$97.6 million** for the nine months ended September 30, 2022, from $49.4 million in the prior year[159](index=159&type=chunk) - Increase primarily due to higher sales volume and increased manufacturing costs related to the Bolingbrook facility start-up[159](index=159&type=chunk) [Gross Profit](index=29&type=section&id=Gross%20Profit%20%289M%29) This subsection discusses the decrease in gross profit for the nine-month period, impacted by increased manufacturing and raw material costs - Gross profit decreased by **$0.7 million** (**7.4%**) to **$8.4 million** for the nine months ended September 30, 2022, from $9.0 million in the prior year[160](index=160&type=chunk) - Decrease primarily due to the impact of increased manufacturing and raw material costs[160](index=160&type=chunk) [Operating Expenses](index=29&type=section&id=Operating%20Expenses%20%289M%29) This subsection details the changes in selling, distribution, marketing, and administrative expenses for the nine-month period - Total operating expenses increased by **$16.4 million** (**77.7%**) to **$37.5 million** for the nine months ended September 30, 2022[156](index=156&type=chunk) - Selling and distribution expense increased by **44.3%** to **$14.9 million**, but decreased as a percentage of net sales (from 17.6% to **14.0%**) due to economies of scale and normalizing shipping costs[161](index=161&type=chunk) - Marketing expense increased by **48.0%** to **$4.6 million**, but decreased as a percentage of sales (from 5.3% to **4.4%**) due to leveraging previous market penetration efforts[162](index=162&type=chunk) - Administrative expense significantly increased by **134.6%** to **$18.0 million**, driven by public company costs, equity compensation, personnel expenses, and significant expenses for the Bolingbrook facility[163](index=163&type=chunk) [Loss from Operations](index=30&type=section&id=Loss%20from%20Operations%20%289M%29) This subsection analyzes the substantial increase in operating loss for the nine-month period and its percentage of net sales - Loss from operations increased by **$17.1 million** (**141.4%**) to **$(29.1) million** for the nine months ended September 30, 2022, from $(12.1) million in the prior year[165](index=165&type=chunk) - Loss from operations as a percentage of sales was **(27.5)%** for the current period, compared to (20.6)% for the prior year[165](index=165&type=chunk) [Interest Expense](index=30&type=section&id=Interest%20Expense%20%289M%29) This subsection explains the increase in interest expense for the nine-month period due to higher debt levels - Interest expense increased by **$0.3 million** (**7.6%**) to **$4.7 million** for the nine months ended September 30, 2022, from $4.3 million in the prior year[166](index=166&type=chunk) - Increase primarily due to higher levels of interest-bearing debt[166](index=166&type=chunk) [Net Loss](index=30&type=section&id=Net%20Loss%20%289M%29) This subsection reports the overall net loss for the nine-month period and its year-over-year change - Net loss increased by **$11.6 million** (**52.3%**) to **$(33.8) million** for the nine months ended September 30, 2022, from $(22.2) million in the prior year[167](index=167&type=chunk) [Liquidity and Capital Resources](index=30&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's ability to generate and manage cash, its sources of funding, and future capital needs - Primary uses of cash include working capital, operating expenses, promotional activities, debt service, and capital expenditures for manufacturing facilities[168](index=168&type=chunk) - Financed operations through equity and debt issuances, credit agreements, and cash flows[168](index=168&type=chunk) - Amended debt agreement with PMC on August 14, 2022, increasing Revolver capacity to **$75.0 million** and creating a new **$10.0 million** Term Loan[169](index=169&type=chunk) - As of September 30, 2022, had **$5.4 million** in cash (including **$2.3 million** restricted cash), **$0.4 million** current debt, and **$67.7 million** long-term debt[170](index=170&type=chunk) - Expects to make approximately **$0.5 million** in future capital expenditures for production enhancements in the remainder of 2022[170](index=170&type=chunk) - Believes current cash, operations, and credit facilities provide sufficient financial flexibility for the foreseeable future[170](index=170&type=chunk) [Cash Flows](index=30&type=section&id=Cash%20Flows) This subsection provides a summary of cash flows from operating, investing, and financing activities for the reported periods Cash Flows (in thousands) | Metric | Sep 30, 2022 | Sep 30, 2021 | | :-------------------------------- | :----------- | :----------- | | Net cash used in operating activities | $(49,512) | $(7,483) | | Net cash used in investing activities | $(3,737) | $(4,629) | | Net provided by financing activities | $28,857 | $13,734 | | Net (decrease) increase in cash and cash equivalents | $(24,392) | $1,622 | | Cash and cash equivalents at beginning of period | $29,745 | $28 | | Cash and cash equivalents at end of period | $5,353 | $1,650 | [Net Cash Used in Operating Activities](index=30&type=section&id=Net%20Cash%20Used%20in%20Operating%20Activities) This subsection analyzes the significant increase in cash used for operations, driven by working capital needs and net loss - Net cash used in operating activities increased to **$(49.5) million** for the nine months ended September 30, 2022, from $(7.5) million in the prior year[172](index=172&type=chunk) - Increase primarily due to higher working capital needs (increased inventory to support growth and create safety stock for the new Bolingbrook facility) and an increased net loss[172](index=172&type=chunk) - Increase in accounts receivable from late Q3 sales also contributed[172](index=172&type=chunk) [Net Cash Used in Investing Activities](index=31&type=section&id=Net%20Cash%20Used%20in%20Investing%20Activities) This subsection details the cash outflows related to capital expenditures for manufacturing facilities - Net cash used in investing activities was **$(3.7) million** for the nine months ended September 30, 2022, compared to $(4.6) million in the prior year[173](index=173&type=chunk) - Primarily related to equipment purchases for manufacturing facilities in both periods[173](index=173&type=chunk) [Net Cash Provided by Financing Activities](index=31&type=section&id=Net%20Cash%20Provided%20by%20Financing%20Activities) This subsection explains the increase in cash from financing, primarily due to higher borrowings on the revolving credit facility - Net cash provided by financing activities totaled **$28.9 million** for the nine months ended September 30, 2022, compared to $13.7 million in the prior year[174](index=174&type=chunk) - Increase primarily due to higher borrowings on the revolving credit facility, partially offset by payments on acquisition-related liabilities[174](index=174&type=chunk) [Contractual Obligations](index=31&type=section&id=Contractual%20Obligations) This subsection states that there are no material changes to the company's contractual payment obligations - No material changes in payments due under contractual obligations from those disclosed in the Annual Report as of September 30, 2022[175](index=175&type=chunk) [Off-Balance Sheet Arrangements](index=31&type=section&id=Off-Balance%20Sheet%20Arrangements) This subsection confirms the absence of any off-balance sheet arrangements for the company - The company does not have any off-balance sheet arrangements[176](index=176&type=chunk) [New Accounting Standards](index=31&type=section&id=New%20Accounting%20Standards) This subsection refers to Note 2 for a discussion of recently adopted or issued accounting standards - Refers to Note 2 for discussion of new accounting standards[177](index=177&type=chunk) [Critical Accounting Policies and Estimates](index=31&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This subsection states that there are no material changes to the company's critical accounting policies and estimates - No material changes to critical accounting policies and estimates from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021[178](index=178&type=chunk) [Cautionary Note Regarding Forward-Looking Statements](index=31&type=section&id=Cautionary%20Note%20Regarding%20Forward-Looking%20Statements) This subsection advises readers about the inherent risks and uncertainties associated with forward-looking statements in the report - This section contains forward-looking statements subject to risks and uncertainties, not based on historical facts[179](index=179&type=chunk) - Statements relate to future financial condition, results, plans, objectives, performance, and business strategies[179](index=179&type=chunk) - Actual results may differ materially due to various factors, including those in the 'Risk Factors' section of the Annual Report[179](index=179&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=31&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, The Real Good Food Company, Inc. is not required to provide detailed quantitative and qualitative disclosures about market risk under Rule 12b-2 of the Securities Exchange Act of 1934 - The company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act[180](index=180&type=chunk) - As such, it is not required to provide information under this item[180](index=180&type=chunk) [Item 4. Controls and Procedures](index=32&type=section&id=Item%204.%20Controls%20and%20Procedures) This section details the company's evaluation of its disclosure controls and procedures, concluding that they were effective as of September 30, 2022. It also states that there were no material changes in internal control over financial reporting during the quarter - Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures[183](index=183&type=chunk) - As of September 30, 2022, disclosure controls and procedures were concluded to be effective[183](index=183&type=chunk) - No material changes in internal control over financial reporting occurred during the three months ended September 30, 2022[184](index=184&type=chunk) [Evaluation of Disclosure Controls and Procedures](index=32&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This section describes the assessment of the effectiveness of the company's disclosure controls and procedures by management - Disclosure controls and procedures are designed to provide reasonable, not absolute, assurance of meeting objectives[182](index=182&type=chunk) - Management applied judgment in evaluating the cost-benefit relationship of controls[182](index=182&type=chunk) - The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2022[183](index=183&type=chunk) [Changes in Internal Control over Financial Reporting](index=32&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) This section reports on any material changes to the company's internal control over financial reporting during the period - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the three months ended September 30, 2022[184](index=184&type=chunk) [PART II—OTHER INFORMATION](index=32&type=section&id=PART%20II%E2%80%94OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=32&type=section&id=Item%201.%20Legal%20Proceedings) This section incorporates by reference the information regarding legal proceedings from Note 12 to the Financial Statements, indicating that the company is party to ordinary course claims and litigation, but management does not expect a material adverse effect - Information required by this item is incorporated by reference to Note 12, 'Commitments and Contingencies,' in Part I, Item 1[185](index=185&type=chunk) [Item 1A. Risk Factors](index=32&type=section&id=Item%201A.%20Risk%20Factors) This section advises readers to carefully consider the risk factors discussed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021, and states that there were no material changes to these risk factors during the reporting period - Readers should consider factors discussed in the 'Risk Factors' section of the Annual Report[186](index=186&type=chunk) - No material changes in the company's risk factors

The Real Good Food Company, Inc. (NASDAQ:RGF) Q3 2022 Earnings Conference Call November 11, 2022 8:30 AM ET Corporate Participants Chris Bevenour - Vice President, Investor Relations Bryan Freeman - Executive Chairman Jerry Law - Chief Executive Officer Akshay Jagdale - Chief Financial Officer Conference Call Participants Jon Andersen - William Blair Bill Chappell - Truist Securities George Kelly - ROTH Capital Partners Operator Greetings, and welcome to The Real Good Food Company Third Quarter 2022 Earning ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2022 or ☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 001-41025 THE REAL GOOD FOOD COMPANY, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 87-1280343 (State o ...