The Real Good Food pany(RGF) - 2022 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) 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 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] - 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] - Total stockholders' equity decreased by $28.6 million to $2.4 million, largely due to accumulated deficit and non-controlling interest[8] Consolidated Statements of Operations 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] - 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] - 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] - 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] Consolidated Statements of Changes in Stockholders' Equity/Members' Deficit 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] - The accumulated deficit increased from $(10.143) million to $(18.246) million during the nine months ended September 30, 2022[12] - 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] - Equity-based compensation added $5.218 million to additional paid-in capital during the nine months ended September 30, 2022[12] Consolidated Statements of Cash Flows 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][172] - 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][174] - 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][171] Notes to Consolidated Financial Statements 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] - The company operates as a single operating segment, with all assets located in the United States[26] - Significant accounting estimates include allowances for credit losses, inventory write-downs, and revenue recognition (variable consideration)[25] - 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][67][68] NOTE 1. ORGANIZATION AND DESCRIPTION OF BUSINESS 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][18][21] - 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] - 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] NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING STANDARDS This note outlines the key accounting principles and methods used in preparing the financial statements, along with recent accounting pronouncements Basis of Presentation 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] - The financial statements include all necessary adjustments for fair statement, which are normal and recurring[20] - Post-IPO, the financial statements consolidate The Real Good Food Company, Inc. and RGF; prior to IPO, RGF was the predecessor[23] Use of Estimates 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] - Significant estimates include allowance for credit losses, inventory write-downs for obsolescence, and variable consideration in revenue recognition[25] - Actual results may differ materially from estimates due to inherent uncertainties[25] Segment Reporting and Geographical Information 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] - All of the company's assets are maintained in the United States[26] Cash and Cash Equivalents 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] - No cash equivalents were held as of September 30, 2022, and December 31, 2021[27] Restricted Cash 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] - 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] - Amounts will be released proportionately over a three-year period starting January 2023[28] Accounts Receivable 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] - Management assesses collectability and maintains an allowance for credit losses, considering historical experience, creditworthiness, and economic conditions[30] - Reserves for credit losses were de minimis for the three months ended September 30, 2022 and 2021[30] 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] - Finished goods cost includes ingredients, direct labor, freight-in, and indirect production/overhead[31] - 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] Property and Equipment 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] - Recoverability is reviewed when circumstances indicate carrying value may not be recoverable, requiring significant management judgment[33] 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] - ROU assets and lease liabilities are measured at the present value of future lease payments, using the incremental borrowing rate[34] - Short-term leases (12 months or less) are not recorded on the balance sheet; payments are expensed as incurred[36] - 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] Fair Value of Financial Instruments 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] - Carrying values of short-term instruments (cash, receivables, payables) approximate fair value due to immediate/short-term maturity[42] - Variable interest rates on secured credit facilities reflect market rates, so carrying value approximates fair value[42] Product Placement Agreement 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] - 5,240 RGF common units were converted into 999,082 Class B common stock during the IPO[43] - The grant date fair value of these awards was recognized as a reduction of net sales over the relevant term[44] Revenue Recognition 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] - Variable consideration (trade promotions, discounts, allowances) is included in revenue, estimated using the expected value method and constrained by a reserve[47][72] - 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][74] Contract Assets 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] - For contracts longer than one year, costs are capitalized and amortized[49] - No contract assets were recognized as of September 30, 2022, and December 31, 2021[49][75] Shipping and Handling Costs 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] - Internal freight costs (moving products through distribution) and outbound freight are included in selling and distribution expenses[50][51] - 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][51] Marketing Expenses 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] - Incurred $1.7 million for both three months ended September 30, 2022 and 2021[52] - Incurred $4.6 million (9M 2022) vs. $3.1 million (9M 2021)[52] Research and Development Expenses This subsection describes the expensing of research and development costs and reports their amounts - Expensed as incurred and recorded in administrative expense[53] - Increased significantly to $1.3 million (3M 2022) from $0.1 million (3M 2021)[53] - Increased to $3.0 million (9M 2022) from $1.6 million (9M 2021)[53] Business Combination 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] - Goodwill is the excess of consideration transferred over identifiable net assets acquired[54] - Adjustments to acquired assets/liabilities can be made during the measurement period (up to one year)[54] Acquisition-Related Contingent Consideration 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] - Fair value is estimated using probability-adjusted present values, considering milestone likelihood and discount rates[56] - Liabilities are remeasured each reporting period, with changes impacting current operations[56] 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] - Annual impairment tests are performed as of the first day of the fourth quarter, or more frequently if indicators arise[57] - 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][59] Income Taxes 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] - Income taxes are accounted for using the asset and liability method, recognizing deferred tax assets and liabilities for temporary differences[61] - 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][124] Loss per Share/Unit 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] - 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] - RSUs were excluded from diluted net loss per unit computation as they were anti-dilutive due to the net loss position[107] NEW ACCOUNTING STANDARDS 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] - 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] - 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] NOTE 3. REVENUE RECOGNITION 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] - No contract assets or liabilities were recognized as of September 30, 2022, and December 31, 2021[75] NOTE 4. BUSINESS COMBINATIONS 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][78] - Total purchase consideration was $16.8 million, including a $4.5 million term loan and $12.3 million in deferred/contingent payments[81] - Goodwill of $12.486 million was recorded, which is deductible for income tax purposes and remained unchanged as of September 30, 2022[82] - Acquisition-related expenses of $34 thousand were recorded for the nine months ended September 30, 2021[83] NOTE 5. INVENTORIES 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] NOTE 6. PROPERTY AND EQUIPMENT 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] - 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] NOTE 7. LEASES 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] NOTE 8. DEBT 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] 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 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] - Prior period unit amounts were retroactively adjusted for the Reorganization and IPO, reflecting a 139.78-for-one exchange ratio[102] - All pre-IPO units (common, Series A, Series Seed preferred) were converted into 14,422,924 Class B common stock upon IPO[103] NOTE 10. LOSS PER SHARE/UNIT 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] NOTE 11. RELATED-PARTY TRANSACTIONS 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] - The Executive Chairman holds over 20% beneficial ownership[109] - 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] NOTE 12. COMMITMENTS AND CONTINGENCIES 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] - The company is involved in ordinary course legal claims and litigation, but management believes the outcomes will not have a material adverse effect[113] - No accruals for pending litigation were deemed necessary as of September 30, 2022, and December 31, 2021[113] NOTE 13. RISKS OF UNCERTAINTIES AND CONCENTRATION OF CREDIT RISK 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][115] - 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] - 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] NOTE 14. EQUITY-BASED COMPENSATION 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] - 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] - 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] NOTE 15. INCOME TAXES 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] - A full valuation allowance was applied to deferred tax assets, resulting in no income tax amounts recognized in the consolidated statement of operations[124] - The effective tax rate on the portion of loss attributable to the company is 25.0% before the valuation allowance[125] NOTE 16. NON-CONTROLLING INTEREST 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] - Future changes in ownership interest in RGF, while retaining control, will be accounted for as equity transactions[126] NOTE 17. SUBSEQUENT EVENTS 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] - No subsequent events were identified[127] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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][131] - 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] - 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] - 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] - 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] Overview of Our Business 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][131] - Products are sold through natural and conventional grocery, drug, club, and mass merchandise stores, as well as e-commerce channels[130] - The company focuses on health and wellness (H&W) products in the frozen food aisle, competing in frozen entrée and breakfast subcategories[131] Trends and Other Factors Affecting Our Business and Industry 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] - Experiencing increased costs for ingredients due to commodity cost challenges and supply chain disruptions, negatively impacting gross profit margins[133] - Avian flu adversely impacted chicken and egg costs and sourcing[133] - Expects sourcing and supply chain challenges to diminish in Q4 2022 as market dynamics normalize[133] - Anticipates continued growth in e-commerce utilization and in-home consumption due to changing work patterns[134] Components of Our Results of Operations 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][136][137][138][139][140][141] - Net sales are gross sales less discounts, allowances, coupons, slotting fees, and trade advertising[135] - Cost of sales includes ingredients, labor, co-manufacturing fees, plant/equipment costs, and manufacturing overhead[136] - Operating expenses cover freight, warehousing, sales personnel, marketing, advertising, administrative salaries, R&D, and professional fees[137][138][139] Net Sales 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] - Also sells through e-commerce (direct-to-consumer and retail online platforms)[135] - Recorded as gross sales net of discounts, allowances, coupons, slotting fees, and trade advertising[135] Gross Profit 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] - Cost of sales includes ingredients, direct/indirect labor, co-manufacturing fees, plant/equipment costs, manufacturing overhead, and depreciation/amortization[136] - Gross profit margin is influenced by ingredient costs, labor availability/cost, and manufacturing efficiency (including capacity and automation investments)[136] Operating Expense 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] - Marketing Expense: Covers salaries for marketing personnel, website costs, advertising, consumer promotions, influencer agreements, and product samples[138] - Administrative Expense: Includes salaries for management/administrative personnel, R&D costs, non-manufacturing depreciation, professional fees, ERP system costs, and insurance[139] Non-Controlling Interest 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] - The company, as the sole managing member, controls RGF despite having a minority economic interest[140] Segment Overview 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] - The company has one operating segment and one reportable segment[141] - All assets are located within the U.S[141] 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] - Highest percentage of net sales typically occurs in Q1 and Q2, driven by consumer focus on health and wellness brands[143] - Seasonal production cycles for agricultural ingredients (e.g., cauliflower, artichoke hearts) also contribute[143] - Historically, seasonality has not materially impacted net sales due to strong distribution point growth, but its impact is expected to increase over time[143] Results of Operations — Comparison of the Three Months Ended September 30, 2022 and 2021 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] - 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] - Gross profit decreased by 24.9% to $1.8 million, impacted by higher manufacturing and raw material costs[148] - Operating expenses increased by 56.6% to $12.4 million, primarily due to administrative expenses (public company costs, equity compensation, R&D)[144][151] - Loss from operations increased by 91.0% to $(10.6) million[153] - Interest expense increased by 194.3% to $2.5 million due to higher debt levels[154] - Net loss increased by 10.8% to $(13.1) million[155] Net Sales 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] - Increase primarily attributed to strong growth in sales volumes from existing retail and club customers, new customers, and decreased sales discounts[145] Cost of Sales 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] - Increase driven by higher sales volume, raw material costs, and plant manufacturing costs related to the Bolingbrook facility start-up[146] - Expected cost pressures to diminish as the Bolingbrook facility reaches peak efficiency and commodity costs normalize[146] Gross Profit 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] - Decrease primarily due to higher manufacturing and raw material costs[148] Operating Expenses 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] - 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] - 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] - 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] Loss from Operations 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] - Loss from operations as a percentage of sales was (28.4)% for the current period, compared to (24.2)% for the prior year[153] Interest Expense 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] - Increase primarily due to higher levels of interest-bearing debt[154] Net Loss 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] Results of Operations — Comparison of the Nine months ended September 30, 2022 and 2021 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] - 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] - Gross profit decreased by 7.4% to $8.4 million, impacted by increased manufacturing and raw material costs[160] - Operating expenses increased by 77.7% to $37.5 million, primarily due to administrative expenses (public company costs, equity compensation, Bolingbrook facility operations)[156][163] - Loss from operations increased by 141.4% to $(29.1) million[165] - Interest expense increased by 7.6% to $4.7 million due to higher debt levels[166] - Net loss increased by 52.3% to $(33.8) million[167] Net Sales 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] - Increase primarily due to strong growth in sales volumes from existing retail and club customers, new customers, and a decrease in sales promotions[157] Cost of Sales 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] - Increase primarily due to higher sales volume and increased manufacturing costs related to the Bolingbrook facility start-up[159] Gross Profit 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] - Decrease primarily due to the impact of increased manufacturing and raw material costs[160] Operating Expenses 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] - 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] - 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] - 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] Loss from Operations 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] - Loss from operations as a percentage of sales was (27.5)% for the current period, compared to (20.6)% for the prior year[165] Interest Expense 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] - Increase primarily due to higher levels of interest-bearing debt[166] Net Loss 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] Liquidity and Capital Resources 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] - Financed operations through equity and debt issuances, credit agreements, and cash flows[168] - 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] - 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] - Expects to make approximately $0.5 million in future capital expenditures for production enhancements in the remainder of 2022[170] - Believes current cash, operations, and credit facilities provide sufficient financial flexibility for the foreseeable future[170] Cash Flows 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 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] - 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] - Increase in accounts receivable from late Q3 sales also contributed[172] Net Cash Used in Investing Activities 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] - Primarily related to equipment purchases for manufacturing facilities in both periods[173] Net Cash Provided by Financing Activities 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] - Increase primarily due to higher borrowings on the revolving credit facility, partially offset by payments on acquisition-related liabilities[174] Contractual Obligations 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] Off-Balance Sheet Arrangements 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] New Accounting Standards 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] Critical Accounting Policies and Estimates 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] Cautionary Note Regarding Forward-Looking Statements 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] - Statements relate to future financial condition, results, plans, objectives, performance, and business strategies[179] - Actual results may differ materially due to various factors, including those in the 'Risk Factors' section of the Annual Report[179] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] - As such, it is not required to provide information under this item[180] Item 4. Controls and Procedures 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] - As of September 30, 2022, disclosure controls and procedures were concluded to be effective[183] - No material changes in internal control over financial reporting occurred during the three months ended September 30, 2022[184] Evaluation of Disclosure Controls and Procedures 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] - Management applied judgment in evaluating the cost-benefit relationship of controls[182] - The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2022[183] Changes in Internal Control over Financial Reporting 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] PART II—OTHER INFORMATION Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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] - No material changes in the company's risk factors