The Real Good Food pany(RGF) - 2022 Q4 - Annual Report

FORM 10-K Filing Information 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 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] Cautionary Note Regarding Forward-Looking Statements 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 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] - Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from expectations[11] - Key risks include: the impact of COVID-19 on the economy, employees, suppliers, customers, and consumers[12] - Ability to successfully implement growth strategy and maximize production capabilities[12] - Ability to generate sufficient cash flow or raise capital on acceptable terms[12] - Loss of key senior management members or significant customers[12] - Entrance of new competitors, effectiveness of marketing, and ability to introduce new products[12] - Impact of government regulation, potential price increases and shortages of inputs, and supply chain management[12] Item 1: Business 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 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] - 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] - 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] - 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] Our Products 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] - 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] - Entrée Bowls: Lasagna bowl contains 11g carbohydrates and 32g protein per serving, compared to a competitor's 40g carbohydrates and 16g protein[25] - Enchiladas: Made with chicken and cheese 'tortilla', fewer than 4g carbohydrates and 20g protein per serving[26] - 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] - 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] Manufacturing and Quality Control 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][36] - Manufacturing facilities are USDA and FDA registered and certified by the Gluten-Free Certification Organization (GFCO) for 'gluten free' labeling[24][37] - 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][40][41] Mission, Sales, and Marketing 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] - 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] - 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][47] Corporate Culture and Human Capital 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] 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] Facilities and Intellectual Property 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] - 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][57] - Warehouse: La Verne, CA (19,500 sq ft, lease expires March 2026)[58] - 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][61] - 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 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] - 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][66] - 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][68] Item 1A: Risk Factors 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 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] - Need to increase net sales from existing customers and acquire new customers to execute growth strategy[76] - Short and long-term effects of the COVID-19 pandemic on business and industry[76] - Indebtedness and associated financial restrictions and operating covenants[76] - Substantial customer concentration risk and potential consolidation of customers[76] - Ability to compete successfully in a highly competitive market and rapidly changing consumer preferences[76] - Volatile price of food commodities and packaging materials[76] - Brand and reputation risk from quality or food safety issues[76] - Reliance on third-party delivery and warehousing companies[76] - Requirements and challenges of being a public company[76] Risks Related to Our Business, Brand, Products, and Industry 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] - 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][90][91] - 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] - 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] Risks Related to Our Structure 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] - 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][151] - The company will not be reimbursed for any payments made under the TRA if tax benefits are disallowed by the IRS[153] - 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][156] Risks Related to Our Regulatory Environment 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][160] - 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][164] - 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] - 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][170] Risks Related to Our Intellectual Property, Information Technology, and Privacy 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][175] - 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][178][179][180] - 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][183][184][185] Risks Related to Being a Public Company 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] - The management team has limited experience managing a public company, which could impact the efficient management of reporting obligations and regulatory oversight[192] - 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][194][195][196] - 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][434] Risks Related to Ownership of Our Class A Common Stock 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][203][205] - 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] - 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][210][211] - 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][213][214] Item 1B: Unresolved Staff Comments There are no unresolved staff comments from the Securities and Exchange Commission Unresolved Staff Comments There are no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[218] Item 2: Properties 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 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] - 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] - Warehouse: La Verne, California (19,500 sq ft industrial building for packaging and distribution, lease expires March 31, 2026)[221] Item 3: Legal Proceedings 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 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] - 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] - Legal proceedings and disputes may generally have an adverse impact due to defense and settlement costs and diversion of management resources[222] Item 4: Mine Safety Disclosures This item is not applicable to the company Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[224] Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock trades on NASDAQ under 'RGF', with no cash dividends declared or anticipated Market and Shareholder Information 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] - As of March 24, 2023, there were approximately 2,490 record holders of the company's Class A common stock[226] - During the fiscal year ended December 31, 2022, the company did not sell any unregistered securities nor purchase any of its equity securities[227][229] - 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] Item 6: [Reserved] This item is reserved and contains no information Reserved This item is reserved and contains no information - This item is reserved[231] Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - 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] - 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][238] Components of Our Results of Operations 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] - 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] - Selling and Distribution Expense: Includes third-party freight, warehousing, and personnel costs[242] - Marketing Expense: Covers marketing personnel, website costs, advertising, consumer promotions, and influencer agreements[243] - Administrative Expense: Encompasses management and administrative salaries, R&D, non-manufacturing depreciation, professional fees, and ERP system implementation costs[244] - The company is managed as a single operating segment, with all sales and assets primarily within the United States[246] - 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] Results of Operations 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] - 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] - Gross profit as a percentage of sales decreased by 2.9% in 2022 due to increased manufacturing and raw material costs[252] - 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] - 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] Liquidity and Capital Resources 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] 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] - 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] - The company expects to make future capital expenditures of approximately $3.0 million to $7.0 million during 2023 for enhancing production capabilities[265] Critical Accounting Policies and Estimates 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][278] - 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][281] - 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][283] - Equity-Based Compensation: Measured at grant date fair value (closing stock price) and recognized on a straight-line basis over the vesting period[285] - 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] Item 7A: Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the company is not required to provide quantitative and qualitative disclosures about market risk Market Risk Disclosures 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] Item 8: Financial Statements and Supplementary Data 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 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] - The audit did not include an opinion on the effectiveness of the company's internal control over financial reporting[293] Consolidated Financial Statements 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 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][311] - 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][318] 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][371][373][374][375] - 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][388][428] - 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] Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There are no changes in or disagreements with accountants on accounting and financial disclosure matters Changes in and Disagreements with Accountants 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] Item 9A: Controls and Procedures 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 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] Management's Report on Internal Control over Financial Reporting 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] - Identified material weaknesses include: lack of sufficient resources with appropriate knowledge, experience, and training[434] - Absence of sufficient formal accounting policies and procedures for transaction initiation, recording, processing, reporting, authorization, and approval[434] - Insufficient segregation of duties between significant business processes[434] - Incomplete necessary testing over certain business processes and cycles[434] - Inadequate access controls over accounting systems and financial information[434] - Remediation efforts are underway, including designing and implementing additional formal accounting policies and procedures and restricting access to key financial systems and records[435] Item 9B: Other Information There is no other information to report under this item Other Information There is no other information to report under this item - There is no other information to report[437] Item 9C: Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - This item is not applicable[438] Part III 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 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] Item 11: Executive Compensation 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] Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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] Item 13: Certain Relationships and Related Transactions and Director Independence 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] Item 14: Principal Accountant Fees and Services 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] Part IV 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 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][449] - The exhibits also include certifications from the Chief Executive Officer and Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002[449] Item 16: 10-K Summary This item indicates that no 10-K summary is provided - No 10-K Summary is provided[452] 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 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][459] - 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]