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May 16, 2022, 5:02 p.m. EDT

10-Q: REAL GOOD FOOD COMPANY, INC.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Our management's discussion and analysis of our financial condition and results of operations ("MD&A") is provided to assist readers in understanding our performance, as reflected in the results of our operations, our financial condition and our cash flows. The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flows as of and for the periods presented below. This MD&A should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form

Overview of our Business

We are a frozen food company that develops, markets, and manufactures foods that are designed to be high in protein, low in sugar, gluten and grain- free. We, along with our

Since our inception, we have focused on creating health and wellness ("H&W") products for the frozen food aisle, where we believe H&W brands are underrepresented compared to other categories. We compete in multiple large subcategories within the U.S. frozen food category, including frozen entree and breakfast, which we consider our two core, strategic growth subcategories. Currently, we sell comfort foods such as our bacon wrapped stuffed chicken, chicken enchiladas, grain-free cheesy bread breakfast sandwiches, and various entree bowls. All of our products are prepared with our proprietary ingredient systems and recipes, allowing us to provide consumers with delicious meals designed to be high in protein, low in sugar, and gluten and grain free.

On November 4, 2021, Real Good Foods, LLC ("RGF"), the successor to The Real Good Food Company LLC (the "Predecessor"), underwent a reorganization whereby the RGF become a subsidiary of The Real Good Food Company, Inc (the "Company"). The Real Good Food Company, Inc. completed an initial public offering ("IPO") on November 9, 2021, in which it issued and sold shares of its class A common stock, $0.0001 par value per share, at an offering price of $12.00 per share. For periods subsequent to November 4, 2021, any references to the Company shall imply The Real Good Food Company, Inc., and its consolidated subsidiary.

Trends and Other Factors Affecting our Business

Our results are impacted by economic and consumer trends, and changes in the food industry market dynamics, such as sourcing and supply chain challenges. Changes in trends in consumer buying patterns may impact the results of our operations. In recent years, there has been an increased focus on healthy eating and an increase in focus on natural, organic and specialty foods. This trend has benefited the Company, as well as has the increase in in-home







        COVID-19
        pandemic (the "Pandemic"). However, consumer spending may shift to the
        food-away-from-home industry, as the impact of the Pandemic subsides. We believe
        the trend in
        in-home
        consumption positively affected our sales, given the increase in demand of our
        retail customers during 2021, which we expect to continue throughout 2022.
        However, cost challenges have persisted due to supply and recent supply chain
        disruptions, and as such we are experiencing increases in costs for certain
        ingredients in our products. In addition, the effects of the Avian flu have
        adversely impacted the cost of chicken and eggs, as well as created challenges
        with regards to sourcing. We expect these cost, sourcing and supply chain
        challenges to continue throughout the year
        


In addition to the above, we believe that changes in work patterns, such as work being performed outside of the traditional office setting, will continue to contribute to

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Components of Our Results of Operations

Net Sales

Our net sales are primarily derived from the sale of our products directly to our retail customers. Our products are sold to consumers through an increasing number of locations in retail channels, primarily in natural and conventional grocery, drug, club and mass merchandise stores. We sell a limited percentage of our products to consumers through

Gross Profit

Gross profit consists of our net sales less cost of sales. Our cost of sales sold primarily consists of the cost of ingredients for our products, direct and indirect labor cost,

Operating Expense

Selling and Distribution Expense

Our products are shipped from our and our co-manufacturers'

Marketing Expense

Marketing expense includes salaries and wages for marketing personnel, website costs, advertising costs, costs associated with consumer promotions, influencer and promotional agreements, product samples and sales ads incurred to acquire new customers and consumers, retain existing customers and consumers, and build our brand awareness.

Administrative Expense

Administrative expense includes salaries, wages, and bonuses for our management and general administrative personnel, research and development costs, depreciation of

Non-Controlling

As the sole managing member of RGF, we operate and control all of the business and affairs of RGF. Although we have a minority economic interest in RGF, we have a majority voting interest in, and control the management of, RGF. Accordingly, we consolidate the financial results of RGF and report a non-controlling

Segment Overview

Our chief operating decision maker, who is our Chief Executive Officer, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance, as well as for strategic operational decisions and managing the organization. For the periods presented, we have determined that we have one operating segment and one reportable segment. In addition, all of our assets are located within the U.S.

Seasonality

We experience mild seasonal earning characteristics, predominantly with products that experience lower sales volume in

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material impact on our net sales primarily due to the timing and strong growth of our total distribution points. The bulk of our distribution point gains are a function of retailer shelf-resets, which tend to occur during the third and fourth quarters of the calendar year, which helps to support year-round performance across our product offerings. As our business continues to grow, we expect the impact from seasonality to increase over time, with net sales growth occurring predominantly in the first and second quarters.

Results of Operations

Comparison of the three months ended March 31, 2022 and 2021

The following table details the results of our operations for the three months ended March 31, 2022 and 2021 (dollars in thousands):







                                                        THREE MONTHS ENDED
                                                            MARCH 31,
                                                       2022            2021         $ Change         % Change
        Net sales                                    $  37,576       $ 16,778       $  20,798            124.0 %
        Cost of sales                                   33,329         12,765          20,564            161.1 %
        Gross profit                                     4,247          4,013             234              5.8 %
        Operating expenses:
        Selling and distribution                         5,327          2,919           2,408             82.5 %
        Marketing                                        1,786            632           1,154            182.6 %
        Administrative                                   5,801          2,820           2,981            105.7 %
        Total operating expenses                        12,914          6,371           6,543            102.7 %
        Loss from operations                            (8,667 )       (2,358 )        (6,309 )          267.6 %
        Interest expense                                   890          2,043          (1,153 )          (56.4 )%
        Loss before income taxes                        (9,557 )       (4,401 )        (5,156 )          117.2 %
        Income tax expense                                  -              -               -
        Net Loss                                     $  (9,557 )     $ (4,401 )     $  (5,156 )          117.2 %
        Less: net loss attributable to
        non-controlling
        interest                                        (7,263 )           -
        Preferred return on Series A preferred
        units                                               -             146
        Net loss attributable to The Real Good
        Food Company, Inc.                           $  (2,294 )     $ (4,547 )
        


Net Sales

Net sales for the three months ended March 31, 2022 increased $20.8 million, or 124.0% to $37.6 million compared to $16.8 million for the prior year period. This increase was primarily due to strong growth in sales volumes of our core products, driven by expansion in the club channel, as well as to greater demand from our existing retail customers.

Cost of Sales

Cost of sales increased approximately $20.6 million, or 161.1%, to $33.3 million, during the three months ended March 31, 2022, as compared to $12.8 million for the prior year period, primarily due to an increase in the sales volume of our products, as well as to an increase in labor and raw material costs. The increase in labor and raw material costs increased primarily due to labor shortages and supply chain pressures related to the impact of the pandemic as well as the conflict in eastern Europe. In addition, the recent outbreak in the avian flu has put further upward pressure on the cost of poultry and eggs. The increases in costs were partially offset by the increase in sales of our self-manufactured products, which yield a higher margin, as well as price increases.

Gross Profit

Gross profit increased $0.2 million to $4.2 million for the three months ended March 31, 2022, compared to $4.0 million for the prior year period. This increase is primarily due to the increase in net sales which was offset by the impacts of inflation described above.

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Operating Expenses

Selling and Distribution Expense

The following table sets forth our selling and distribution expense for the periods indicated (dollar amounts in thousands):







                                     THREE MONTHS ENDED
                                          MARCH 31,
                                     2022           2021         $ change       % Change
        Selling and distribution   $   5,327       $ 2,919      $    2,408           82.5 %
        Percentage of net sales         14.2 %        17.4 %                         (3.2 )%
        


Selling and distribution expense increased $2.4 million, or 82.5%, for the three months ended March 31, 2022, as compared to the prior year period. Selling and distribution expense increased primarily due to an increase in selling expenses related to the increase in sales, and, to a lesser extent, an increase in industry freight rates. Selling and distribution expense decreased as a percentage of net sales due to gaining economies of scale with regards to our operations and successful execution of the company's strategy to reduce distribution costs.

Marketing Expense

The following table sets forth our marketing expense for the periods indicated (dollar amounts in thousands):







                                    THREE MONTHS ENDED
                                         MARCH 31,
                                     2022           2021        $ change       % Change
        Marketing                 $    1,786        $ 632      $    1,154          182.6 %
        Percentage of net sales          4.8 %        3.8 %                          1.0 %
        


Marketing expense increased $1.2 million, or 182.6%, during the three months ended March 31, 2022, as compared to the prior year period. Marketing expense increased primarily due to an increase in advertising and promotional costs we incurred to increase household awareness of our brand as well as support our sales growth. Marketing expense increased as a percentage of sales primarily as we increased the intensity of the aforementioned efforts during this year's quarter.

Administrative Expense

The following table sets forth our administrative expense for the periods indicated (dollar amounts in thousands):







                                    THREE MONTHS ENDED
                                         MARCH 31,
                                    2022           2021         $ change       % Change
        Administrative            $   5,801       $ 2,820      $    2,981          105.7 %
        Percentage of net sales        15.4 %        16.8 %                         (1.4 )%
        


Administrative expense increased $3.0 million, or 105.7% during the three months ended March 31, 2022, as compared to the prior year period. This increase was primarily driven by expenses related to being a publicly owned company as well as to equity compensation expense and other personnel related expenses incurred in support our of growth. Additionally, we incurred approximately $1.0 million in expenses to bring our new manufacturing facility in Bolingbrook in full operation.

Loss from Operations

As a result of the foregoing, loss from operations increased $6.3 million, or 267.6% to $8.7 million for the three months ended March 31, 2022, compared to a loss from operations of $2.4 million for the prior year period. Loss from operations as a percentage of sales was (23%) for the current period, compared to (14%) for the prior year period.

Interest Expense

Interest expense decreased $1.2 million, or 56.4%, to $0.9 million during the three months ended March 31, 2022, as compared to $2.0 million for the prior year period. The decrease in interest expense during the 2021 period, was primarily due to lower costs of borrowing as well as having significantly less debt during the quarter ended March 31, 2022 as compared to the prior year period.

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Net Loss

As a result of the foregoing, our net loss increased $5.1 million, or 117.2%, to $9.6 million during the three months ended March 31, 2022, compared to a net loss of $4.4 million for the prior year period.

Liquidity and Capital Resources

Our primary uses of cash are to fund working capital, operating expenses, promotional activities, debt service and capital expenditures related to our manufacturing facilities. Since our inception, we have dedicated substantially all of our resources to the commercialization of our products, the development of our brand and social media presence, and the growth of our operational infrastructure. Historically, we have financed our operations primarily through issuances of equity and debt securities and borrowings under our credit agreements and, to a lesser extent, through cash flows from our operations.

As of March 31, 2022, we had $14.4 million in cash (which includes restricted cash of $2.3 million), current debt obligations of $0.3 million, and long-term debt obligations of $34.2 million. Additionally, as of March 31, 2022, we had current and long-term business acquisition liabilities of $1.0 million and $3.1 million, respectively. We believe that our cash on-hand







        Cash Flows
        The following table summarizes our cash flows for the periods indicated (in
        thousands):
                                                                    March 31,
                                                                2022          2021
        (In thousands)
        Net cash (used in) provided by operating activities   $  (6,189 )    $  696
        Net cash used in investing activities                    (3,647 )      (537 )
        Net cash used in financing activities                    (5,536 )      (163 )
        Net decrease in cash and cash equivalents               (15,372 )        (4 )
        Cash and cash equivalents at beginning of period         29,745          28
        Cash and cash equivalents at end of period            $  14,373      $   24
        


Net Cash Used in Operating Activities

Cash used in operating activities was $6.2 million during the three months ended March 31, 2022, as compared to cash provided by operating activities of $0.7 million for the three months ended March 31, 2021. The increase in cash used in operating activities is primarily due to the increase in our net loss during the 2022 period.

Net Cash Used in Investing Activities

During the three months March 31, 2022 and 2021, net cash used in investing activities was $3.6 million and $0.5 million, respectively. Cash used in investing activities during the quarter ended March 31, 2022 were primarily related to equipment for our Bolingbrook facility, necessary to render the facility fully operational by the end of the second quarter of 2022. Our capital expenditures during the quarter ended March 31, 2021 were primarily related to equipment purchases in connection with the newly acquired SSRE facility.

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Net Cash Used in Financing Activities

Net cash used in financing activities totaled $5.5 million during the three months ended March 31, 2022, as compared to net cash used in financing activities of $0.2 million during the same period last year. This increase was primarily due to the $7.1 million in payments made to our acquisition liability incurred in connection with our SSRE acquisition, offset in part, with an increase in borrowing on our credit line of $1.9 million during the quarter ended March 31, 2022.

Contractual obligations

As of March 31, 2022, there were no material changes in payments due under contractual obligations from those disclosed in our Annual Report.

Off-Balance

We do not have any

New accounting standards

For discussion of new accounting standards, see Note 2 to the Financial Statements, "Summary of Significant Accounting Policies and New Accounting Standards," in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Critical Accounting Policies and Estimates

There were no material changes to the critical accounting policies and estimates as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

Forward-Looking Statements

This Quarterly Report on Form

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are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected. Such statements are based on certain key assumptions, which could cause actual results to differ materially from those projected or implied in any

May 16, 2022

COMTEX_407288557/2041/2022-05-16T17:02:20

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