THE REAL GOOD FOOD COMPANY, INC.
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
10-Q.
Our future results could differ materially from our historical performance as a
result of various factors, such as those discussed in "Risk Factors" in Item 1A
of our Annual Report and the section entitled "Forward-Looking Statements"
within this Quarterly Report on Form 10-Q.
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 co-manufacturers, produce breakfast sandwiches, entrées, and other products, which are primarily sold in theU.S. frozen food category, excluding frozen and refrigerated meat. Our customers include retailers, which primarily sell their products through natural and conventional grocery, drug, club, and mass merchandise stores throughoutthe United States . We also sell our products through our e-commerce channel, which includes direct-to-consumer sales through our website, as well as sales through our retail customers' online platforms. 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 theU.S. frozen food category, including frozen entrée 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 entrée 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. OnNovember 4, 2021 ,Real Good Foods, LLC ("RGF"), the successor to TheReal Good Food Company LLC (the "Predecessor"), underwent a reorganization whereby the RGF become a subsidiary of TheReal Good Food Company, Inc (the "Company"). TheReal Good Food Company, Inc. completed an initial public offering ("IPO") onNovember 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 toNovember 4, 2021 , any references to the Company shall imply TheReal 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
consumption as a result of the
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
in-home
consumption. The Pandemic also drove significant growth in eCommerce utilization
by grocery consumers, and we expect that trend to continue as well. However,
should such demand persist, there may be a significant increase in new market
entrants within the same space.
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Components of Our Results of Operations
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 "click-and-collect" e-commerce transactions, where consumers pick up their product at a retailer following an online sale, and traditional direct-to-consumer "deliver-to-me" e-commerce transactions through our own website and third-party websites. We record net sales as gross sales net of discounts, allowances, coupons, slotting fees, and trade advertising that we offer our customers. Such amounts are estimated and recorded as a reduction in total gross sales in order to arrive at reported net sales. 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, co-manufacturing fees, plant and equipment cost, other manufacturing overhead expense, and depreciation and amortization expense, as well as the cost of packaging our products. Our gross profit margin is impacted by a number of factors, including changes in the cost of ingredients, cost and availability of labor, and factors impacting our ability to efficiently manufacture our products, including through investments in production capacity and automation.
Operating Expense
Selling and Distribution Expense
Our products are shipped from our and our co-manufacturers' facilities directly to customers' or to third-party logistics providers by truck and rail. Distribution expense includes third-party freight and warehousing costs, as well as salaries and wages, bonuses, and incentives for our distribution personnel. Selling expense includes salaries and wages, commissions, bonuses, and incentives for our sales personnel, broker fees, and sales-related travel and entertainment expenses.
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-manufacturing property and equipment, professional fees to service providers including accounting and legal, costs associated with the implementation and utilization of our new ERP system, insurance, and other operating expenses.
Non-Controlling
Interest
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 interest on our consolidated statements of operations, representing the portion of net income or loss attributable to the other members of RGF. The ownership percentages during the period are used to calculate the net income or loss attributable to TheReal Good Food Company, Inc. and the non-controlling interest holders 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 theU.S.
Seasonality
We experience mild seasonal earning characteristics, predominantly with products
that experience lower sales volume in
warm-weather
months. For example, our bacon wrapped stuffed chicken experiences seasonal
softness during months that consumers prefer to grill outdoors instead of
preparing microwaveable meals. In addition, similar to other H&W brands, the
highest percentage of our net sales tends to occur in the first and second
quarters of the calendar year, when consumers are more likely to seek H&W
brands. Further, certain of the ingredients we process, such as cauliflower and
artichoke hearts, are agricultural crops with seasonal production cycles. These
seasonal earning characteristics have not historically had a
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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
The following table details the results of our operations for the three months
ended
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 endedMarch 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 endedMarch 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 easternEurope . 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 endedMarch 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. 26
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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 endedMarch 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 endedMarch 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 endedMarch 31, 2022 as compared to the prior year period. 27
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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 endedMarch 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 ofMarch 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 ofMarch 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 and cash received from operations, together with borrowing capacity under our credit facilities, will provide sufficient financial flexibility to meet working capital requirements and to fund capital expenditures and debt service requirements for the remainder of 2022 as well as the foreseeable future. We expect to make future capital expenditures of approximately$1.0 million to$3.0 million in connection with the enhancement of our current production capabilities during the remainder of 2022.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in
thousands):
March 31,
2022 2021
(In thousands)
Net cash (used in) provided by operating activities
(3,647 ) (537 )
Net cash used in financing activities (5,536 ) (163 )
Net decrease in cash and cash equivalents (15,372 ) (4 )
Cash and cash equivalents at beginning of period 29,745 28
Cash and cash equivalents at end of period$ 14,373 $ 24
Cash used in operating activities was$6.2 million during the three months endedMarch 31, 2022 , as compared to cash provided by operating activities of$0.7 million for the three months endedMarch 31, 2021 . The increase in cash used in operating activities is primarily due to the increase in our net loss during the 2022 period.
During the three monthsMarch 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 endedMarch 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 endedMarch 31, 2021 were primarily related to equipment purchases in connection with the newly acquired SSRE facility. 28
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Net cash used in financing activities totaled$5.5 million during the three months endedMarch 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 endedMarch 31, 2022 .
Contractual obligations
As of
Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. 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
Forward-Looking Statements
This Quarterly Report on Form
10-Q
contains forward-looking statements which are prospective in nature and are not
based on historical facts, but rather on current expectations and projections of
the management of the Company about future events and are therefore subject to
risks and uncertainties. All statements other than statements of historical or
current fact included in this report are forward-looking statements.
Forward-looking statements discuss our current expectations and projections
relating to our financial condition, results of operations, plans, objectives,
future performance and business. You can identify forward-looking statements by
the fact that they do not relate strictly to historical or current facts. These
statements may include words such as "aim," "anticipate," "believe," "estimate,"
"expect," "forecast," "outlook," "potential," "project," "projection," "plan,"
"intend," "seek," "may," "could," "would," "will," "should," "can," "can have,"
"likely," the negatives thereof and other words and terms of similar meaning in
connection with any discussion of the timing or nature of future operating or
financial performance or other events. For example, all statements we make
relating to our expected revenues, costs, expenditures, cash flows, growth rates
and financial results, our plans and objectives for future operations, growth or
initiatives, or strategies
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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 forward-looking statements. For additional information of the risks and uncertainties that may impact our forward-looking statements, refer to the section entitled "Risk Factors" in our Annual Report.
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