UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM10-K È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2022 or ‘ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 001-41025 THE REAL GOOD FOOD COMPANY, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 87-1280343 (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number) 3 Executive Campus, Suite 155 Cherry Hill, NJ 08002 (Address of principal executive offices and zip code) Registrant’s telephone number, including area code: (856) 644-5624 Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Class A Common Stock, $0.0001 par value per share RGF Nasdaq Global Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ‘ No È Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes È No ‘ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act: Large accelerated filer ‘ Accelerated filer ‘ Non-accelerated filer È Smaller reporting company È Emerging growth company È If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. È Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ‘ Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ No È The aggregate market value of the Class A common Stock, par value $0.0001 per share, held by non-affiliates of the registrant as of June 30, 2022 was approximately $42,902,466 (based on the closing price of such stock as quoted on the Nasdaq Global Market of $7.03 on such date). As of March 24, 2023, there were 7,187,951 shares of the registrant’s Class A common stock, par value $0.0001 per share, and 18,677,681 shares of the registrant’s Class B common stock, par value $0.0001 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant’s definitive Proxy Statement for the 2023 annual meeting of the stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year ended December 31, 2022, are incorporated by reference into Part III of this Annual Report on Form 10-K.
The Real Good Food Company, Inc. ANNUAL REPORT ON FORM 10-K For the fiscal year ended December 31, 2022 TABLE OF CONTENTS Page Part I Item1: Business ...................................................................... 1 Item1A: RiskFactors ................................................................... 9 Item1B: UnresolvedStaffComments ...................................................... 37 Item2: Properties ..................................................................... 37 Item3: LegalProceedings .............................................................. 37 Item4: MineSafetyDisclosures.......................................................... 37 Part II Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities ............................................................... 38 Item6: [Reserved] .................................................................... 38 Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . 38 Item 7A: Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Item8: FinancialStatementsandSupplementaryData ........................................ 49 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . 77 Item9A: ControlsandProcedures.......................................................... 77 Item9B: OtherInformation............................................................... 78 Item 9C: Disclosure Regarding Foreign Jurisdictions that Prevent Inspections . . . . . . . . . . . . . . . . . . . . . . . 78 Part III Item 10: Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Item11: ExecutiveCompensation ......................................................... 79 Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ....................................................................... 79 Item 13: Certain Relationships and Related Transactions and Director Independence . . . . . . . . . . . . . . . . . 79 Item14: PrincipalAccountantFeesandServices ............................................. 79 Part IV Item15: ExhibitsandFinancialStatementSchedules .......................................... 80 Item16: 10-KSummary ................................................................. 82 Signatures ............................................................................. 83 i
Cautionary Note Regarding Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical 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 forwardlooking 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. Forward-looking statements include statements regarding our intentions, beliefs or current expectations and all statements we make relating to our estimated and projected earnings, revenues, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies, or the expected outcome or impact of pending or threatened litigation 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. Examples of such risks and uncertainties include: • the impact of COVID-19 on the U.S. and global economies, our employees, suppliers, customers and end consumers, which could adversely and materially impact our business, financial condition and results of operations; • our ability to successfully implement our growth strategy; • our ability to maximize our production capabilities in our manufacturing facilities and achieve benefits therefrom; • our ability to generate sufficient cash flow or raise capital on acceptable terms; • the loss of key members of our senior management team; • allegations that our products cause illness or fail to comply with government regulations; • the loss of a significant customer; • the entrance of new competitors into our industry; • the effectiveness of our marketing and trade spending programs; • our ability to introduce new products and improve existing products; • our ability to match our manufacturing capacity with demand; • the impact of government regulation, scrutiny, warning and public perception; • the effect of false marketing claims; • adverse weather conditions, natural disasters, pestilences and other natural conditions affecting our operations; • our ability to develop and maintain our brand; • the effect of potential price increases and shortages on the inputs, commodities and ingredients that we require; • our ability to manage our supply chain effectively; • volatility in the price of our Class A common stock; and • other factors discussed under the headings “Risk Factors,” “Business,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. ii
While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties. iii
PART I Unless the context requires otherwise, references in this Annual Report on Form 10-K to “we,” “us,” “our,” “the Company,” “our Company” and “our business” refer to The Real Good Food Company, Inc. and its consolidated subsidiary. ITEM 1. Business Our Company We were founded in 2016, and are an innovative, high-growth, branded, health and wellness (“H&W”) focused frozen food company. We develop, market, and manufacture delicious and convenient comfort foods designed to be high in protein, low in sugar, and made from gluten- and grain-free ingredients that are intended to be sold in the H&W segment of the frozen food category. We offer delicious and nutritious options across breakfast, lunch, dinner, and snacking occasions, which are available in approximately 15,000 stores nationwide, and directly from our website at www.realgoodfoods.com. Our brand commitment, “Real Food You Feel Good About Eating,” represents our strong belief that, by eating our food, consumers can enjoy more of their favorite foods and, by doing so, live better lives as part of a healthier lifestyle. Our branded 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, including Walmart, Kroger, and Costco. On November 9, 2021, we completed our initial public offering (“IPO”) of 5,333,333 shares of Class A common stock at a price to the public of $12.00 per share. In connection with the IPO, we issued 836,522 shares of Class A common stock to Fidelity Investment Funds, related to convertible promissory notes issued to the Company in May 2021, in the amount of $35.0 million. Our Class A common stock trades on the Nasdaq Global Market (“Nasdaq”) under the symbol “RGF.” Our Industry and Competition We operate in multiple large subcategories within the U.S. frozen food category, although we believe we compete with other conventional brands within the frozen food category. We operate in a highly competitive market with numerous brands and products competing for market share and limited shelf space from retail customers. We compete with conventional packaged food companies such as Conagra Brands, Inc., Kraft Heinz Company, Nestle S.A., and Tyson Foods, Inc. We also compete with H&W brands such as Amy’s Kitchen, Atkins, Dr. Praeger’s, EVOL, Quest Nutrition, Saffron Road, and Tattooed Chef. We believe the nutritional content and quality of our products position us to compete directly within the $210 billion U.S. H&W industry, which includes natural, specialty, and wellness food products. Since our inception, we have focused on creating H&W products for the frozen food aisle, where we believe H&W brands are underrepresented compared to other categories. Our strategic advantages are rooted in our mission-focused approach, craveable products, large and engaged consumer community, innovative product-development process, self-manufacturing capabilities, product positioning within our category, and management expertise. Our Products Historically, we have sold substantially all of our products under our “Realgood Foods Co.” brand. We also sell a limited number of private label products to select retail customers. Our branded products are sold to consumers through an increasing number of locations within retail channels, primarily in natural and conventional grocery, drug, club, and mass merchandise stores, including Walmart, Kroger, and Costco. We produce and sell, entrées, bowls, breakfast sandwiches, enchiladas, other H&W products and snacks within the frozen food category. Our craveable products are offered in ready-to-heat and ready-to-cook formats for 1
consumers to prepare. Our breakfast sandwiches and entrées are our core products and have been the chief drivers of our growth. All of our products are designed to be free of gluten-containing ingredients and added sugar, and to be higher in protein and lower in carbohydrates than their conventional equivalents. We are focused on making our products delicious, while ensuring they are balanced in macronutrients. The manufacture of our products requires a specialized process and purpose-built equipment to help ensure they have the macronutrient composition we strive to achieve while maintaining taste. The vast majority of our products are manufactured within the United States. We operate what we believe to be a best in class manufacturing facilities in the City of Industry California (the “City of Industry Facility”), and in Bolingbrook Illinois (the “Bolingbrook Facility”), where we produced over 80% of our goods sold during 2022. These facilities meet United States Department of Agriculture (“USDA”) standards and currently contain several flexible production lines which are U.S. Food and Drug Administration (“FDA”) and USDA registered. In addition, the products we manufacture at these facilities are certified by the Gluten-Free Certification Organization (“GFCO”) to be labeled for sale as “gluten free” (a gluten threshold of 10ppm or less), in accordance with the standards set by the GFCO. Entrées Bowls Our entrée bowls are designed to have the satisfying taste of comfort food. For example, instead of using traditional wheat flour pasta, our lasagna bowl is made with layers of our chicken and parmesan pasta base, marinara sauce that we make with simple ingredients, and ricotta and mozzarella cheese. Our lasagna bowls contain 11 grams of carbohydrates and 32 grams of protein per serving, compared to a similar dish produced by one of our competitors, which has 40 grams of carbohydrates and 16 grams of protein per serving. We also produce over half a dozen other bowls, all of which are microwavable and convenient to prepare. Enchiladas Our enchiladas provide a macronutrient balanced, delicious sampling of Mexican food. Instead of carbohydrateloaded wheat flour tortillas, we use thin, round slices of our innovative chicken and cheese “tortilla.” We roll freshly seasoned and cooked shredded chicken, pork, cheese, or beef into our “tortillas” and top them with our tomatillo verde sauce or roasted chili poblano red sauce. Our sauces are made using fresh produce. The result is a delicious enchilada with fewer than four grams of carbohydrates and 20 grams of protein per serving. Stuffed Chicken Our bacon wrapped stuffed chicken is our modern take on a classic dish. We wrap our cheese-stuffed chicken with thick-cut bacon in lieu of the wheat-flour breading used by certain of our competitors, which can comprise up to one-third of their final product. Our product design results in a high-protein meal that is grain-free and gluten-free, and contains three grams of carbohydrates and 32 grams of protein. A conventional version of this dish has 16 grams of carbohydrates and 20 grams of protein per serving. Our fully cooked stuffed chicken offers a convenient, and nutritious entrée for any occasion. Wrapped in chicken breast, and stuffed with flavors like cordon bleu, spinach artichoke and broccoli & cheese. Our stuffed chicken is 100% grain free and gluten free, and has 80%-90% less carbs than our competitors with one to two times more protein. Asian Chicken Our Asian chicken entrees use lightly breaded chicken made from nutritious ingredients and are 100% grain-free and gluten-free, and are low carb with only one gram of sugar, packed with 25g of protein per serving. We offer three varieties: Orange Chicken, General Tso’s Chicken and Sweet and Sour Chicken. 2
Breaded Chicken We offer nutritious Chicken Nuggets and Strips which are 100% grain and gluten free, with only 3g-4g net carbs and with 23g protein per serving. Our breaded chicken lineup consists of four offerings: original lightly breaded nuggets, lightly breaded strips, buffalo nuggets and buffalo strips. All our breaded chicken products use real food ingredients such as chickpea flour and egg whites to make its crispy breading. Breakfast Sandwiches Our breakfast sandwiches have a delicious bun made with grain-free, gluten-free, and protein-rich ingredients, including cheese, almond flour, and eggs. We use this innovative bun to sandwich eggs, cheddar cheese, and a sausage, bacon, or turkey patty. Our breakfast sandwiches are designed to look and taste like traditional breakfast sandwiches but without wheat flour, grain, or other carbohydrate-dense ingredients. Each breakfast sandwich provides 18 to 20 grams of protein and four grams of carbohydrates per serving, compared to a similar breakfast sandwich produced by one of our conventional counterparts, which has 29 grams of carbohydrates and 13 grams of protein per serving. Snacks and Pizza We participate in the snacks and appetizers subcategory with our bite-sized, breading-free chicken nuggets stuffed with cheese. We also offer frozen pizza, which is a large segment with consumers continually trying new items and discovering new brands. We use this category to funnel new consumers into our franchise. Other Frozen Food Items We provide macronutrient balanced foods for all eating occasions and times of day and offer products in multiple subcategories within the frozen food category. Certain of these products are offered on a limited time basis, such as our no-added sugar, extra-creamy ice cream, offered through our E-commerce platform. We consider products such as these to be our non-core products. Our Manufacturing and Packaging Process Our products are manufactured at our City of Industry and Bolingbrook Facilities, and through our co-manufacturing partner located in Missouri. During 2022, more than 80% of our products were selfmanufactured. Our facilities each contain several flexible production lines that are FDA and USDA registered. In addition, the products we manufacture at our facilities are certified by the GFCO to be labeled for sale as “gluten free” (threshold of 10ppm gluten or less), in accordance with the standards set by the GFCO, when bearing the GFCO certification mark. Packing configurations available to us are significant and flexible. Configurations include shrink wrap, horizontal wrapping, vertical weighing and bagging, and cartoning. Quality Control We utilize a food safety and quality management program, which employs manufacturing procedures, expert technical knowledge of food safety science, employee training, ongoing process innovation, and both internal and independent auditing. 3
We and our co-manufacturing partner each have a food safety plan (“FSP”) that focuses on preventing food safety risks and is designed to be compliant with the requirements set forth under the Food Safety Modernization Act (“FSMA”). In addition, each facility has at least one preventive controls qualified individual who has successfully completed training in the development and application of risk-based preventive controls at least equivalent to that received under a standardized curriculum recognized by the USDA and FDA. Each of our and our co-manufacturer’s facilities complies with the Global Food Safety Initiative. All facilities manufacturing our products are certified against a standard recognized by Safe Quality Food Institute. These standards are integrated food safety and quality management protocols designed specifically for the food sector and offer a comprehensive methodology to manage food safety and quality. Certification provides an independent and external validation that a product, process, or service is designed to comply with applicable regulations and standards. In addition to third-party inspections of our manufacturing partners, we have instituted audits to address topics including allergen control; ingredient, packaging and product specifications, and sanitation. Under FSMA, our facilities and our co-manufacturer’s facilities are required to have an FSP, a hazard analysis critical control plant plan, or a hazard analysis critical control points plan that identifies critical pathways for contaminants and mandates control measures that must be used to prevent, eliminate, or reduce relevant food-borne hazards. Our Mission We are a mission-focused company. Our mission is to make our craveable, nutritious comfort foods accessible to everyone across the United States and, eventually, throughout the world. Our mission is important to us because we believe an increasing number of consumers are seeking to make healthier food choices yet face limited options when it comes to the convenience of products found in the frozen food aisle. These consumers include the portion of the U.S. population seeking to reduce sugar in their diets, the portion of the U.S. population seeking to reduce their carbohydrate intake, the 13% of the U.S. adult population suffering from the health effects of diabetes, and the 42% of the adult U.S. population suffering from obesity. We believe our products provide alternatives for these consumers, and also have broad appeal due to our uncompromising approach to developing products suited to a wide range of consumer tastes and diet preferences. Segment Reporting and Geographical Information For the years ended December 31, 2022 and 2021, we were managed as a single operating segment. Our Chief Executive Officer, who is the Chief Operating Decision Maker, reviews financial information on an aggregate basis for purposes of allocating resources and assessing financial performance, as well as for making strategic operational decisions and managing the organization. All of our sales occur primarily within the United States, and all of our assets are maintained in the United States. Sales and Marketing Sales Our sales team is led by our Senior Vice President, Head of Sales. In addition to our sales team, we use an extensive network of brokers to service our customers. The vast majority of our net revenue is derived from products shipped directly to our retailer customers’ warehouses, with no involvement with distributors. Marketing Our marketing department is led by our Chief Marketing Officer. We currently manage all of our marketing activities in-house and do not rely on agencies or third parties for such activities, which we believe enhances the consistency and strength of our brand messaging. Our marketing team is made up of community managers, who 4
engage with thousands of consumers every week to build relationships, educate them on our products, talk about our mission, and promote healthy lifestyles. We primarily engage with our community directly through social media, SMS text, and our website, and indirectly through influencers. Our Culture and Human Capital “Keeping it REAL” We believe there is a better, more nutritious way to enjoy our favorite foods, and we are committed to producing Real Food You Feel Good About Eating. We believe that our company culture has been and will continue to be a key contributor to the fulfillment of this commitment. Our culture enables us to foster the creativity, teamwork, focus, and innovation we need to support our growth. Our employees drive our mission and share core values that both stem from and define our culture, which plays an invaluable role in our execution at all levels within our organization, and contributes to our success and the continued growth of our business. Our shared core values focus on trust and respect for each other, our customers, consumers, business partners, stockholders, and other constituents; relentless product innovation and continuous improvement; and a culture of transparency, accountability, and ownership, and collectively serve as the driving force behind how we work together, engage with our constituents and the communities in which we operate, and lay the groundwork for our future growth and success. We call this “Keeping it REAL.” Our board of directors adopted a written code of business conduct and ethics, as well as other governance policies and practices, which serve as a guide for our directors, officers, employees, and representatives in our daily interactions with our customers, consumers, business partners, stockholders, and other constituents. We provide periodic training and educational materials to our directors and employees on these governance principles, which will help instill a commitment to ethical behavior and legal compliance. OurTeam We value having talented people at every level of our business. As of December 31, 2022, we had approximately 130 full-time employees on our payroll. None of our employees is represented by a labor union. We have never experienced a labor-related work stoppage, and believe our relationship with our employees to be very good. We contract with several professional employer organizations (“PEOs”) that administer our human resources, payroll, and employee benefits functions for substantially all of our warehouse and production employees. Our PEOs recruit and select these contract employees to fulfill our hiring needs, and each of these employees is an employee of record of the relevant PEO. In addition to our full-time employees, as of December 31, 2022, we had approximately 495 contract employees hired through our PEOs. Our ability to execute our growth plan and achieve our strategic objectives depends in part upon our ability to attract, train, and retain a sufficient number of qualified employees (including contract personnel hired through PEOs), who can manage our business, oversee our manufacturing operations, and establish credibility with our customers, co-manufacturers, suppliers, and other business partners. In an effort to attract and retain employees, we provide competitive employee wages that are consistent with employee positions, skill levels, experience, knowledge, and geographic location. We also offer our employees competitive time off, health, and welfare benefits, Company-paid holidays, recognition programs, and careerdevelopment opportunities. In addition, we focus on our employees’ growth by creating experiences that align with our strategic priorities, and promote performance and opportunities for development. We strive to create a workplace that reflects our values, and one that adheres to a responsible employer philosophy, which includes, among other things, commitments to create job opportunities, ensure safety and well-being, and promote diversity, equity and inclusion. 5
The health and safety of our employees is our highest priority. For instance, during the COVID-19 pandemic, we remained operational as an “essential business” while focusing on safeguarding the well-being of our employees. During that time, in an effort to protect the health and safety of our employees, we limited the number of employees on-site relative to our typical personnel capacity, adopted remote work and flexible scheduling policies, and implemented enhanced safety measures and protocols at our facilities, most of which are still in place today. Facilities We do not own any of the buildings we occupy. Our principal executive office is located in Cherry Hill, New Jersey, where we lease approximately 5,800 square feet of office space under a lease agreement that expires in October 2026, subject to an option to extend the term of the lease for a successive five-year period. We primarily use this location for general office and administrative purposes. In addition, we lease our City of Industry Facility pursuant to a transfer agreement entered into on January 4, 2021. In connection with the lease, we took possession of certain equipment and inventory located on the premises. In addition, on February 16, 2021, we entered into a purchase agreement with PMC Financial Services Group, LLC (“PMC”) pursuant to which we purchased certain equipment and inventory required to operate our City of Industry Facility. These agreements collectively reflect our acquisition of the co-manufacturing business belonging to one of our former co-manufacturers, which closed on March 31, 2021. Our City of Industry Facility lease expires on June 30, 2024, with an option to extend the lease for a successive five-year period. On October 4, 2021, we entered into a lease agreement for our Bolingbrook Facility, which is an 81,406 square foot industrial facility in Bolingbrook Illinois which we use for food manufacturing and assembly, warehousing, and distribution. This lease commenced on January 1, 2022 and will expire on April 1, 2029, with two options to extend the lease for successive five-year periods. This facility became fully operational during the second half of 2022. In addition to our principal executive office and food manufacturing facilities, we lease a 19,500 square foot industrial building in La Verne, California, which we use as a warehouse for packaging and distributing our products, as well as for office and administrative purposes. This lease expires on March 31, 2026, with an option to extend the lease for a successive five-year period. We believe that these facilities are sufficient to meet our current needs. We intend to expand our facilities or add new facilities as we grow, and we believe that suitable additional space will be available as needed to accommodate expansion of our operations. Trademarks and Other Intellectual Property To establish and protect our proprietary rights, we rely on a combination of copyright, trademark, trade dress, and trade secret laws, as well as confidentiality agreements and other contractual restrictions. We do not own any registered patents. Our intellectual property is a strategically important component of our business. In particular, we believe that our trademarks are valuable assets that reinforce the distinctiveness of our brand to consumers, are critical to maintaining and improving our competitive position, and are an important aspect of building brand equity. As such, we consider “Real Good Food Company” and our “Realgood Foods Co.” logo trademarks to be among our most valuable intellectual property assets. We also believe that having distinctive marks that are readily identifiable on our products is an important factor in continuing to build our brand and distinguish our products. Accordingly, our products are marketed and sold uniformly using the term “Realgood.” We have registered trademarks identifying our most popular products, including Realgood Enchiladas, Realgood Stuffed Chicken, Realgood Entrée Bowls, and Realgood Breakfast Sandwiches, among others. We expect to continue to invest in our trademark portfolio as we introduce new products and seek to build and protect our brand. 6
As of December 31, 2022, we held 16 U.S. trademark registrations, one pending U.S. trademark application, two foreign trademark registrations and one pending foreign trademark registration. Further, we have a registered domain name, www.realgoodfoods.com. The information contained on or accessed through our website does not constitute part of this report. Information Systems and Data Security We operate using legacy systems for finance and accounting, supply chain, inventory control, sales transactions, replenishment and other functions. Our long-term strategy includes implementing a comprehensive Enterprise Resource Planning (“ERP”) system supported by a third-party provider, which will integrate and streamline these functions and allow for our continued growth. In the interim we supplement an ERP system with a Warehouse Management System, which allows us to improve tracking and management of ingredients and streamline manufacturing. The regulatory environment surrounding information security and privacy is demanding, with the frequent imposition of new and changing requirements across our business. Various federal, state, and foreign legislative and regulatory bodies may expand current laws or regulations, enact new laws or regulations, or issue revised rules or guidance regarding privacy, data protection, information security, and consumer protection. We must comply with increasingly complex and rigorous laws and regulations regarding privacy and the collection, storage, use, processing, transfer, transmission, disclosure, and protection of personal and other data, which require us, among other things, to maintain reasonable and appropriate data security measures and to provide timely notice to individuals and regulators in the event that such personal information is compromised. Our team of professionals works to identify and mitigate risks, implement best practices, and continue to evaluate ways to improve our information security. These steps include data encryption in transit and at rest, network security, limiting and authorizing access controls, and multi-factor authentication for access to systems with data. We also employ regular system monitoring, logging, and alerting to retain and analyze the security state of our corporate and production infrastructure. In addition, we take appropriate steps to help ensure that appropriate security measures are maintained by the third-party vendors we use, including by conducting security reviews. Government Regulation The food industry is highly regulated. We, our co-manufacturers, and our suppliers are subject to extensive laws and regulations in the United States by federal, state, and local government authorities, or by federal, state, and local government authorities in other jurisdictions where they are located. These laws and regulations apply to many aspects of our business, including the manufacture, packaging, labeling, distribution, advertising, sale, quality, and safety of our products, as well as the health and safety of our employees and the protection of the environment. Our business is subject to extensive regulation by the FDA, USDA, and the U.S. Federal Trade Commission (“FTC”), and other federal, state, and local authorities in the United States, and any other jurisdictions in which we may manufacture or sell our products. Specifically in the U.S., the FDA and USDA comprise a comprehensive regulatory program that governs the manufacturing, nutritional value, composition and ingredients, packaging, labeling, and safety of food. Under this program, the FDA requires that facilities that manufacture food products comply with a range of requirements, including hazard analysis and preventative controls regulations, good manufacturing practices (“GMPs”), and supplier verification requirements. Our processing facilities, including those of our co-manufacturers, are subject to periodic inspection by foreign, federal, state, and local authorities. We are also subject to labor and employment laws, laws governing advertising, privacy laws, safety regulations, and other laws, including consumer protection regulations that regulate retailers or govern the promotion and sale of merchandise. Our operations, and those of our co-manufacturers and suppliers, are also subject to various laws and regulations relating to environmental protection and worker health and safety matters. 7
Although we have implemented policies and procedures designed to comply with existing laws and regulations, we operate in a highly regulated environment with constantly evolving legal and regulatory frameworks. Consequently, we are subject to heightened risk of legal claims, government investigations, or other regulatory enforcement actions. Where You Can Find More Information Our investor website can be accessed at www.realgoodfoods.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and Proxy statements filed with or furnished to the Securities and Exchange Commission (“SEC”), are available free of charge in the “Investors” section on our website under the caption “Financial Information” and then “SEC Filings” promptly after we electronically file such materials with, or furnish such materials to, the SEC. Documents filed with the SEC are also available free of charge on the SEC’s website at www.sec.gov. 8
Item 1A. Risk Factors Summary of Risk Factors Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. If any of these risks are realized, our business, financial condition, results of operations, and prospects could be materially and adversely affected. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business The following is a summary of the most significant risk factors which could have a material impact on our business: • our limited operating history as a public company and significant operating losses; • our need to increase net sales from existing customers and acquire new customers in order to execute our growth strategy; • the short and long-term effects of the coronavirus (“COVID-19”) pandemic on our business and the industry in which we operate; • our ability to successfully implement our growth strategy and obtain additional financing to achieve our goals; • our indebtedness, and the agreements governing such indebtedness, which subject it to required debt service payments, as well as financial restrictions and operating covenants, which may reduce our financial flexibility and affect our ability to operate our business; • our quarterly results may fluctuate significantly, and period-to-period comparisons of our results may not be meaningful; • the substantial customer concentration risk to which we are subject; • potential consolidation of our customers; • our ability to compete successfully in our highly competitive market; • consumer preferences for our products, which can change rapidly; • our ability to introduce new products or successfully improve existing products; • the volatile price of food commodities and packaging materials; • our brand and reputation, as impacted by real or perceived quality or food safety issues with our products; • the effectiveness of our digital marketing strategy and the expansion of our social media presence; • our reliance on third-party delivery and warehousing companies, which could negatively impact our operating results; • any disruption at one of our facilities; • our ability to pay taxes and expenses, including payments under the Tax Receivable Agreement, may be limited by our structure; and • the requirements of being a public company. Additionally, certain statements made in this section constitute “forward-looking statements,” which are subject to numerous risks and uncertainties including those described in this section. For additional information, refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” within this Annual Report. 9
Risks Related to Our Business, Brand, Products, and Industry We have incurred significant operating losses. As a result of continuing investments to expand our business, we may not achieve or sustain profitability. We have experienced net losses in every period since our inception. In the years ended December 31, 2022 and 2021, we incurred net losses of $44.5 million and $67.1 million (represents full year of operating company losses and includes both controlling and noncontrolling interest), respectively. We anticipate our operating expenses and capital expenditures will increase substantially in the foreseeable future as we seek to expand our retail distribution, invest in our approach to grow our community, leverage our product development capabilities, and invest in production capacity and automation. As a result of our continuing investments to expand our business in these and other areas, we expect our expenses to increase significantly, and we may not achieve profitability in the foreseeable future. These factors along with our limited history as a public company make it more difficult to forecast accurately our future operating results, which in turn makes it more difficult for us to prepare accurate budgets and implement strategic plans. If we do not address these risks successfully, our operating results could differ materially from our estimates and forecast and from the expectations of investors or analysts. Even if we are successful in broadening our consumer base and increasing net sales from new and existing customers, we may not be able to generate additional net sales in amounts that are sufficient to cover our expenses. We may incur significant losses for a number of reasons, including as a result of the other risks and uncertainties described elsewhere in this Annual Report. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will sustain profitability over any particular period of time. To execute our growth strategy, we need to attract new customers and consumers to our brand and increase our net sales from existing customers, and we may not be successful in achieving these objectives. Our ability to execute our growth strategy depends in part on our ability to attract new customers and consumers to our brand, retain our existing customers, and increase net sales from existing customers. However, we may not be successful in achieving these objectives, particularly increasing our net sales, as a result of a number of factors, including: • our inability to commercialize innovative and relevant products with the taste, nutritional content, quality, and value demanded by our customers and consumers; • changes in consumer preferences, including trends impacting the H&W industry and the frozen food category; • introduction of competitive products by other branded food companies, retailers, restaurants, and other industry participants; • the pricing of our products and the products of our competitors; • any decision by customers to reduce the number of our products they sell, or to limit their shelf space available for our products; • greater reliance by certain retailers on private label products; • our ability to fulfill orders in a timely manner; • perceptions regarding the taste, nutritional content, quality, and value of our products relative to those of our competitors or other food products; • our failure to effectively engage with customers or consumers through our advertising and marketing efforts, including through our social media presence; • factors impacting our current or target customers, including bankruptcy or financial hardship, changes in business strategy or operations, or industry consolidation; 10
• regulatory matters impacting our products or the products of our competitors, including product recalls or seizures; • incidence of food-borne illnesses, contamination or other food-safety incidents caused by our products, or involving our competitors, co-manufacturers, suppliers, or other business partners; • the impacts and disruptions caused by the COVID-19 pandemic, or any similar pandemics or incidence of disease; or • unfavorable general economic and geopolitical conditions, including discretionary spending, consumer confidence, interest rates, and unemployment rates. Any factors that negatively impact our ability to attract customers and consumers to our brand, retain our existing customers, or increase net sales from existing customers, or that result in sales of our products increasing at a lower rate than expected, including factors that are beyond our control, could adversely affect our business, operating results, financial condition, and prospects. If we are unable to significantly increase our net sales, we may never achieve or sustain profitability, which would negatively impact our ability to execute our strategic plan and cause the trading price of our Class A common stock to decline. Unfavorable general economic and geopolitical conditions could negatively impact our ability to attract customers and our financial results. Our business, operating results, financial condition and liquidity may be adversely affected by changes in global economic conditions, including inflation, credit market conditions, increased unemployment, levels of consumer and business confidence, commodity (including energy) prices and supply, a recession or economic slowdown, trade policies, changing policy positions or priorities, levels of government spending and deficits, and any actual or anticipated default on sovereign debt. Unfavorable changes in economic conditions could negatively affect consumer demand for, our products. We are subject to substantial customer concentration risk and our failure to retain existing customers would have an adverse effect on our business. We have been and continue to be subject to substantial customer concentration risk. Our two largest retail customers during the year ended December 31, 2022 were Costco and Walmart. During the year ended December 31, 2022, Costco and Walmart accounted for approximately 70% of our net sales, collectively, and accounted for approximately 51% and 18% of our net sales, respectively, for the year ended December 31, 2022. During the year ended December 31, 2021, Walmart and Costco collectively accounted for approximately 71% of our net sales. These customers individually accounted for approximately 51% and 21% of our net sales, respectively, for the year ended December 31, 2021. We do not have long-term contracts with our significant customers, any of which could discontinue their relationship with us or seek to modify their commercial terms with us. In addition, our customers are typically not required to purchase a minimum amount of our products. While our growth strategy involves retaining and increasing net sales from existing customers, we cannot guarantee that we will be successful in executing this strategy. The loss of any significant customer, the reduction of purchasing levels from any such customer, or the failure of any of these customers to purchase new products from us would have a material adverse impact our business, operating results and financial condition. For example, throughout 2020, we experienced a reduction of purchasing activity from many of our significant customers, as well as a decision by many retail customers to cancel or postpone shelf-resets, as a result of the impacts of the COVID-19 pandemic, which had a material adverse impact on our net sales during that year. In addition, our customer concentration risk exposes us to product concentration risk as our significant customers may choose to only purchase and provide shelf space for a limited number of our products. If this occurs, it could result in such products representing a large percentage of our net sales, and limit our ability to expand production of and gain market acceptance for new products. For example, we have experienced some concentration of sales 11
of our bacon wrapped stuffed chicken and enchiladas through one of our significant retail customers. We cannot assure you that our significant customers will continue to favor these or other products they purchase from us over competitive products. Further, a significant customer may take actions that affect us for reasons that we cannot always anticipate or control, such as their financial condition, changes in business strategy or operations, introduction of competing products, or its management’s perceptions regarding the quality, value, or desirability of our products. Any factor adversely affecting sales of these products to our significant customers could have a disproportionate negative impact on our business. Consolidation of customers, or the loss of a significant customer, could negatively impact our sales and profitability. In recent years, retailers across the United States have consolidated, including within the geographic regions in which we sell our products. This consolidation has reduced the number of our target customers, while at the same time producing larger organizations with increased negotiating power that are often able to resist price increases, demand fixed commercial terms, operate with lower inventories, and decrease the number of branded products they carry, all of which could negatively impact our business. The consolidation of customers also increases the impact that the loss of a significant customer, or an adverse event affecting the business of a significant customer, could have on our business. Consequently, our operating results may fluctuate significantly in future periods based on the actions of one or more significant customers. Pandemics, epidemics, or disease outbreaks, such as COVID-19, may disrupt our business, including, among other things, consumption and trade patterns, supply chain, and production processes, each of which could materially and adversely affect our business, financial condition and results of operations. The actual or perceived effects of a pandemic, epidemic, disease outbreak, or similar widespread public health concern, such as COVID-19, could materially and adversely affect our business, financial condition, and results of operations, For instance, COVID-19, had an impact on our costs to produce our products during 2021, as well as negatively impacting on our supply chain in that year. Even the perceived risk of infection or health risk may adversely affect traffic to our store-based retail customers and, in turn, our business, financial condition, and results of operations, particularly if any self-imposed or government-imposed restrictions are in place for a significant period of time. We may not be able to compete successfully in our highly competitive market. We are a frozen food company operating within the H&W industry, although we believe we compete with other conventional brands within the frozen food category. We operate in a highly competitive market with numerous brands and products competing for market share and limited shelf space from retail customers. Within our market, we believe competition is primarily based on the following factors: • product quality and taste; • brand reputation, recognition, and loyalty; • nutritional content and claims; • product pricing; • product variety; • relationships with customers and access to retail shelf space; and • advertising and marketing activity, including social media presence. We compete with conventional brands within the frozen food category such as Conagra Brands, Inc., Kraft Heinz Company, Nestle S.A., and Tyson Foods, Inc., each of which have substantially greater financial and other 12
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