through private ordering. Increasing regulation of fuel emissions could substantially increase the distribution and supply chain costs associated with our products. Additionally, if regulations of GHG emissions are more aggressive than the sustainability measures that we undertake at any point to monitor the emissions associated with our operations and improve our energy efficiency, we may experience significant increases in our costs of operation and delivery. As a result, climate change could negatively affect our business and operations. Claims, legal proceedings, and other disputes could divert our management’s attention, have a negative impact on our reputation, expose us to significant liabilities, and make it more difficult to obtain insurance coverage. From time to time, we may be party to various claims, legal proceedings, and other disputes. We evaluate these matters to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we may establish reserves, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a significant amount of management judgment. Actual outcomes or losses may differ materially from our assessments and estimates. Even when not merited, the defense of legal proceedings may divert our management’s attention, and we may incur significant expenses in defending these matters. The results of legal proceedings are inherently uncertain, and adverse judgments or settlements in some of these proceedings may result in adverse monetary damages, penalties, or injunctive relief against us, which could have a material adverse effect on our operating results, financial condition, and liquidity. Any legal proceedings or other disputes, even if fully indemnified or insured, could have a negative impact on our reputation, and make it more difficult to compete effectively or to obtain adequate insurance in the future. Further, while we maintain insurance for certain potential liabilities, such insurance does not cover all types and amounts of potential liabilities and is subject to various exclusions and caps on amounts recoverable. Even if we believe a claim is covered by insurance, insurers may dispute our entitlement to recovery for a variety of potential reasons, which may affect the timing and amount of our recovery. Risks Related to Our Structure Our ability to pay taxes and expenses, including payments under the Tax Receivable Agreement, may be limited by our structure. The Company’s principal asset is a controlling equity interest in Real Good Foods, LLC (“RGF”). As such, the Company is not expected to have any independent means of generating income. RGF is treated as a partnership for U.S. federal income tax purposes and, as such, is not subject to U.S. federal income tax. Instead, taxable income will be allocated to holders of RGF’s units, including the Company, as a holder of Class A units of RGF. Accordingly, the Company will incur income taxes on its allocable share of any net taxable income of RGF and incur expenses related to our operations. Pursuant to RGF’s operating agreement, RGF will make cash distributions to the holders of RGF’s units in an amount intended to be sufficient to fund their tax obligations in respect of the cumulative taxable income in excess of cumulative taxable losses of RGF that is allocated to them, to the extent previous tax distributions from RGF have been insufficient. In addition, if we do not have sufficient funds for liabilities incurred under this agreement, we may need to borrow funds, which could have a material adverse impact on our business, operating results, financial condition, and liquidity. Under the Tax Receivable Agreement, we will be required to pay certain holders of Class B units of RGF for certain tax benefits we may claim, and we expect that the payments we will be required to make will be substantial. To the extent we are unable to make payments under the Tax Receivable Agreement when due, subject to certain exceptions for limitations on payments imposed by credit agreements existing at the time the Tax Receivable 23
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