NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING STANDARDS Basis of Presentation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of The Real Good Food Company, Inc. and its wholly owned or controlled subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company’s fiscal year end is December 31. Unless otherwise stated, all references to the period refer to the twelve months ended December 31, 2022. The Real Good Food Company, Inc. has no operations other than those of RGF. Prior to the IPO, the Company’s results were reported under RGF as the predecessor company. Subsequent to the IPO, all results reported upon contain the consolidated financial statements of The Real Good Food Company, Inc. and RGF. In accordance with the reverse acquisition guidance in as set forth by the Financial Accounting Standards Board (“FASB”), the financial statements of RGF, Inc. (the accounting acquiree) for the year ended December 31, 2021 are a continuation of the financial statements of RGF (the accounting acquirer), adjusted to retroactively change RGF’s legal capital to reflect the legal capital of RGF, Inc. This adjustment was calculated based upon the partnership unit to share exchange ratio of 139.78 new shares of Company common stock for every unit of RGF’s previously issued and outstanding equity. Comparative information preserved in these consolidated financial statements is also retroactively adjusted to reflect the legal capital of RGF, Inc. The legal capital at December 31, 2022 and 2021 reflects the legal capital of the RGF, Inc. after the acquisition date and therefore requires no adjustment. Use of Estimates The preparation of the Company’s financial statements in conformity with U.S. GAAP requires management to use its judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of net sales and expenses during the reporting period. Significant estimates and assumptions reflected in the financial statements include, but are not limited to, the allowance for credit losses, the write down of obsolete or excess inventory, and revenue recognition, including variable consideration for estimated reserves for discounts, incentives, and other allowances. Management bases its estimates on historical experience and on assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Due to the inherent uncertainty involved in making assumptions and estimates, changes in circumstances could result in actual results differing from those estimates, and such differences could be material to the Company’s balance sheet and statements of operations. Liquidity The accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates realization of assets and satisfaction of liabilities in the normal course of business. At December 31, 2022, the Company had an accumulated deficit of $21.1 million and a working capital surplus of $32.9 million. For the year ended December 31, 2022, the Company had a net loss of $11.0 million and negative cash flows from operations of $57.3 million. The Company’s operating activities consume the majority of its cash resources. The Company anticipates that it will continue to incur net losses into the following year. In addition, the Company has had and expects to have negative cash flows from operations, at least into the second quarter of 2023. The Company has previously funded, and plans to continue funding, these losses primarily through current cash on hand and borrowing availability under its debt facility. The Company’s management believes it has the ability to continue as a going concern as a result of the proceeds received from its November 2021 public offering and the Company’s borrowing capacity. In addition, management believes the Company will achieve a level of sales and gross margin adequate to support the 56
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