UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2021
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
(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of |
(I.R.S. Employer | |
Incorporation or Organization) |
Identification Number) |
(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 | ||
Stock, $0.0001 |
||||
par value per share |
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 preceding 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
☐
☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation Yes ☒ No ☐
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) 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 | ☐ | |||
| ☐ | Smaller reporting company | |||||
| Emerging growth company | ||||||
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 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule ☒
12b-2
of the Exchange Act). Yes ☐ No As of December 16, 2021, there were 6,169,885 shares of the registrant’s Class A common stock, par value $0.0001 per share, and 19,577,681 shares of the registrant’s Class B common stock, par value $0.0001 per share, outstanding.
THE REAL GOOD FOOD COMPANY, INC.
TABLE OF CONTENTS
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2
PROJECT CLEAN, INC.
Unaudited Balance Sheets
September 30, 2021 |
June 2, 2021 |
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| ASSETS |
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| Cash |
$ | 1 | $ | 1 | ||||
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| Total assets |
$ | 1 | $ | 1 | ||||
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| LIABILITIES AND STOCKHOLDER’S EQUITY |
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| Total liabilities |
$ | — | $ | — | ||||
| Stockholder’s equity: |
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| Common stock, $0.0001 par value per share, 10,000 authorized, 10,000 shares issued and outstanding |
1 | 1 | ||||||
| Additional paid-in capital |
— | — | ||||||
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| Total liabilities and stockholder’s equity |
$ | 1 | $ | 1 | ||||
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See accompanying notes to the Financial Statements
3
NOTE 1. DESCRITPTION OF BUSINESS AND BASIS OF PRESENATION
Project Clean, Inc. was formed as a Delaware corporation on June 2, 2021, with the intention to change its name to The Real Good Food Company, Inc. prior to the consummation of the initial public offering (“IPO”) discussed in Note 14, Subsequent Events, for The Real Goods Foods Company LLC.
Project Clean, Inc. was formed for the purpose of completing a public offering and related transactions (the “Transactions”) in order to carry on the business of The Real Goods Foods Company LLC and serve as the issuer of the Class A common stock offered in the Company’s IPO (see The Real Goods Foods Company LLC, Note 14, Subsequent Events, included within this report).
The accompanying financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Separate statements of income and comprehensive income, changes in stockholder’s equity, and cash flows have not been presented because there have been no activities in this entity for the period from its formation through September 30, 2021 (unaudited).
NOTE 2. STOCKHOLDER’S EQUITY
As of September 30, 2021 and June 2, 2021, Project Clean, Inc. was authorized to issue 10,000 shares of common stock, par value $0.0001 per share, and had issued 10,000 shares of common stock to The Real Goods Foods Company LLC.
NOTE 3. SUBSEQUENT EVENTS
On
October 7, 2021, Project Clean, Inc. changed its name to The Real Good Food Company, Inc. On November 4, 2021, The Real Good Food Company, Inc. completed a series of reorganization transactions in connection with its IPO, whereby The Real Good Food Company Inc., became the managing member of The Real Goods Foods Company LLC, and as such became the financial reporting entity subsequent to November 4, 2021. The IPO closed November 9, 2021
.
4
THE REAL GOOD FOOD COMPANY LLC
Unaudited Balance Sheets
(In thousands, except unit and liquidation preference data)
As of |
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September 30, 2021 |
December 31, 2020 |
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| ASSETS |
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| Current assets: |
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| Cash |
$ | $ | ||||||
| Accounts receivable, net |
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| Inventories |
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| Other current assets |
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| Total current assets |
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| Property and equipment, net |
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| Operating lease right-of-use |
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| Deferred loan cost |
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| Goodwill |
— | |||||||
| Deferred transaction costs |
— | |||||||
| Other noncurrent assets |
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| Total assets |
$ | $ | ||||||
| LIABILITIES AND MEMBERS’ DEFICIT |
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| Current liabilities: |
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| Accounts payable |
$ | $ | ||||||
| Operating lease liabilities |
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| Finance lease liabilities |
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| Business acquis i tion liabilities, current portion |
— | |||||||
| Accrued and other current liabilities |
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| Loan with PPZ, LLC, a related party |
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| Convertible note |
— | |||||||
| Current portion of long-term debt |
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| Total current liabilities |
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| Long-term debt |
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| Long-term operating lease liabilities |
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| Long-term finance lease liabilities |
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| Long-term Business acquis i tion liabilities |
— | |||||||
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| Total Liabilities |
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| Commitments and contingencies (Note 12) |
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| Members’ deficit: |
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| Common units: |
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| Series A preferred units: $ December 31, 2020 |
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| Series Seed preferred units: |
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| Accumulated deficit |
( |
) | ( |
) | ||||
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| Total members’ deficit |
( |
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| Total liabilities and members’ deficit |
$ |
$ |
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See accompanying notes to the Financial Statements.
5
THE REAL GOOD FOOD COMPANY LLC
Unaudited Statements of Operations
(In thousands, except unit and per unit data)
THREE MONTHS ENDED SEPTEMBER 30, |
NINE MONTHS ENDED SEPTEMBER 30, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
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| Net sales |
$ | $ | $ | $ | ||||||||||||
| Cost of sales |
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| Gross profit |
( |
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| Operating expenses: |
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| Selling and distribution |
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| Marketing |
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| Administrative |
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| Total operating expenses |
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| Loss from operations |
( |
) | ( |
) | ( |
) | ( |
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| Interest expense |
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| Other income |
( |
) | — | ( |
) | — | ||||||||||
| Change in fair value of convertible debt |
— | — | ||||||||||||||
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| Loss before income taxes |
( |
) | ( |
) | ( |
) | ( |
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| Income tax expense |
— | — | — | |||||||||||||
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| Net Loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
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| Preferred return on Series A preferred units |
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| Net loss attributable to common unitholders |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
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| Net loss per common unit (basic and diluted) |
$ |
( |
) | $ |
( |
) | $ |
( |
) | $ |
( |
) | ||||
| Weighted-average common units outstanding (basic and diluted) |
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See accompanying notes to the Financial Statements.
6
THE REAL GOOD FOOD COMPANY LLC
Unaudited Statements of Cash Flows
(In thousands)
Nine months ended September 30, |
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2021 |
2020 |
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| Cash flows from operating activities: |
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| Net loss |
$ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
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| Depreciation and amortization |
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| Amortization of loan costs |
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| Bad debt expense |
— |
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| Non-Cash interest and debt fees |
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| Remeasurement of liabilities associated with business combinations |
— | |||||||
| Change in fair value of convertible debt |
— | |||||||
| Changes in operating assets and liabilities: |
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| Accounts receivable |
( |
) | ( |
) | ||||
| Inventories |
( |
) | ||||||
| Other assets |
( |
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| Accounts payable, accrued and lease liabilities |
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| Net cash used in operating activities |
( |
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| Cash flows from investing activities: |
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| Acquisition of business, net of cash acquired |
( |
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| Purchase of property and equipment |
( |
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| Net cash used in investing activities |
( |
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| Cash flows from financing activities: |
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| Proceeds from line of credit borrowings |
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| Proceeds from convertible notes |
— | |||||||
| Payments on line of credit borrowings |
( |
) | ( |
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| Payments on deferred offering costs |
( |
) | — | |||||
| Payments on finance lease liabilities |
( |
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| Net cash provided by financing activities |
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| Net increase (decrease) in cash |
$ | $ | ( |
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| Beginning cash |
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| Ending cash |
$ | $ | ||||||
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| Supplemental disclosures of cash flow information: |
— | — | ||||||
| Cash paid for interest |
$ | $ | ||||||
| Supplemental disclosures of noncash investing and financing activities: |
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| Net liabilities assumed from business combination |
$ |
$ |
— |
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| Lease liabilities arising from obtaining right-of-use |
$ |
$ |
— |
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| Deferred offering costs in AP and accrued liabilities |
$ |
$ |
— |
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See accompanying notes to the Financial Statements
7
THE REAL GOOD FOOD COMPANY LLC
Unaudited Statements of Members’ Deficit
(In thousands, except number of units)
Series A |
Series Seed |
Members’ |
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Common Units |
Preferred Units |
Preferred Units |
Accumulated |
Equity |
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Units |
Amount |
Units |
Amount |
Units |
Amount |
Deficit |
(Deficit) |
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| Balance, June 30, 2021 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) | |||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | ( |
) | ( |
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| Balance, September 30, 2021 |
$ |
$ |
$ |
$ |
( |
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$ |
( |
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Series A |
Series Seed |
Total |
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Common Units |
Preferred Units |
Preferred Units |
Accumulated |
Members’ |
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Units |
Amount |
Units |
Amount |
Units |
Amount |
Deficit |
Equity |
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| Balance, December 31, 202 0 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
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| Net loss |
— | — | — | — | — | — | ( |
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| Balance, September 30, 2021 |
$ |
$ |
$ |
$ |
( |
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$ |
( |
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Total |
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Series A |
Series Seed |
Members’ |
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Common Units |
Preferred Units |
Preferred Units |
Accumulated |
Equity |
||||||||||||||||||||||||||||
Units |
Amount |
Units |
Amount |
Units |
Amount |
Deficit |
(Deficit) |
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| Balance, June 30, 2020 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) | |||||||||||||||||||||||
| Net loss |
— |
— |
— |
— |
— |
— |
( |
) |
( |
) | ||||||||||||||||||||||
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| Balance, September 30, 2020 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
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Series A |
Series Seed |
Total |
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Common Units |
Preferred Units |
Preferred Units |
Accumulated |
Members’ |
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Units |
Amount |
Units |
Amount |
Units |
Amount |
Deficit |
Equity |
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| Balance, December 31, 2019 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) | |||||||||||||||||||||||
| Net loss |
— |
— |
— |
— |
— |
— |
( |
) |
( |
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| Balance, September 30, 2020 |
$ |
$ |
$ |
$ |
( |
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$ |
( |
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8
THE REAL GOOD FOOD COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENATION
The Real Good Food Company LLC (“RGF”, or the “Company”) is a frozen food company that develops, markets, and manufactures f sales through its website, as well as sales through its retail customers’ online platforms.
o
ods that are designed to be high in protein, low in sugar, gluten and grain-free. The Company along with its co-manufacturers
produce breakfast sandwiches, entrées, and other products, which are primarily sold in the U.S. frozen food category, excluding frozen and refrigerated meat. The Company’s customers include retailers, which primarily sell its products through natural and conventional grocery, drug, club, and mass merchandise stores throughout the United States. The Company also sells its products through its e-commerce
channel, which includes direct-to-consumer
On November 9, 2021, the Company completed an initial public offering (“IPO”). In connection with the IPO, the Company completed a reorganization among the Company, a California limited liability company, and the predecessor entity of RGF (the “
Predecessor Entity
”), and its members (the “
Members
”). Notwithstanding the reorganization, the financial statements herein are those of the Company, which was the existing reporting company at the balance sheet date (see Note
14-
Subsequent Events, for a complete discussion regarding the reorganization and IPO).
The accompanying financial statements as of September 30, 2021, and for the three and nine months ended September 30, 2021 and 2020, are unaudited. All significant intercompany transactions have been eliminated. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The interim financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation in conformity with GAAP. The interim financial statements should be read in conjunction with the Company’s registration statement on Form
S-1,
as amended (File No. 333-260204)
which was declared effective on November 4, 2021 (the “Registration Statement”). The results of operations for the interim periods should not be considered indicative of results to be expected for the full year. As of December 31, 2020, the Company’s recurring net losses and the amount of its indebtedness raised doubts regarding its ability to continue as a going concern. However, subsequent to December 31, 2020, in addition to completing the IPO, the Company has taken a number of actions designed to enhance its liquidity and alleviate doubt regarding its ability to continue as a going concern, including reducing costs, extending the maturity date of certain existing indebtedness, and acquiring additional borrowing capacity. Accordingly, the financial statements have been presented on the basis that the Company is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As a result, these financial statements do not include any adjustments that might result from the outcome of going concern uncertainty.
COVID-19
Pandemic In March 2020, the World Health Organization declared the global novel coronavirus
(“COVID-19”)
outbreak a pandemic. The COVID-19
pandemic has resulted in challenging operating environments and affected regions where the Company operates its business and in which the Company’s products are made, manufactured, distributed, and sold. The ongoing impacts of the COVID-19
pandemic may continue to affect the ability of the Company and its co-manufacturers,
suppliers, and customers to operate in certain regions, delay the development or launch of new products, disrupt the supply chain and manufacture or shipment the Company’s ingredients, raw materials, or products, or have other adverse effects on the Company’s business, financial condition, results of operations, and prospects. In addition, the impacts of the COVID-19
pandemic have caused substantial disruption in the financial markets and may adversely impact economies worldwide, both of which could result in adverse effects on the Company’s business and operations and its ability to raise additional funds to support its operations. In connection with the ongoing impacts of the
COVID-19
pandemic, many of the Company’s retail customers canceled or postponed shelf-resets, which significantly impacted the Company’s net sales in the year ended December 31, 2020. Further, one of the Company’s key co-manufacturers
experienced financial hardship as a result of the impacts of the COVID-19
pandemic, which resulted in the Company’s inability to meet demand for certain of its products in the year ended December 31, 2020, and negatively impacted the Company’s financial condition and results of operations. Although the Company has taken actions to mitigate the impacts of the COVID-19
pandemic on its business, it cannot at this time predict the specific extent, duration, or full impact that the COVID-19
pandemic will have on its business, financial condition, and operations, including its ability to successfully implement its growth strategy and to obtain additional financing to achieve its strategic objectives. The impacts of the COVID-19
pandemic 9
on the Company’s financial performance will depend on future developments, including the duration and spread of the pandemic; its impact on the Company’s business, including its manufacturing capacity, and other third parties with whom it does business; progress of vaccination efforts; and related governmental advisories and restrictions. These developments and the impact of the
COVID-19
pandemic on the financial markets and the overall
economy are highly uncertain and cannot be predicted. If the financial markets or the overall economy are impacted for an extended period, the Company’s business may be materially adversely affected. NOTE 2. SUMMARY OF SIGNIFICANT AC
C
OUN
TING POLICIES AND NEW ACCOUN
TING STANDARDS Use of Estimates
The preparation of the Company’s financial statements in conformity with 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.
Management considered the impact of and 2020. As events continue to evolve and additional information becomes available, management’s assumptions and estimates may change materially in future periods.
COVID-19
on the assumptions and estimates used to prepare the Company’s financial statements and determined that there were no material adverse impacts on the financial statements for the periods ended September 30, 2021Segment Reporting and Geographical Information
For the three and nine months ended September 30, 2021 and 2020, the Company was managed as a single operating segment. The Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), 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. As such, the Company does not have reportable segments. Additionally, all of the Company’s assets are maintained in the United States.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity period of three months or less, when acquired, to be cash equivalents. There were no
Accounts Receivable
Accounts receivable are recorded at the invoiced amount, net of allowances for estimated variable consideration and amounts payable to customers for slotting, which are fees assessed by customers for the cost of accepting new products into their store. Estimated product returns are immaterial. Management assesses the collectability of outstanding customer invoices, and if it deems necessary, maintains an allowance for credit losses resulting from the 48 thousand and $29 thousand as of September 30, 2021 and December 31, 2020, respectively.
non-collection
of customer receivables. In estimating this reserve, management considers factors such as historical collection experience, customer creditworthiness, specific customer risk, trends specific to the customer, and current and expected general economic conditions that may affect a customer’s ability to pay. Customer balances are written off after all collection efforts are exhausted. The Company has recorded a reserve for credit losses of $Inventories
Inventories are stated at the lower of cost or net realizable value. The Company records sales and other reductions in inventory through cost of sales using the
first-in,
first-out
method. The cost of finished goods inventories include ingredients, direct labor, freight-in
for ingredients, and indirect production and overhead costs. The Company monitors its inventory to identify excess or obsolete items on hand. The Company writes down its inventories for 10
estimated excess and obsolescence in an amount equal to the difference between the cost of inventories and estimated net realizable value. These estimates are based on management’s judgment about future demand and market conditions. Once established, these adjustments are considered permanent and are not revised until the related inventory is sold or disposed of. Inventory written down was $0 and $0.9 million, for the three and nine months ended September 30, 2021, respectively, and $0.5 million and $0.5 million for three months and nine months ended September 30,
2020
. Property and Equipment
Property and equipment are stated at acquisition cost, net of accumulated depreciation and amortization. Depreciation is calculated using the straight-line method typically over the following range of estimated useful lives of the assets as follows:
ESTIMATED USEFUL LIVES | ||
| | ||
| Computers |
||
| Office equipment |
||
| Machinery equipment |
Leasehold improvements are capitalized and amortized over the shorter of the estimated useful life or the remaining term of the lease.
The Company reviews the recoverability of property and equipment when circumstances indicate that the carrying value of an asset or asset class may not be recoverable. Indicators of impairment could include, among other factors, significant changes in the business environment, the planned closure of a facility, or deteriorations in operating cash flows. Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows. Expenditures for repairs and maintenance which do not substantially improve or extend the useful life of an asset are expensed as incurred.
Leases
The Company’s leases consist of corporate office space, warehouse, and equipment. The Company determines whether a contract is or contains a lease at the time of the contract’s inception based on the presence of identified assets and the Company’s right to obtain substantially all the economic benefit from or to direct the use of such assets. When the Company determines a lease exists, it records a (“ROU”) asset and corresponding lease liability on its balance sheet. ROU assets represent the Company’s right to use an underlying asset for the lease term. Lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are recognized at the lease commencement date at the present value of the remaining future lease payments the Company is obligated for under the terms of the lease. Lease liabilities are recognized concurrent with the recognition of the ROU asset and represent the present value of lease payments to be made under the lease. These ROU assets and liabilities are adjusted for any prepayments, lease incentives received, and initial direct costs incurred. As the discount rate implicit in the lease is not readily determinable in most of the Company’s leases, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The Company’s lease terms include options to extend the lease when it is reasonably certain that the Company will exercise that option.
right-of-use
The Company does not record lease contracts with a term of 12 months or less on its balance sheet. Payments for these short-term leases are expensed when incurred.
The Company recognizes fixed-lease expense for operating leases on a straight-line basis over the lease term. For finance leases, the Company recognizes amortization expense over the shorter of the estimated useful life of the underlying assets, or the lease term. Interest expense on a finance lease is recognized using the effective interest method over the lease term.
The Company has lease agreements with
non-lease
components, such as maintenance- and utility-related charges. The Company accounts for each lease and any non-lease
components associated with that lease as a single-lease component for all underlying asset classes. Accordingly, all costs associated with a lease contract are accounted for as lease costs. 11
Certain leasing arrangements require variable payments that are dependent on usage or output or may vary for other reasons, such as insurance and tax payments. Variable lease payments that do not depend on an index or rate are excluded from lease payments in the measurement of the ROU asset and lease liability and are recognized as expense in the period in which the payment occurs.
The Company’s lease agreements do not include significant restrictions or covenants, and residual value guarantees are generally not included within its leases.
Fair Value of Financial Instruments
Fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.
The carrying value of the Company’s short-term financial instruments, such as cash, accounts receivable, notes payable, and accounts payable, approximate fair value due to the immediate or short-term maturity of these instruments. The interest rate on the Company’s secured credit facility and certain other debt has a variable component, and which is reflective of the market for such instruments at any given date, and as such the carrying value this debt value approximates its fair value.
With regards to the Company’s debt related to the convertible promissory notes issued in connection with the Fidelity Secured Financing (refer to Note 8, for additional discussion), the Company has elected to account for these notes at fair value per the provisions of ASC Topic 815, (“ASC 815”). Under ASC an election can be at the inception of a financial instrument to account for the instrument at fair value. The notes were recorded at fair value at inception and assessed quarterly thereafter using a convertible debt option pricing model which incorporates multiple conversation scenarios. All changes in fair value subsequent to the initial recording, excluding the impact of the change in fair value related to the Company’s own credit risk, are recorded as a component of
Debt
Derivatives and Hedging
815-15-25,
non-operating
income/expense, within Change in fair value of convertible debt in the statements of operations. Any changes in fair value related to the Company’s own credit risk are recorded through other comprehensive income (loss). Profits Interest Units
On April 1, 2017, the board of managers of the Company granted profits interest units (“PIU”) to CPG Solutions, LLC (“CPG”) in exchange for sales and marketing services. CPG is entitled to share in the Company’s net profits and to receive a settlement payment at the time of a liquidity event, including a sale transaction. A sale is defined as a sale or transfer of substantially all of the assets or membership interests in the Company. Upon the sale of the Company, CPG will receive 10.0 % of the profit on the sale based on the value of the Company at the end of the term (“Capped Value”). The Capped Value will be determined by multiplying the net sale price in connection with the Company sale (purchase price less debt and capital contributions) by a fraction of which the numerator shall be the net revenue for the 12 months prior to the end of the termination of the services to the Company, and the denominator of which shall be net revenue for the 12 months prior to the determination of the purchase price.
While the PIU issued to CPG have features that are similar to both equity and liabilities, they have been determined to be primarily liability-like due to the ultimate settlement being cash and not Company shares or units. Additionally the potential cash settlements are tied to continued service, as such the Company concluded that the CPG PIU should be accounted for in accordance with ASC Topic 710, (“ASC 710”), similar to a performance bonus, and has classified such profits interest units as liabilities. There has been no compensation expense recognized with respect to these profits interest units, for all periods presented.
Compensation, General
Similar to those issued to CPG, the Company issued PIU to the Company’s chief executive officer (“CEO”) and chief financial officer (“CFO”) which have been classified as potential liabilities based on the following considerations: (i) the profits interests entitle the CEO and CFO to a payout upon a sale of the Company based on continued service through the date of an initial public offering and based upon the excess of distributable profits of the Company above a contractually agreed baseline; (ii) the profits interest units will be forfeited upon voluntary or involuntary termination of services; (iii) the profits interest units are not transferrable; and (iv) the profits interest units do not convey voting rights. Accordingly, per the provisions of ASC 710, these units are classified as liability awards and accounted for as a performance bonus.
12
For all periods presented, there has been no compensation expense recognized with respect to these profits interest units, due to payments
on
profits interest units being deemed neither probable or estimable as of September 30, 2021. Common Units Issued to Divario
In February 2018, the Company entered into a product placement agreement (“PPA”) with Divario Ventures, LLC (“Divario”), a subsidiary of Albertsons Companies, Inc. (“Albertsons Companies”), pursuant to which the Company agreed to issue Divario common units (the “Divario Initial Equity”) in exchange for achievement and maintenance of specified distribution thresholds in retail locations operated by Albertsons Companies through October 31, 2020. Additionally, Divario may be entitled to additional common units (the “Divario Incentive Equity”) as incentive awards upon achievement of specified annual sales targets with Albertsons Companies through October 31, 2021. The PPA authorized the issuance of up to 5,240 common units of the Company in connection with the Divario Initial Equity. Additionally, the PPA authorized issuance of a variable number of common units in connection with the Divario Incentive Equity.
As both the Divario Initial Equity and Divario Incentive Equity represent consideration due to a customer under Accounting Standards Codification (“ASC”) Topic 606, (“ASC 606”), the grant date fair value of the awards, measured in accordance with ASC Topic 718, , is recognized in earnings as reduction of net sales over the term of the slotting arrangements based upon the relative volume of gross sales to Albertsons Companies during each fiscal period for the duration of the agreement.
Revenue from Contracts with Customers
Stock Compensation
A total of 5,240 0 and $36 thousand during the three and nine months ended September 2021, respectively, and $0.1 million and $0.3 million during the three and nine months ended September 2020, respectively. Total unrecognized consideration to Divario in connection with these awards was $36 thousand as of September 30, 2021.
Revenue Recognition
The Company’s revenue is principally derived from selling goods to retailers. Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied and promised goods have been transferred to the customer. Control transfers to the customer when the product is shipped or delivered to the customer based upon applicable shipping terms. For each contract, the Company considers the transfer of products, each of which is distinct, to be the identified performance obligation. Although some payment terms may be more extended, generally the majority of the Company’s payment terms range from payment due immediately upon invoice to up to 60 days. Accordingly, there are no significant financing components to consider when determining the transaction price.
Variable consideration is included in revenue for trade promotions, , for additional information.
off-invoice
discounts, shrinkages and shortages, and other discounts and sales incentives. The Company uses a reserve to constrain revenue for the expected variable consideration at each period. See Note 3, Revenue
Recognition
Any taxes collected on behalf of government authorities (e.g. sales tax) are excluded from net sales, and recorded as a liability due the particular authority.
The Company applies the practical expedient that allows it to exclude disclosure of performance obligations that are part of a contract that has an expected duration of one year or less. The Company’s contracts are all short term in nature, therefore there are no unsatisfied performance obligations requiring disclosure at September 30, 2021.
Contract Assets
The Company has elected the practical expedient which allows costs incurred in connection with obtaining a contract to be expensed as incurred for those contracts with a duration of one year or less. For those contracts which have a duration of greater than one year, the Company capitalizes those costs and amortized them over the duration of the agreement. As of September 30, 2021 and December 31, 2020, there were no
13
Shipping and Handling Costs
The Company’s shipping and handling costs are included in both cost of sales and selling and distribution expense, depending on the nature of such costs. Cost of sales reflects cost incurred for inbound freight on ingredients to be used in production. Internal freight costs included in selling and distribution expenses consist primarily of those costs associated with moving products from production facilities through the Company’s distribution network. Total internal freight costs recorded within selling and distribution expenses were $1.2 million and $2.2 million during the three and nine months ended September 30, 2021, respectively, and $0.4 million and $1.3 million during the three and nine months ended September 30, 2020, respectively.
Shipping and handling costs associated with outbound freight are included within selling and distribution expenses and are accounted for as a fulfillment cost as incurred. Total of these costs recorded within selling and distribution expenses were $2.2 million and $5.4 million during the three and nine months ended September 30, 2021, respectively, and $1.0 million and $3.3 million during the three and nine months ended September 30, 2020, respectively.
Marketing Expenses
Marketing costs are expensed as incurred. The Company incurred $1.7 million and $3.1 million during the three and nine months ended September 30, 2021, respectively, and $0.4 million and $1.9 million during the three and nine months ended September 30, 2020, respectively. Advertising and marketing costs are recorded in general and administrative expense in the Company’s statement of operations.
Research and Development Expenses
Research and development expenses are recorded in administrative expense in the statements of operations as incurred. During the three and nine months ended September 30, 2021, the Company incurred $0.1 million and $1.6 million, respectively, of research and development expenses. For the three and nine months ended September 30, 2020, research and development costs incurred were $0.2 million and $0.3 million, respectively.
Business Combination
The Company accounts for business combinations under the acquisition method of accounting ASC Topic 805, , which requires the Company to recognize separately from goodwill the assets acquired, and the liabilities assumed at their acquisition date fair values. The amount by which the fair value of consideration transferred exceeds the fair value of the identifiable net assets acquired is recorded as goodwill. While the Company uses its best estimates and assumptions to accurately value assets acquired, and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, the estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the identifiable assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the statements of operations.
Business Combinations
Acquisition-Related Contingent Consideration
Contingent consideration in a business combination is included as part of the purchase consideration and is recognized at fair value as of the acquisition date. For contingent consideration, management is responsible for determining the appropriate valuation model and estimated fair value, and in doing so, considers a number of factors, including information provided by valuation advisors. Contingent consideration liabilities are reported at their estimated fair values based on probability-adjusted present values of the consideration expected to be paid, using significant inputs and estimates. Key assumptions used in these estimates include probability assessments with respect to the likelihood of achieving certain milestones and discount rates consistent with the level of risk of achievement. The fair value of these contingent consideration liabilities are remeasured each reporting period, with changes in the fair value included in current operations. The remeasured liability amount could be significantly different from the amount at the acquisition date, resulting in material charges or credits in future reporting periods.
Goodwill
Goodwill represents the excess of the aggregate fair value of the consideration transferred in a business combination over the fair value of the identifiable net assets acquired, net of liabilities assumed. The Company performs its annual goodwill impairment test as of the first day of the fourth quarter or more frequently if events or changes in circumstances indicate that the goodwill may be impaired.
14
The Company’s goodwill is accounted for in a single reporting unit representing the company as a whole. As part of its annual impairment testing of goodwill, the Company may elect to assess qualitative factors as a basis for determining whether it is necessary to perform the traditional quantitative impairment testing. If the Company’s assessment of these qualitative factors (“Step zero”) indicates that it is more likely than not that the fair value of the reporting unit exceeds its carrying value, then no further testing is required. Otherwise, the goodwill reporting unit, must be quantitatively tested for impairment (“Step one”).
The Step one impairment test for goodwill involves a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. The Company determines the fair value of its reporting unit by using a market approach and a discounted cash flow (“DCF”) analysis. Determining fair value using a DCF analysis requires the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash flows. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. There were no
Income Taxes
The Company is currently in a net loss position for all periods presented, in addition to being a pass-through entity for federal income tax purposes, for periods prior to the date of the IPO (see
Note 1,
Description of Business and
Basis of Presentation)
. As such income taxes related to the Company’s operations were the responsibility of those who held partnership interests in the Company (a limited liability corporation). Accordingly, the Company has not provided for federal income taxes during the periods presented. Additionally, there are d
December 31, 2020. There was
provision for income taxes for the three and nine months ended September 30, 2021, respectively. During the three and nine months ended September 30, 2021, amount provided for state income
.
Loss per Unit
Loss per unit is computed by dividing the Company’s net loss, after deducting any dividends on preferred units or accumulated on cumulative preferred units, by the weighted-average number of common units outstanding during the period, adjusted for the dilutive effect of any outstanding dilutive securities. As the Series Seed preferred units are participating, the Company utilizes the
two-class
method in computing loss per unit. The preferred unit holders participate in income but are not obligated to participate in losses. The two-class
method did not impact the loss per unit calculation for the periods presented due to the net losses incurred in the periods. Loss per unit is computed by dividing the Company’s net loss, after deducting any dividends on preferred units or accumulated on cumulative preferred units, by the weighted-average number of common units outstanding during the period, adjusted for the dilutive effect of any outstanding dilutive securities. As the Series Seed preferred units are participating the Company utilizes the
two-class
method in computing loss per unit. The preferred unit holders participate in income but are not obligated to participate in losses. The two-class
method did not impact the loss per unit calculation for the periods presented due to the net losses incurred in the three and nine months ended September 30, 2021 and 2020. The Company’s convertible promissory notes are included in the calculation of diluted earnings per share if the assumed conversion into common shares is dilutive, using the “if-converted”
method. This calculation involves adding back the periodic interest expense associated with the convertible promissory notes to the numerator and by adding the shares that would be issued in an assumed conversion (regardless of whether the conversion option is in or out of the money) to the denominator for the purposes of calculating diluted earnings per share. See Note 10, Loss per Unit. NEW ACCOUNTING STANDARDS
During August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No to modify disclosure requirements related to fair value measurement. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. The Company elected early adoption of this ASU on January 1, 2020, the adoption of which had no impact to the Company’s financial statements.
2018-13,
Fair Value Measurement (Topic 820)
15
During August 2020, the FASB issued ASU amending an issuer’s accounting for convertible instruments and its application of the derivatives scope exception for contracts in its own equity. Early adoption was permitted for all entities for fiscal periods beginning after December 15, 2020, including interim periods within the same fiscal year. The Company elected early adoption of this ASU on January 1, 2021. The adoption did not have a material impact to the Company’s financial statements.
No. 2020-06,
Debt—Conversion and Other Options (Subtopic
470-20)
and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40),
During January 2021 the FASB issued ASU to provide optional expedients and exceptions to current guidance, if certain criteria are met, for contracts, hedging relationships and derivative instruments that reference the London Interbank Offered Rate (LIBOR) and other interbank offered rates expected to be discontinued or modified by rate reform. The overall purpose of Topic 848 is to ease the financial reporting burdens related to the expected market transition to alternative reference rates. The provisions of this ASU may be applied prospectively to contract modifications made and hedging relationships entered on or before December 31, 2022. The Company continues to evaluate the effect the adoption of this guidance would have on its financial statements, if any.
No. 2021-01,
Reference Rate Reform (Topic 848),
NOTE 3. REVENUE RECOGNITION
Disaggregation of Net Sales
The following table presents a disaggregation of the Company’s net sales by revenue source. The Company believes that these revenue streams most appropriately depict the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with its customers.
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (in ‘000s) | ||||||||||||||||
| Entrees |
$ | $ | $ | $ | ||||||||||||
| Breakfast |
||||||||||||||||
| Pizza and Snacks |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total Net Sales |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Revenue Recognition, Sales Incentives, and Accounts Receivable
Revenue is recognized when the performance obligation is satisfied, as evidenced by the transfer of control of the promised good to the customer. This transfer occurs upon shipment of goods, as the customer can direct the use and obtain substantially all of the remaining benefits from the asset at that point in time. Revenue is recognized in an amount that reflects the consideration that the Company expects to ultimately receive in exchange for those promised goods, net of expected discounts for sales promotions and customary allowances. The Company offers sales promotions through various regional and national programs to its customers. These programs include
in-store
discounts as well as product coupons offered direct to consumers which may be redeemed at the point of sale. Customary allowances for early invoice payment and shrinkage are also applied by customers. The costs associated with these programs are accounted for as variable consideration as defined under ASC 606 and are reductions to the transaction price. Depending on the specific type of sales incentive and other promotional program, the expected value method is used to determine the variable consideration. The Company reviews and updates its estimates and related accruals of variable consideration each period based on the terms of the agreements, historical experience, and expected levels of performance of the trade promotion or other programs. Any uncertainties in the ultimate resolution of variable consideration due to factors outside the Company’s influence are typically resolved within a short timeframe therefore not requiring any additional constraint on the variable consideration. Additionally, the Company also offers compensation to customers for access to shelf space in stores; associated payments are recognized as reductions to the transaction price received from the customer on sale of associated products. 16
Payment terms and conditions are generally consistent amongst customers, including credit terms to customers ranging from seven days to 60 days, and as such the Company’s contracts do not include significant financing components. The Company performs credit evaluations of customers and evaluates the need for allowances for potential credit losses based on historical experience, as well as current and expected general economic conditions. These allowances reduce the accounts receivable balance and are charged to operating expense. For the periods presented, amounts recorded in connection with credit losses were de minimis.
The Company applies the practical expedient that allows for companies to exclude disclosing performance obligations that are unsatisfied as of the period end, that are expected to be satisfied in a duration of one year or less of that date. Given that the Company’s contracts are generally short term in nature, there are no unsatisfied performance obligations requiring disclosure at September 30, 2021.
Contract Assets and Liabilities
Contract assets are rights to consideration in exchange for goods or services that the Company has transferred to a customer when that right is conditional on something other than the passage of time. Contract liabilities are obligations to transfer goods or services to a customer for which the Company has received consideration, or for which an amount of consideration is due from the customer. The Company continually evaluates whether its contractual arrangements with customers result in the recognition of contract assets or liabilities. For the periods ending September 30, 2021, and December 31, 2020, there were no
contract assets or liabilities recognized.
NOTE 4. BUSINESS COMBINATIONS
During the year ended December 31, 2020, SSRE Holdings, LLC (“SSRE”), the previous lessee of the City of Industry Facility, and one of the Company’s largest co-manufacturers during the year ended December 31, 2020, experienced financial hardship as a result of the impacts of the COVID-19 pandemic, which resulted in a default under the facility lease, as well as a default pursuant to a credit agreement with PMC Financial Services, LLC (“PMC”), under which SSRE had secured its borrowings with certain assets, including food manufacturing equipment, raw materials, and finished goods inventory. The lease was subsequently reassigned by the landlord to LO Entertainment, LLC (“LO Entertainment”), and on January 4, 2021, the Company entered into a transfer agreement with LO Entertainment to sublease the premises and take possession of equipment and inventory on the premises in exchange for deferred payments totaling
$Additionally, on February 16, 2021, the Company entered into a purchase agreement with PMC to purchase equipment and inventory used in the food manufacturing operations at the City of Industry Facility for a purchase price of which $4.5 million was paid in cash at the close of the transaction, which was funded through additional debt (see below discussion).
These agreements (collectively the “Transaction”) represent the acquisition of the 4.5 54 months commencing on September 30, 2021, and interest-only payments commencing at the close of the Transaction. The term loan shall bear interest at an annual rate equal to the greater of the prime rate announced by Wells Fargo Bank, N.A., or 3.3 %, plus 8.6 % per annum. Related interest expense was $0.1 million and $0.3 million for the three and nine months ended September 30, 2021, and is included as a component of total interest expense as disclosed in Note 8, .
co-manufacturing
business belonging to SSRE. The Transaction closed on March 10, 2021. To fund a portion of the Transaction, the Company entered into an agreement with PMC in February 2021 to obtain a term loan of $Debt
The Transaction was accounted for under the acquisition method of accounting. Accordingly, the fair value of the purchase consideration was measured and subsequently allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the date of acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill.
17
In determining the fair value of the purchase consideration as of March 10, 2021, the Company determined the term loan from PMC to be at market terms, and therefore the fair value to be equal to the stated contractual value of $4.5 million. With respect to the agreement with LO Entertainment, the $2.5 million in deferred payments and $10.0 million in contingent consideration was estimated to have a total fair value of $12.3 million, comprising $9.8 million of contingent consideration and $2.5 million of deferred payments to LO Entertainment as of the transaction date. See below for additional information.
Contingent Consideration
The following table summarizes the allocation of the fair market value of the purchase consideration to the assets acquired and liabilities assumed as of March 10, 2021:
(In thousands) |
AS OF MARCH 10, 2021 |
|||
| Inventories |
$ | |||
| Property and equipment |
||||
| Operating leases right-of-use |
||||
| |
|
|||
| Total identifiable assets |
$ | |||
| |
|
|||
| Operating lease labilities – current |
$ | |||
| Operating lease labilities – non-current |
||||
| |
|
|||
| Total liabilities assumed |
$ | |||
| |
|
|||
| Net identifiable assets acquired |
$ | |||
| Goodwill |
||||
| |
|
|||
| Total purchase price allocation |
$ |
|||
| |
|
|||
The goodwill recorded in this transaction is not tax deductible. The results of operations of the acquired
co-manufacturing
business from March 11, 2021 through September 30, 2021 have been reflected within the Company’s financial statements. For the three and nine months ended September 30, 2021, the Company recorded acquisition-related expenses associated with the Transaction of $0 and $34 thousand, respectively, as a component of administrative expense on the statement of operations.
Disclosure of supplemental pro forma information for revenue and earnings related to the acquisition, assuming the acquisition was made at the beginning of the earliest period presented, has not been disclosed as the since the effects of the acquisition would not have been material to the results of operation for the periods presented given the intercompany nature of a substantial portion of the acquired business.
Contingent Consideration
As of September 30, 2021, the estimated fair value of the contingent consideration totaled
$actual
contingent consideration payment will be recorded in operating income in the statements of operations. The recurring Level 3 fair value measurements of the contingent consideration liabilities include the following significant inputs as of September 30, 2021:
18
RANGE |
WEIGHTED AVERAGE BY RELATIVE FAIR VALUE |
|||||||
| Input |
||||||||
| Discount rate |
||||||||
| Term (in years) |
||||||||
| Probability of payment |
||||||||
As of September 30, 2021, the estimated contingent consideration was . The resulting net change in the estimated contingent consideration for three and nine months ended September 30, 2021 was recorded in interest expense in the statements of operations and consisted of the following:
re-evaluated
and measured at fair value on a recurring basis using unobservable inputs (Level 3) as defined in ASC Topic 820, Fair Value Measurement
THREE MONTHS ENDED |
NINE MONTHS ENDED |
|||||||
(In thousands) |
SEPTEMBER 30, 2021 |
SEPTEMBER 30, 2021 |
||||||
| Opening balance |
$ | $ | ||||||
| Change in fair value of estimated contingent consideration |
||||||||
| |
|
|
|
|||||
| Closing balance |
$ |
$ |
||||||
| |
|
|
|
|||||
NOTE 5. INVENTORIES
Inventories as of September 30, 2021and December 31, 2020, consisted of the following:
| As of |
||||||||
(In thousands) |
SEPTEMBER 30, 2021 |
DECEMBER 31, 202 0 |
||||||
| Ingredients and supplies |
$ | $ | ||||||
| Finished goods |
||||||||
| |
|
|
|
|||||
| Total inventories |
$ |
$ |
||||||
| |
|
|
|
|||||
19
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 2021 and December 31, 2020 consisted of the following:
As of |
||||||||
(In thousands) |
September 30, 2021 |
December 31, 2020 |
||||||
| Computer equipment |
$ | $ | ||||||
| Vehicles |
— | |||||||
| Machinery and equipment |
||||||||
| Leasehold improvements and office equipment |
||||||||
| |
|
|
|
|||||
| Total property and equipment |
$ | $ | ||||||
| |
|
|
|
|||||
| Less: accumulated depreciation |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Property and equipment, net |
$ |
$ |
||||||
| |
|
|
|
|||||
Depreciation
and amortization expense
was $0.3 million and $0.8 million for the three and nine months ended September 30, 2021, respectively, and $0.1 million and $0.4 million for the three and nine months ended September 30, 2020, respectively.
NOTE 7. LEASES
The Company has various finance leases for equipment and operating leases for office and warehouse space, as well as equipment. The Company’s lease agreements do not contain any material residual value guarantees, bargain purchase options, or restrictive covenants. Variable lease costs were not significant for the periods presented.
Operating lease liabilities and their corresponding ROU assets are recorded at the present value of fixed lease payments over the expected lease term. The interest rate implicit in lease contracts was not readily determinable. As such, the Company used an incremental borrowing rate based on the information available at inception date. In the development of the discount rate, the Company considered its internal borrowing rate, treasury security rates, collateral, and credit risk specific to it, and its lease portfolio characteristics. As of September 30, 2021 and December 31, 2020, the weighted-average discount12 The components of lease expense were as follows:
rate
of the Company’s operating and finance leases was Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, |
September 30, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
(in ‘000s) |
||||||||||||||||
| Operating lease costs |
$ | $ | $ | $ | ||||||||||||
| Finance lease costs: |
||||||||||||||||
| Amortization of ROU assets |
||||||||||||||||
| Interest on lease liabilities |
|
|||||||||||||||
| Short-term lease costs |
|
|||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total lease costs |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Supplemental balance sheet information related to leases is as follows:
20
As of September 30, |
As of December 31, |
|||||||||
2021 |
2020 |
|||||||||
Assets |
Balance Sheet Location |
|||||||||
| Operating lease right-of-use |
Operating lease right-of-use |
$ | $ | |||||||
| Finance lease right-of-use |
Property and equipment, net | |||||||||
| |
|
|
|
|||||||
| Total lease assets |
$ |
$ |
||||||||
| |
|
|
|
|||||||
| Liabilities |
||||||||||
| Current: |
||||||||||
| Operating lease liabilities |
Operating lease liabilities | $ | $ | |||||||
| Finance lease liabilities |
Finance lease liabilities | |||||||||
| Noncurrent: |
||||||||||
| Operating lease liabilities |
Long term Operating lease liabilities | |||||||||
| Finance lease liabilities |
Long term Finance lease liabilities | |||||||||
| |
|
|
|
|||||||
| Total lease liabilities |
$ |
$ |
||||||||
| |
|
|
|
|||||||
As of September 30, |
As of December 31, |
|||||||
2021 |
2020 |
|||||||
| Weighted-average discount rate (%) |
||||||||
| Operating leases |
% | % | ||||||
| Finance leases |
% | % | ||||||
Supplemental cash flow information related to leases is as follows:
Nine months Ended September 30, |
||||||||
2021 |
2020 |
|||||||
| Supplemental Cash Flow Information: |
||||||||
| Cash paid for amounts included in the measurement of lease liabilities |
||||||||
| Operating cash flows from operating leases |
$ | $ | ||||||
| Operating cash flows from finance leases |
$ | $ | ||||||
| Financing cash flows from finance leases |
$ | $ | ||||||
| Supplemental noncash information on right-of-use |
$ | $ |
— |
|||||
The maturities of the Company’s operating and finance lease liabilities as of September 30, 2021 were as follows:
| (in Thousands) | Operating Leases |
Finance Leases |
||||||
| 2021 (Remaining three months) |
$ | $ | ||||||
| 2022 |
||||||||
| 2023 |
||||||||
| 2024 |
— | |||||||
| 2025 and thereafter |
— | |||||||
| |
|
|
|
|||||
| Total future lease payments |
||||||||
| Less: Interest |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Present value of lease obligations |
$ |
$ |
||||||
| |
|
|
|
|||||
21
NOTE 8. DEBT
Long-term debt consisted of the following as of September 30, 2021, and December 31, 2020:
September 30, |
December 31, |
|||||||||||||||
Maturity Date |
Interest Rate |
2021 |
2020 |
|||||||||||||
| PMC Revolver, net |
January 2023 | Prime rate plus |
$ | $ | ||||||||||||
| PMC Capex line |
January 2023 | Prime rate plus |
||||||||||||||
| PPZ Loan arrangement |
Dec 2021 | |||||||||||||||
| PPP Loan |
May 2022 | — | ||||||||||||||
| Fidelity |
May 2022 | — | ||||||||||||||
| |
|
|
|
|||||||||||||
| Less: Current maturities of long-term debt |
||||||||||||||||
| |
|
|
|
|||||||||||||
| Long-term debt |
$ | $ | ||||||||||||||
| |
|
|
|
|||||||||||||
PMC Credit Facility
On 30, 2016, the Company entered into a loan and security agreement (the “PMC Credit Facility”) with PMC Financial Services Group, LLC (“PMC”). As of December 31, 2020, the PMC Credit Facility, as amended, provided the Company with a $36.5 million (the “PMC Revolver”), and permitted the Company to make repayments without penalty. Effective as of March 29, 2021, the Company entered into an amendment to the PMC Credit Facility to extend the maturity date of the PMC Revolver from September 30, 2021 to January 31, 2023 . As part of this amendment the Company paid a $1.3 million “success fee” to PMC, which was paid in May 2021. Accumulated borrowings on the PMC Revolver were partially repaid in May 2021 utilizing proceeds of the 2021 Notes Agreement as further discussed below in . In addition, during third quarter of 2021 the Company further amended the agreement to reduce the revolving limit of the PMC Revolver from $36.5 million to $18.5 million. As amended, the PMC Credit Facility also provides for a $3.0 million capital expenditure line of credit, which matures on March 31, 2025 (the “PMC CapEx Line”). The PMC CapEx Line was amended to increase borrowing capacity from $2.0 million to $3.0 million effective as of September 1, 2021. The PMC Revolver and the PMC CapEx Line outstanding balances shall bear interest at an annual rate equal to the greater of the prime rate announced by Wells Fargo Bank, N.A. or 3.5 8.5
June
line of credit repayable on September 30, 2021
Fidelity Secured Financing
As of September 30, 2021 and December 31, 2020, amounts outstanding under the PMC Revolver were $18.3 million and $36.9 million, respectively. The success fee incurred in connection with this agreement were recorded as Deferred loan costs, a component of 0.7 million, which will be charged to interest expense ratably over the remainder of the borrowing term.
non-current
assets, on the Company’s balance sheet. The unamortized balance of these fees as of September 30, 2021 was $The amortization expense of these Deferred loan costs was $0.1 million and $0.2 million for the three months ended September 30, 2021 and 2020, respectively, and $1.4 million and $0.6 million for the nine months ended September 30, 2021 and 2020, respectively. Included in this expense for the nine months ended September 30, 2021 was $0.4 million of unamortized costs written off as the result of reduction of the borrowing limit under the agreement as noted above.
As aforementioned, the PMC Credit Facility, as amended, also provides for $3.0 million in borrowing capacity under the PMC CapEx Line. As of September 30, 2021 and December 31, 2020, the outstanding balances on the PMC CapEx Line were $3.0 million and $1.5 million, respectively. The Company is required to make monthly payments of $38,000 , which include both principal and interest, on the PMC CapEx Line through its maturity date of March 31, 2025
Subsequent Events
).
22
PPZ Loan
The Company has entered into a series of loan arrangements with PPZ, LLC, a member of the Company (collectively the “PPZ Loan”). The PPZ Loan was initially entered into on February 21, 2017, pursuant to which the Company issued to PPZ, LLC a promissory note in the principal amount of $40 thousand. Subsequently, the Company borrowed additional fund under the PPZ Loan on June 1, 2017 and October 25, 2018 by $0.4 million and $0.5 million, respectively. The $40 thousand borrowing under the loan bears interest at a rate of 8.0 % per annum, and the $0.4 million and $0.5 million borrowings under the loan each bear interest at a rate of 9.0 % per annum. The PPZ Loan is collateralized by the Company’s assets, including its deposit accounts, inventory, accounts receivable, property, plant, and equipment. The Company was in compliance with the covenants as of September 30, 2021. At September 30, 2021, and December 31, 2020, the outstanding principal balance, including accrued interest, on the PPZ Loan was $1.2
PPP Loan
On May 9, 2020, the Company received loan proceeds in the amount of $0.3 million under the Paycheck Protection Program (“PPP”) from Carter Federal Credit Union (the “PPP Loan”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act, provides for loans to qualifying businesses for amounts of up to 2.5 times the average monthly payroll expenses of the qualifying business. Under the terms of the PPP Loan, the entire amount of principal and accrued interest may be forgiven to the extent the borrower uses the proceeds for qualifying expenses as determined by the U.S. Small Business Administration (“SBA”) under the PPP, including payroll, benefits, rent and utilities, and maintains its payroll levels. At December 31, 2020, the outstanding balance on the PPP Loan was $0.3 million. In March 2021 the Company applied for forgiveness of the full $0.3 million principal amount and related interest. In August 2021, the Company was notified that forgiveness of the PPP Loan had been approved and was reflected as a reduction in the September 30, 2021 debt balances. The $0.3 million of loan forgiveness has been recognized as a gain and recorded as a component of other income in the Company’s statement of operations in accordance with FASB Subtopic
470-50
(ASC 470-50)
Debt – Modifications and Extinguishments. Fidelity Secured Financing
On May 7, 2021, the Company entered into a note purchase agreement (the “2021 Notes Agreement”) with various Fidelity investment funds (collectively, the “Fidelity Investors”), pursuant to which the Fidelity Investors purchased the convertible promissory notes of the Company with an aggregate principal amount of $35.0 million (the “2021 Notes”), of which $34.1 million was used to partially repay amounts owed pursuant to the PMC Credit Facility. The 2021 Notes bear an interest rate of 1.0 % per annum compounded annually on the unpaid principal balance. The principal and any accrued and unpaid interest are due on the first anniversary of the closing date of the 2021 Notes.
According to the terms of the 2021 Notes, upon the occurrence of a Qualified Financing, the notes will convert into fully paid and 50.0 million (excluding all proceeds from the 2021 Notes and from any incurrence, conversion, or cancelation of other indebtedness or other securities converting into Units in the financing). The discount investors would receive in connection with a Qualified Financing is 20.0 %.
non-assessable
Series A preferred units of the Company. A “Qualified Financing” is defined in the 2021 Notes Agreement as a transaction or series of related transactions, conducted with the principal purpose of raising capital, pursuant to which the Company issues and sells its Series A preferred units (as may be adjusted for any security split, security dividend, combination, or other recapitalization or reclassification effected after May 7, 2021), with aggregate gross proceeds to the Company of at least $Further, pursuant to the terms of the 2021 Notes, the notes will convert into common units of the Company upon the occurrence of a Qualified Public Transaction. A “Qualified Public Transaction” includes the closing of the issuance and sale of equity securities the Company in the Company’s first firmly underwritten public offering with gross proceeds to the Company of not less than $75.0 million pursuant to an effective registration statement under the Securities Act. See Note 14,
Subsequent Events.
The Company has elected the fair value option under ASC 825, for measurement of the 2021 Notes. As of September 30, 2021, the outstanding balance on the Fidelity Secured Financing was $41.1 million. The Fidelity Secured Financing balance has been included in current liabilities as of September 30, 2021, as all borrowings are due by March 7, 2022.
Financial Instruments
Financial Instruments
23
The Company measures the fair value of the 2021 Notes using unobservable inputs, which are inputs in which there is little or no market data, and as such classifies the 2021 Notes as a Level 3 measurement under the fair value hierarchy. The Company uses the convertible debt scenarios approach to measure the fair value of the 2021 Notes, the various key assumptions of which include the discount rate, call option value, and weighted probability.
The recurring Level 3 fair value measurements of the 2021 Notes include the following significant inputs as of September 30, 2021:
RANGE |
WEIGHTED AVERAGE BY RELATIVE FAIR VALUE |
|||||||
Input |
||||||||
Annual volatility |
% | % | ||||||
Dividend yield |
% | % | ||||||
Annual risk free rate |
% | % | ||||||
Time to maturity (in years) |
||||||||
Discount rate |
% | % | ||||||
Probability weight |
% | % | ||||||
The following table details the changes in fair value during the period ending September 30, 2021:
(In Thousands) |
||||
Opening Balance, May 31, 2021 |
$ | |||
Change in fair value |
||||
Balance at June 30, 2021 |
||||
Change in fair value |
||||
Balance at September 30, 2021 |
$ | |||
The increase in fair value of the 2021 Notes was mainly attributable to the decrease in the maturity of the Notes. None of the increase was due to changes in the Company’s credit ratings, and as such there have been no amounts recorded as a component of other comprehensive income(loss) for the periods presented.
The weighted average interest rates for the Company’s debt, by loan type, for the nine months ended September 30, 2021, is as follows:
PMC revolver |
||||
PMC capex line |
||||
PPZ loan arrangement |
||||
PPP Loan |
||||
Fidelity convertible notes |
Debt Maturities
Contractual future payments for all borrowings as of September 30, 2021 are as follows:
For the year ending December 31, |
||||
(in thousands) |
||||
2021 ( remaining three months) |
$ | |||
2022 |
||||
2023 and thereafter |
||||
Total payments outstanding |
$ |
|||
24
NOTE 9. EQUITY
Equity interests in the Company consist of common units, Series A preferred units, and Series Seed preferred units. All units have equal voting rights.
Common Units
Common units outstanding as of September 30, 2021 and December 31, 2020 were 62,957
Series A Preferred Units
In March 2019, the Company issued 11,798 units of Series A preferred units at a price of $626.12 per unit. Such units are not convertible and are redeemable only upon contingent events. The Series A preferred units are participating securities in periods of income, as the Series A preferred unit holders participate in undistributed earnings on a pro rata basis in accordance with the percentage of total membership units held. The Series A preferred unit holders do not share in losses.
The Series A preferred units provide for a cumulative annual return at a rate of 7.0 %, and they receive liquidation preference over holders of common units and Series Seed preferred units after the Series Seed preferred unit holder receives payout of its capital contribution. As of September 30, 2021 and December 31, 2020, undeclared cumulative unpaid preferred returns were approximately $1.4 million and $1.0 million, respectively. Cumulative unpaid preferred returns increase in the liquidation preference attributable to Series A preferred units.
Series Seed Preferred Units
The Series Seed preferred units are participating securities in periods of income, as the Series Seed preferred unit holders participate in undistributed earnings on a pro rata basis in accordance with the percentage of total membership units held. The Series Seed preferred unit holders do not share in losses. In the event of a deemed liquidation event, given their preference, the Series Seed preferred unit holder receives a distribution of its capital contribution before other members.
NOTE 10. LOSS PER UNIT
The following table sets forth the computation of loss per unit:
THREE MONTHS ENDED |
NINE MONTHS ENDED |
|||||||||||||||
SEPTEMBER 30, |
SEPTEMBER 30, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Numerator: |
||||||||||||||||
| Net Loss |
$ | ( |
) | $ | ||||||||||||