10-Q
Table of Contents
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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, 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 CampusSuite 155
Cherry HillNJ 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
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 90d days.    Yes  ☒    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 such files.)    Yes  ☒    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
 
  
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 November 11, 2022, there were 6,199,885 shares of the registrant’s Class A common stock, par value $0.0001 per share, and 19,552,681 shares of the registrant’s Class B common stock, par value $0.0001 per share, outstanding.
 
 
 


Table of Contents

THE REAL GOOD FOOD COMPANY, INC.

TABLE OF CONTENTS

 

         Page  

PART I—FINANCIAL INFORMATION

  

Item 1.

  Financial Statements (unaudited)   
  Consolidated Balance Sheets      1  
  Consolidated Statements of Operations      2  
  Consolidated Statements of Changes in Stockholders’ Equity/Members’ Deficit      3  
  Consolidated Statements of Cash Flows      4  
  Notes to Consolidated Financial Statements      5  

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      22  

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      29  

Item 4.

  Controls and Procedures      30  

PART II—OTHER INFORMATION

     30  

Item 1.

  Legal Proceedings      30  

Item 1A.

  Risk Factors      30  

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      30  

Item 3.

  Defaults Upon Senior Securities      30  

Item 4.

  Mine Safety Disclosures      30  

Item 5.

  Other Information      30  

Item 6.

  Exhibits      31  

SIGNATURES

     32  

 


Table of Contents
THE REAL GOOD FOOD COMPANY, INC.
Unaudited Consolidated Balance Sheets
(In thousands, except share data)
 
 
  
As of
 
 
  
September 30,
 
 
December 31,
 
 
  
2022
 
 
2021
 
ASSETS
  
     
 
     
Current assets:
  
     
 
     
Cash
   $ 3,040     $ 27,435  
Accounts receivable, net
     17,510       8,968  
Inventories
     35,118       16,622  
Other current assets
     5,307       9,927  
    
 
 
   
 
 
 
Total current assets
     60,975       62,952  
Property and equipment, net
     35,213       10,289  
Operating lease
right-of-use
assets
     11,232       12,127  
Deferred loan cost
     1,053       818  
Goodwill
     12,486       12,486  
Restricted Cash
     2,313       2,310  
Other noncurrent assets
     187       1,162  
    
 
 
   
 
 
 
Total assets
   $ 123,459     $ 102,144  
    
 
 
   
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current liabilities:
                
Accounts payable
   $ 19,239     $ 15,205  
Operating lease liabilities
     1,407       1,040  
Finance lease liabilities
     2,127       198  
Business acquisition liabilities, current portion
     920       8,111  
Accrued and other current liabilities
     1,476       6,763  
Current portion of long-term debt
     359       328  
    
 
 
   
 
 
 
Total current liabilities
     25,528       31,645  
Revolving line of credit/capex line
     47,515       17,501  
Lease line of credit
     10,213       7,258  
Long-term operating lease liabilities
     10,408       11,249  
Long-term finance lease liabilities
     14,598       154  
Term Loan
     10,000           
Long-term Business acquisition liabilities
     2,654       3,352  
Other long term liabilities
     138           
    
 
 
   
 
 
 
Total Liabilities
     121,054       71,159  
Commitments and contingencies (Note 12)
                
Stockholders’ Equity:
                
Class A common stock, $
0.0001 par value—100,000,000 shares authorized; 6,199,885 and 6,169,885 shares issued and outstanding as of
 September 30, 2022 and December 31, 2021, respectively
     1       1  
Class B common stock, $
0.0001 par value—25,000,000 shares authorized; 19,552,681 and 19,577,681 shares issued and outstanding as of
 September 30, 2022 and December 31, 2021, respectively
     2       2  
Additional paid-in capital
     54,911       49,693  
Accumulated deficit
     (18,246     (10,143
    
 
 
   
 
 
 
Total stockholders’ equity attributable to The Real Good Food Company, Inc.
     36,668       39,553  
Non-controlling interest
     (34,263     (8,568
    
 
 
   
 
 
 
Total stockholders’ equity
     2,405       30,985  
    
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $  123,459     $  102,144  
    
 
 
   
 
 
 
See accompanying notes to the Consolidated Financial Statements
 
1

Table of Contents
THE REAL GOOD FOOD COMPANY, INC.
Unaudited Consolidated Statements of Operations
(In thousands, except share/unit and per share/unit data)
 
 
  
THREE MONTHS ENDED
 
 
NINE MONTHS ENDED
 
 
  
SEPTEMBER 30,
 
 
SEPTEMBER 30,
 
 
  
2022
 
 
2021
 
 
2022
 
 
2021
 
Net sales
  
$ 37,550
 
 
$
23,014
 
 
$
105,935
 
 
$
58,477
 
Cost of sales
  
  35,782
 
 
 
20,659
 
 
 
97,569
 
 
 
49,447
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
  
  1,768
 
 
 
2,355
 
 
 
8,366
 
 
 
9,030
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
  
     
 
     
 
     
 
     
Selling and distribution
  
  4,615
 
 
 
4,323
 
 
 
14,851
 
 
 
10,291
 
Marketing
  
  1,659
 
 
 
1,732
 
 
 
4,617
 
 
 
3,119
 
Administrative
  
  6,142
 
 
 
1,875
 
 
 
18,009
 
 
 
7,677
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total operating expenses
  
  12,416
 
 
 
7,930
 
 
 
37,477
 
 
 
21,087
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from operations
  
  (10,648
 
 
(5,575
 
 
(29,111
 
 
(12,057
Interest expense
  
  2,469
 
 
 
839
 
 
 
4,650
 
 
 
4,322
 
Other expense
  
    
 
 
 
(309
 
 
  
 
 
 
(309
Change in fair value of convertible debt
  
    
 
 
 
5,730
 
 
 
  
 
 
 
6,100
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss before income taxes
  
  (13,117
 
 
(11,835
 
 
(33,761
 
 
(22,170
Income tax expense
  
    
 
 
 
  
 
 
 
  
 
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Loss
  
$
(13,117
 
$
(11,835
 
$
(33,761
 
$
(22,170
Less: net loss attributable to
non-controlling
interest
  
  (9,969
 
 
  
 
 
 
(25,659
 
 
 
 
 
Preferred return on Series A preferred units
  
    
 
 
 
146
 
 
 
  
 
 
 
438
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss attributable to The Real Good Food Company, Inc.
  
$ (3,148
 
$
(11,981
 
$
(8,102
 
$
(22,608
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss per common share/unit (basic and diluted)
  
  ($0.51
 
 
($1.36
 
 
($1.31
 
 
($2.57
Weighted-average common shares units outstanding (basic and diluted)
  
  6,180,592
 
 
 
8,800,132
 
 
 
6,173,454
 
 
 
8,800,132
 
See accompanying notes to the Consolidated Financial Statements
 
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THE REAL GOOD FOOD COMPANY, INC.
Unaudited Consolidated Statements of Stockholders’ Equity/Members’ Deficit
(In thousands except for share data)

                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
 
 
Members’
Equity
 
 
Members’

Accumulated
Deficit
 
 
Class A Common Stock
 
 
Class B Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Additional Paid-

in Capital
 
 
Accumulated
Deficit
 
 
Non-Controlling

Interest
 
 
Total
Equity
 
Balance, December 31,
2021
  
$
—  
 
  
$
—  
 
 
 
6,169,885
 
  
$
1
 
  
 
19,577,681
 
 
$
2
 
  
$
49,693
 
  
$
(10,143
 
$
(8,568
 
$
30,985
 
Net loss
  
 
—  
 
  
 
—  
 
 
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
—  
 
  
 
—  
 
  
 
(2,294
 
 
(7,240
 
 
(9,534
Equity-based compensation
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
1,699
 
 
 
—  
 
 
 
—  
 
 
 
1,699
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance, March 31, 2022
  
$
—  
 
  
$
—  
 
 
 
6,169,885
 
  
$
1
 
  
 
19,577,681
 
 
$
2
 
  
$
 
51,392
 
  
$
(12,437
 
$
(15,808
 
$
23,150
 
Net loss
  
 
—  
 
  
 
—  
 
 
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
—  
 
  
 
—  
 
  
 
(2,661
 
 
(8,449

 )
 
 
(11,110
Equity-based compensation
  
 
—  
 
  
 
—  
 
 
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
—  
 
  
 
1,733
 
  
 
—  
 
 
 
—  
 
 
 
1,733
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance, June 30, 2022
  
$
—  
 
  
$
—  
 
 
 
6,169,885
 
  
$
1
 
  
 
19,577,681
 
 
$
2
 
  
$
 
53,125
 
  
$
(15,098
 
$
(24,257
 
$
13,773
 
Net loss
  
 
—  
 
  
 
—  
 
 
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
—  
 
  
 
—  
 
  
 
(3,148
 
 
(10,006
)
 
 
(13,154
Shares issued
  
 
—  
 
  
 
—  
 
 
 
25,000
 
  
 
—  
 
  
 
(25,000
 
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
—  
 
 
 
—  
 
Equity-based compensation
  
 
—  
 
  
 
—  
 
 
 
5,000
 
  
 
—  
 
  
 
—  
 
 
 
—  
 
  
 
1,786
 
  
 
—  
 
 
 
—  
 
 
 
1,786
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance, September 30, 2022
  
$
—  
 
  
$
—  
 
 
 
6,199,885
 
  
$
1
 
  
 
19,552,681
 
 
$
2
 
  
$
 

54,911
 
  
$
(18,246
 
$
(34,263
 
$
2,405
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 

 
 
Members’
Equity
 
 
Members’

Accumulated
Deficit
 
 
Class A Common Stock
 
 
Class B Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Additional Paid-

in Capital
 
 
Accumulated
Deficit
 
 
Non-Controlling

Interest
 
 
Total
Equity
 
Balance, December 31, 2020
  
$
9,065
 
  
$
(39,232
 
 
—  
 
  
$
—  
 
  
 
—  
 
 
$
—  
 
  
$
—  
 
  
$
—  
 
 
$
—  
 
 
$
(30,167
Net loss
  
 
—  
 
  
 
(4,401
 
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
—  
 
 
 
(4,401
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance, March 31, 2021
  
$
9,065
 
  
$
(43,633
 
 
—  
 
  
$
—  
 
  
 
—  
 
 
$
—  
 
  
$
—  
 
  
$
—  
 
 
$
—  
 
 
$
(34,568
Net loss
  
 
—  
 
  
 
(5,934
 
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
—  
 
 
 
(5,934
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance, June 30, 2021
  
$
9,065
 
  
$
(49,567
 
 
—  
 
  
$
—  
 
  
 
—  
 
 
$
—  
 
  
$
—  
 
  
$
—  
 
 
$
—  
 
 
$
(40,502
Net loss
  
 
—  
 
  
 
(11,835
 
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
—  
 
  
 
—  
 
  
 
—  
 
 
 
—  
 
 
 
(11,835
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance, September 30, 2021
  
$
9,065
 
  
$
(61,402
 
 
—  
 
  
$
—  
 
  
 
—  
 
 
$
—  
 
  
$
—  
 
  
$
—  
 
 
$
—  
 
 
$
(52,337
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
See accompanying notes to the Consolidated Financial Statements
 
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THE REAL GOOD FOOD COMPANY, INC.
Unaudited Consolidated Statements of Cash Flows
(In thousands)
 
 
  
Nine Months Ended
 
 
  
September 30,
 
 
  
2022
 
 
2021
 
Cash flows from operating activities:
  
 
Net loss
   $ (33,761   $ (22,170
Adjustments to reconcile net loss to net cash used in operating activities:
                
Depreciation and amortization
     1,775       791  
Amortization of loan costs
     165       1,402  
Non-Cash
interest and debt fees
     2,165       2,542  
Remeasurement of contingent consideration in business combination
              130  
Change in fair value of convertible debt
              6,100  
Equity Compensation expense
     5,217           
Changes in operating assets and liabilities:
                
Accounts receivable
     (8,542     (2,232
Inventories
     (18,496     (1,022
Other assets
     1,113       (698
Accounts payable, accrued expenses and lease liabilities
     852       7,674  
    
 
 
   
 
 
 
Net cash used in operating activities
     (49,512     (7,483
    
 
 
   
 
 
 
Cash flows from investing activities:
                
Acquisition of business, net of cash acquired
              (2,114
Purchase of property and equipment
     (3,737     (2,515
    
 
 
   
 
 
 
Net cash used in investing activities
     (3,737     (4,629
    
 
 
   
 
 
 
Cash flows from financing activities:
                
Proceeds from convertible notes
     —         35,000  
Proceeds from line of credit borrowings
     42,237       14,534  
Payments on line of credit borrowings
     (4,768     (34,945
Payments on deferred offering costs
     —         (761
Payments on acquisition related Contingent consideration
     (7,425         
Payments on acquisition related term loan
     (616         
Payments on finance lease liabilities
     (571     (94
    
 
 
   
 
 
 
Net cash provided by financing activities
     28,857       13,734  
    
 
 
   
 
 
 
Net (decrease) increase in cash and restricted cash
   $ (24,392   $ 1,622  
Beginning cash and restricted cash
     29,745       28  
    
 
 
   
 
 
 
Ending cash and restricted cash
   $ 5,353     $ 1,650  
    
 
 
   
 
 
 
Supplemental disclosures of cash flow information:
                
Cash paid for interest
   $ 2,200     $ 555  
Supplemental disclosures of noncash investing and financing activities:
                
Net liabilities assumed from business combination
   $        $ 14,729  
Lease liabilities arising from obtaining
right-of-use
assets
   $ 16,470     $ 4,250  
Purchase of property and equipment in lease line of credit
   $ 10,213     $     
Purchase of property and equipment in AP and accrued liabilities
   $ 323     $     
Deferred offering costs in AP and accrued liabilities
   $        $ 414  
See accompanying notes to the Consolidated Financial Statements
 
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THE REAL GOOD FOOD COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization
The Real Good Food Company, Inc. was formed as a Delaware corporation on June 2, 2021 under the name “Project Clean, Inc.” for the purpose of completing an initial public offering (the “IPO”) and related organizational transactions in order to carry on the business of Real Good Foods, LLC (“RGF”), a Delaware limited liability company and the sole subsidiary of The Real Good Food Company, Inc. (RGF, together with The Real Good Food Company, Inc., the “Company”).
On November 9, 2021, the Company completed an IPO of
 5,333,333 shares of The Real Good Food Company, Inc.’s Class A common stock at an offering price at $12.00 per share. The Company received approximately $59.5 million of proceeds, net of underwriting discounts and commissions and before offering expenses of $3.9 million. In connection with the IPO, the Company completed a reorganization (the Reorganization”) among The Real Good Food Company, Inc., RGF, and the members of RGF immediately prior to the IPO (the “Members”). As part of the Reorganization, the Members became holders of Class B units of RGF and were issued shares of Class B common stock of The Real Good Food Company, Inc., which convey voting rights in The Real Good Food Company, Inc. on
one-to-one basis
with the number of Class B units they held in RGF. As a result of the Reorganization and IPO, the Members collectively controlled approximately 76% of the direct and indirect voting interest in the Company following the
IPO, which remained unchanged as of September 30, 2022. 
Prior to the consummation of the IPO and Reorganization, RGF was owned entirely by the Members and operated its business through itself and no other entities. The following transactions occurred in connection with the Reorganization and IPO:
 
   
Project Clean, Inc. changed its name to The Real Good Food Company, Inc. on October 7, 2021;
 
   
The Real Good Food Company, Inc. adopted an amended and restated certificate of incorporation to, among other things, provide for Class A common stock and Class B common stock;
 
   
The Real Good Food Company, Inc. used all of the net proceeds it received from the IPO to acquire Class A units of RGF at a purchase price per Class A unit equal to the IPO price per share of Class A common stock, less underwriting discounts and commissions, collectively representing 24% of the economic interests and all of the voting interests in the Reorganization of RGF’s outstanding units, including both Class A units and Class B units, following the IPO. RGF in turn used all of the net proceeds it received from The Real Good Food Company, Inc. for its continuing operations; and
 
   
The Real Good Food Company, Inc. became a holding company and the sole managing member of RGF, which has continued to operate the Company’s business.
Description of Business
The Company is a frozen food company that develops, markets, and manufactures foods that are designed to be high in protein, low in sugar, and 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 sales
through its website, as well as sales through its retail customers’ online platforms.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING STANDARDS
Basis of Presentation
The unaudited consolidated financial information for the three and nine months ended September 30, 2022 and 2021, is presented on the same basis as the financial statements included in the Company’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2021 (the “Annual Report”), filed with the Securities and Exchange Commission on March 30, 2022. In the opinion of management, these financial statements include all adjustments necessary for a fair statement of the financial position, results of operations and cash flows of the Company for the interim periods, and the adjustments are of a normal and recurring nature. The financial results for any interim period are not necessarily indicative of the results for the full year. The consolidated balance sheet information as of December 31, 2021, was derived from the audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report.
 
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The consolidated financial statements have been prepared in accordance with 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 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 The Real Good Food Company, Inc. (the accounting acquiree) for the three and nine months ended September 30, 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 The Real Good Food Company, 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 The Real Good Food Company, Inc. The legal capital as of September 30, 2022 reflects the legal capital of The Real Good Food Company, Inc. after the acquisition date and therefore requires no adjustment.
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.
Segment Reporting and Geographical Information
For the three and nine months ended September 30, 2022 and 2021, the Company was managed as a single operating segment. The Chief Executive Officer, who is the Company’s 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. 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. Cash and cash equivalents held at financial institutions may at times exceed insured amounts. The Company believes it mitigates such risk by investing in or through, as well as maintaining cash balances, with major financial institutions. There were no cash equivalents as of September 30, 2022, and December 31, 2021.
Restricted Cash
The Company considers cash which is not freely available for immediate use, and that is held for a specific purpose, to be restricted cash. If the terms dictating the restriction require the restricted cash to be considered as such beyond twelve months, the Company classifies that restricted cash as a noncurrent asset due to its inability to provide liquidity within one year.
As of September 30, 2022, the Company had approximately $
2.3 million of restricted cash, all of which was classified as noncurrent. The entirety of the $2.3 million of restricted cash relates to a letter of credit opened in connection with the Company’s new manufacturing facility in Bolingbrook, IL. Amounts will be released for the Company’s use proportionately over a three-year period beginning in January 2023.
The below table reconciles cash and restricted cash to amounts shown in the Consolidated Statements of Cash Flows:
 
(In thousands)    September 30, 2022  
Cash
   $ 3,040  
Restricted cash
     2,313  
    
 
 
 
Total cash reported in statements of cash flows
   $ 5,353  
    
 
 
 
 
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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 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 amounts recorded for reserves for credit losses for the three months ended September 30, 2022 and 2021 were de minimis.
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 includes 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 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. The Company did not have a write-down of inventory during the three and nine months ended September 30, 2022. Amounts related to the write-down of inventory during the three and nine months ended September 30, 2021 were $0 and $0.9 million, respectively.
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
   3 years
Office equipment
   5 years
Machinery and equipment
   5 – 10 years
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 right-of-use (“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. Certain of the Company’s lease terms include options to extend the lease up to five years. The probability of renewal with regards to these leases was deemed to be remote and as such these renewal options are not reflected in the Company’s ROU assets and lease liabilities. The Company will reflect renewal options in its calculation of ROU assets and liabilities, with regards to future lease agreements, when it is reasonably certain that the Company will exercise that option.
 
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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.
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. Variable payments are determined based on a percentage allocation determined by the landlord and are immaterial for the three and nine months ended September 30, 2022 and 2021.
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.
Product Placement Agreement
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 of RGF (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 was 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. A total of 5,240 common units of RGF were authorized and issued in connection with the Divario PPA. In connection with the Company’s IPO all 5,240 units issued to Divario were converted into 999,082 of the Company’s Class B common stock.
As the shares/units issued to Divario represented consideration due to a customer under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), the grant date fair value of the awards, measured in accordance with ASC Topic 718, Stock Compensation, was recognized in earnings as reduction of net sales over the relevant term and based upon the relative volume of gross sales to Albertsons Companies during that term.
In connection with the PPA, the reduction of net sales the Company recognized during the three and nine months ended September 30, 2021, was de minimus.
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 90 days. Accordingly, there are no significant financing components to consider when determining the transaction price.
 
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Variable consideration is included in revenue for trade
promotions, 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 end. See Note 3, Revenue Recognition, for additional information.
Any taxes collected on behalf of government authorities, such as sales tax, are excluded from net sales, and recorded as a liability due to 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 as of September 30, 2022.
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, 2022 and December 31, 2021, there were no contract assets recognized.
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 $1.1 million and $1.2 million during the three months ended September 30, 2022 and 2021, respectively, and $3.2 million and $2.2 million during the nine months ended September 30, 2022 and 2021, 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 $2.6 million and $2.2 million during the three months ended September 30, 2022 and 2021, respectively, and $7.9 million and $5.4 million during the nine months ended September 30, 2022 and 2021, respectively.
Marketing Expenses
Marketing costs are expensed as incurred. The Company incurred $1.7 million and $1.7 million during the three months ended September 30, 2022 and 2021, respectively, and $4.6 million and $3.1 million during the nine months ended September 30, 2022 and 2021, respectively. Marketing costs are recorded in Operating expenses in the Company’s consolidated statements 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 months ended September 30, 2022 and 2021, the Company incurred $1.3 million and $0.1 million of research and development expenses, respectively. During the nine months ended September 30, 2022 and 2021, the Company incurred $3.0 million and $1.6 million of research and development expenses, respectively.
Business Combination
The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations, 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.
 
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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.
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 goodwill impairment charges recorded during the periods presented.
Income Taxes
For periods prior to the Company’ IPO, the Company was solely a pass-through entity for federal income tax purposes, being a partnership, and as such income taxes related to the Company’s operations were the responsibility of those who held partnership interests in the Company. Accordingly, the Company did not have any expense related to federal income taxes during the three and nine months ended September 30, 2021. Additionally, there were no deferred income taxes related to state and local level income taxes for that same period. For periods subsequent to the IPO, as described above in Note 1, Organization and Description of Business, the Company’s structure became one commonly referred to as
an “Up-C” structure,
which is often used by partnerships and limited liability companies when they undertake an initial public offering of their business.
The Up-C structure
allows the members of the operating company, in this instance the Members of RGF, to continue to realize tax benefits in a similar fashion as was realized prior to the IPO, proportionate to their Membership interest, and the Company will be subject to both Federal and State taxes on the portion of earnings applicable to its controlling interest in RGF of 24%.
Given the foregoing, the Company is subject to income tax on operating results related to the period November 4, 2021, through September 30, 2022, limited to its controlling interest in RGF of 24%. During this time the Company accounted for income taxes pursuant to the asset and liability method which requires the recognition of deferred income tax assets and liabilities related to the expected future tax consequences arising from temporary differences between the carrying amounts and tax bases of assets and liabilities based on enacted statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Any effects of changes in income tax rates or laws are included in income tax expense in the period of enactment.
The Company records valuation allowances against deferred tax assets when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company routinely evaluates the realizability of deferred tax assets by assessing the likelihood that deferred tax assets will be recovered based on all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, estimates of future taxable income, tax planning strategies and results of operations. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, historical results are considered along with certain assumptions related to future earnings. As of September 30, 2022, the Company applied a full valuation allowance against all recognized deferred tax assets, resulting in a zero balance on the Consolidated Balance Sheets. If it is later
 
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determined that in the future that it is more likely than not that certain deferred tax assets may be fully utilized, the valuation allowance applicable to that particular deferred tax asset would be reversed and recognized through earnings in the period the determination was made. Any reversal of a valuation allowance would result in the reduction of the Company’s provision for income taxes in the period of reversal.
During the three and nine months ended September 30, 2022 and 2021, amounts provided for state income taxes were de minimis.
Loss per Share/Unit
Loss per share/unit is computed by dividing the Company’s net loss, after deducting any dividends on preferred units or accumulated returns on cumulative preferred units, by the weighted-average number of common shares or units outstanding during the period, adjusted for the dilutive effect of any outstanding dilutive securities. For periods prior to the Company’s IPO on November 9, 2021, the Company utilized the
two-class method
in computing loss per unit as Series Seed preferred units were participating. Preferred unit holders participated in income but were not obligated to participate in losses, thus the
two-class
method did not impact the loss per unit calculation for the period ended September 30, 2021, due to the net losses incurred in the period. Subsequent to the IPO, equity interests in the Company consisted of Class A common stock and Class B common stock. As shares of Class B common stock do not share in the earnings or losses of the Company they are not considered participating securities. As such, a separate presentation of basic and diluted net loss per share for each of Class B common stock under the
two-class method
has not been presented. See Note 10, Loss Per Share/Unit.
NEW ACCOUNTING STANDARDS
During September 2022 the FASB issued ASU
No. 2022-04,
Liabilities—Supplier Financed Programs (Subtopic
405-50).
The amendments in this Update require entities which are party to supplier finance programs to disclose qualitative and quantitative information about its programs, that delineate the key terms and obligations under of the programs. The amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the provisions that address rollforward information, which are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The amendments in ASU are to be applied retrospectively to each period in which a balance sheet is presented, except for rollforward information, which should be applied prospectively. The Company does not expect to early adopt the provisions of this new ASU, nor does it expect the adoption of this guidance to have a significant impact to its financial statement disclosures.
During March 2022 the FASB issued ASU
No. 2022-02, Financial
Instruments—Credit Losses (Topic 326). This ASU is updates certain guidance as set forth is ASU
No. 2016-03, to
provide additional guidance on the treatment of credit losses, with regards to troubled debt restructuring and gross write-offs related to financing receivables and net investments in leases. The amendments in this update eliminate the previous troubled debt restructuring guidance and instead, require that an entity evaluate whether the modification represents a new loan or a continuation of an existing loan, with the intent to enhance existing disclosure requirements as well as introduce new requirements related to certain modifications for borrowers experiencing financial difficulty. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The provisions of this ASU and must be applied prospectively, and early adoption is permitted. The Company does not expect the adoption of this guidance to have an impact on its financial statements.
During October 2021 the FASB issued
ASU No. 2021-08, Business
Combinations (Topic 805), which provides guidance for the accounting of revenue contracts acquired in a business combination. The provisions of this ASU are intended to improve comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. Further, the provisions provide additional recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The amendments in this Update should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted, including adoption in an interim period. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements, nor does it intend to early adopt the provisions of this guidance.
 
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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
 
(in 000s)
  
2022
 
  
2021
 
  
2022
 
  
2021
 
Entrees
   $ 33,967      $ 19,703      $ 93,937      $ 47,113  
Breakfast
     2,565        2,089        8,412        5,290  
Pizza and snacks
     1,018        1,222        3,586        6,074  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total net sales
   $ 37,550      $ 23,014      $ 105,935      $ 58,477  
    
 
 
    
 
 
    
 
 
    
 
 
 
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.
Payment terms and conditions are generally consistent amongst customers, including credit terms to customers ranging from seven days to 90 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, 2022.
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, 2022 and December 31, 2021, 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,
experienced financial hardship as a result of the impacts of the
COVID-19 pandemic,
which resulted in SSRE defaulting on their facility lease, as well as a defaulting on their 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 $12.5 million.
 
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Of this amount, $
10.0 million was considered contingent consideration, and the remaining $2.5
 million being deferred payments to be paid in instalments through June 2022. At December 31, 2021, the balance of this contingent consideration was $
7.0
 million, of which the entire balance was paid by June 30, 2022. At September 30, 2022, no deferred payments were remaining. 
These agreements (collectively the “Transaction”) represent the acquisition of the
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 $4.5 million with payments due over 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 $0.1 million for the three months ended September 30, 2022 and 2021, respectively, and $0.4 million and $0.3 million for the nine months ended September 30, 2022 and 2021 and is included as a component of total interest expense.
The balance of this term loan at September 30, 2022 was $3.6 million, and is included as a component of short term business acquisition liabilities.
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.
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.
The following table details the purchase price allocation of the total consideration of $16.8 million:
 
(In thousands)
  
AS OF
MARCH 10,
2021
 
Inventories
   $ 500  
Property and equipment
     3,577  
Operating leases
right-of-use
assets
     3,157  
    
 
 
 
Total identifiable assets
   $ 7,234  
    
 
 
 
Operating lease labilities – current
   $ 174  
    
 
 
 
 
(In thousands)
  
AS OF
MARCH 10,
2021
 
Operating lease labilities –
non-current
     2,777  
    
 
 
 
Total liabilities assumed
   $ 2,951  
    
 
 
 
Net identifiable assets acquired
   $ 4,283  
    
 
 
 
Goodwill
     12,486  
    
 
 
 
Total purchase price allocation
  
$
16,769
 
    
 
 
 
The goodwill recorded in this transaction is deductible for income tax purposes. The results of operations of the
acquired co-manufacturing business
from March 11, 2021 through September 30, 2022 have been reflected within the Company’s consolidated financial statements. As of September 30, 2022 there has been no change to the $12.5 million balance of goodwill.
For the nine months ended September 30, 2021, the Company recorded acquisition-related expenses associated with the Transaction of $34 thousand, as a component of administrative expense in the consolidated statements 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 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.
 
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NOTE 5. INVENTORIES
Inventories as of September 30, 2022 and December 31, 2021, consisted of the following:
 
     As of  
(in thousands)    September 30, 2022      December 31, 2021  
Ingredients and supplies
   $ 14,767      $ 6,646  
Finished goods
     20,351        9,976  
    
 
 
    
 
 
 
Total inventories
   $ 35,118      $ 16,622  
    
 
 
    
 
 
 
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 2022 and December 31, 2021 consisted of the following:
 
    
As of
 
(In thousands)
  
September 30, 2022
    
December 31, 2021
 
Computer equipment
   $ 122      $ 106  
Vehicles
     164        69  
Machinery and equipment
     26,315        8,826  
Leasehold improvements and office equipment
     748        519  
    
 
 
    
 
 
 
Total property and equipment
   $ 27,349      $ 9,520  
Less: accumulated depreciation
     (4,365      (2,571
    
 
 
    
 
 
 
Subtotal
     22,984        6,949  
Construction in progress
     12,229        3,340  
    
 
 
    
 
 
 
Property and equipment, net
  
$
35,213
 
  
$
10,289
 
    
 
 
    
 
 
 
Depreciation and amortization expense was $1.0 million and $0.3 million for the three months ended September 30, 2022 and 2021, respectively. Depreciation and amortization expense was $1.8 million and $0.8 million for the nine months ended September 30, 2022 and 2021, 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.
 
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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, 2022 and 2021, the weighted-average discount rate of the Company’s operating and finance leases was 7% and 12%, respectively. The components of lease expense were as follows:


     Three Months Ended September 30,      Nine Months Ended September 30,  
     2022      2021      2022      2021  
     (in ‘000s)      (in ‘000s)  
Operating lease costs
   $ 603      $ 244      $ 1,627      $ 543  
Finance lease costs:
                                   
Amortization of ROU assets
     647        47        780        141  
Interest on lease liabilities
     303        3        321        11  
Short-term lease costs
               105        146        319  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total lease costs
   $ 1,553      $ 399      $ 2,874      $ 1,014  
    
 
 
    
 
 
    
 
 
    
 
 
 
Supplemental balance sheet information related to leases is as follows:
 
(in thousands)
  
 
  
As of September 30,
2022
 
  
As of
December 31,
2021
 
Assets
  
Balance Sheet Location
                 
Operating lease
right-of-use
assets
   Operating lease
right-of-use
assets
   $ 11,232      $ 12,127  
Finance lease
right-of-use
assets
   Property and equipment, net      16,779        822  
         
 
 
    
 
 
 
Total lease assets
       
$
28,011
 
  
$
12,949
 
         
 
 
    
 
 
 
Liabilities
                      
Current:
                      
Operating lease liabilities
   Operating lease liabilities    $ 1,407      $ 1,040  
Finance lease liabilities
   Financing lease liabilities      2,127        198  
Noncurrent:
                      
Operating lease liabilities
   Long term operating lease liabilities      10,408        11,249  
Finance lease liabilities
   Long term finance lease liabilities      14,598        154  
         
 
 
    
 
 
 
Total lease liabilities
       
$
28,540
 
  
$
12,641
 
         
 
 
    
 
 
 
 
 
  
Nine months ended September 30,
 
 
  
2022
 
  
2021
 
(in thousands)
  
 
 
  
 
 
Supplemental cash flow information:
                 
Cash paid for amounts included in the measurement of lease liabilities
                 
Operating cash flows from operating leases
   $ 1,162      $ 417  
Operating cash flows from finance leases
   $ 321      $ 11  
Financing cash flows from finance lease
   $ 571      $ 94  
Supplemental noncash information on lease liabilities arising from obtaining
right-of-use
assets
   $ 16,470      $ 4,250  
 
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The maturities of the Company’s operating and finance lease liabilities as of September 30, 2022 were as follows:

 
(in Thousands)
  
Operating Leases
 
  
Finance Leases
 
Remainder of 2022
   $ 581      $ 814  
2023
     2,382        3,221  
2024
     2,443        3,058  
2025
     2,470        3,058  
2026
     2,291        3,058  
Thereafter
     5,242        7,862  
    
 
 
    
 
 
 
Total future lease payments
     15,409        21,071  
Less: Interest
     (3,594      (4,346
    
 
 
    
 
 
 
Present value of lease obligations
  
$
11,815
 
  
$
16,725
 
    
 
 
    
 
 
 
As of September 30, 2022, the weighted-average remaining term of our operating and finance leases were approximately 6.25 years and 6.50 years, respectively.
 
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NOTE 8. DEBT