Real Good Food Company (RGFC) Risk Analysis
Risk Overview Q2, 2023
Source: the company's latest filing for the period ended Jun 30, 2023, filed Aug 14, 2023
Risk Change Over Time
- Share Price & Shareholder Rights - Risk 1We are a "smaller reporting company" under applicable SEC rules, and the reduced disclosure requirements applicable to smaller reporting companies may make our Class A common stock less attractive to investors.
We are a "smaller reporting company" under applicable SEC rules. We may continue to be a smaller reporting company until the market value of our Class A common stock held by non-affiliates is over $250.0 million, or our annual revenue are greater than $100.0 million during the most recently completed fiscal year (or if our annual revenues are less than $100.0 million during the most recently completed fiscal year and our public float is over $700.0 million). If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent years of audited financial statements and only two years of related Management's Discussion and Analysis of Financial Condition and Results of Operations disclosure in our Annual Report on Form 10-K, and we may take advantage of reduced disclosure obligations regarding executive compensation. We cannot predict if investors will find our Class A common stock less attractive because we rely on these reduced reporting obligations. If some investors find our Class A common stock less attractive, there may be a less active trading market for our Class A common stock, which could have an adverse impact on the trading price of our Class A common stock and cause the trading price to be more volatile.
- Accounting & Financial Operations - Risk 2We have identified material weaknesses in our internal control over financial reporting, which could, if not effectively remediated, result in material misstatements in our financial statements, and a failure to meet our reporting and financial obligations, each of which could adversely affect our results of operations and financial condition.
Beginning with this Annual Report, we are required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting in our Annual Reports on Form 10-K, as required by Section 404(a) of the Sarbanes-Oxley Act. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. As later discussed in this Annual Report, our management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2022. We are actively engaged in developing and implementing a remediation plan designed to address these material weaknesses and are committed to remediating them as promptly as possible. For more information, see "Part II, Item 9A. Controls and Procedures." However, we cannot be certain that all current material weaknesses in internal control will be remediated and our internal control over financial reporting considered effective going forward. Because of its inherent limitations, our system of internal control over financial reporting may not prevent or detect every misstatement. Our current conclusion regarding the effectiveness of our internal control over financial reporting, as well as a conclusion in any future period that our internal control over financial reporting is not effective, could cause investors to lose confidence in the accuracy and completeness of our financial reports, the trading price of our Class A common stock to decline, and Nasdaq, the SEC or other regulatory authorities to investigate or sanction us. Any failure to improve, or once it is effective, maintain the effectiveness of, our internal control over financial reporting could inhibit our ability to accurately report our financial condition, operating results or liquidity, and/or restrict our future access to the capital markets. An evaluation of effectiveness is also subject to the risk that the controls may become inadequate because of changes in conditions, because the degree of compliance with policies or procedures decreases over time, or because of unanticipated circumstances or other factors. We also face risks associated with the cost of establishing effective internal control over financial reporting. We have invested, and expect to continue to invest significant resources in future years, to develop and maintain the necessary documentation and testing procedures required by Section 404(a) of the Sarbanes-Oxley Act. Ensuring we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort.
- Corporate Activity and Growth - Risk 3In certain circumstances, RGF will be required to make distributions to RGF, Inc. and the existing owners of RGF and the distributions that RGF will be required to make may be substantial.
RGF will be treated as a partnership for U.S. federal income tax purposes and, as such, will not be subject to U.S. federal income tax. Instead, taxable income will be allocated to RGF unit holders, including RGF, Inc. Pursuant to RGF's operating agreement, RGF will make pro rata cash distributions, or tax distributions to RGF unit holders. Funds used by RGF to satisfy its tax distribution obligations will not be available for reinvestment in our business. Moreover, the tax distributions that RGF will be required to make may be substantial, and will likely exceed (as a percentage of RGF's income) the overall effective tax rate applicable to a similarly situated corporate taxpayer. As a result of potential differences in the amount of net taxable income allocable to us and to the existing owners of RGF, as well as the use of an assumed tax rate in calculating RGF's distribution obligations, we may receive distributions significantly in excess of our tax liabilities and obligations to make payments under the Tax Receivable Agreement. To the extent, as currently expected, we do not distribute such cash balances as dividends on our Class A common stock and instead, for example, hold such cash balances or lend them to RGF, the existing owners of RGF would benefit from any value attributable to such accumulated cash balances as a result of their ownership of our Class A common stock following an exchange of their Class B units.
Risk Highlights Q2, 2023
Risk Word Cloud
Risk Factors Full Breakdown - Total Risks 55
- Share Price & Shareholder Rights - Risk 1If securities or industry analysts do not initiate coverage over us, cease coverage of us, or issue an adverse or misleading opinion regarding us or our business, the trading price and trading volume of our Class A common stock could decline.
The trading market for our Class A common stock is influenced by the research and reports that industry or securities analysts publish about our business. If one or more of these analysts does not initiate coverage over us, ceases coverage of us, or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the trading price and trading volume of our Class A common stock to decline. Moreover, if any of the analysts who cover us issues an adverse or misleading opinion regarding our business, or our stock performance, or if our operating results fail to meet the expectations of analysts or the investor community, one or more of the analysts who cover us may change their recommendations regarding our business, and the trading price of our Class A common stock could decline.
- Share Price & Shareholder Rights - Risk 2Our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and cause the trading price of our Class A common stock to decline.
Our Certificate of Incorporation and our amended and restated bylaws ("Bylaws") contain provisions that could delay or prevent a change of control of our Company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include: - providing for a classified board of directors with staggered, three-year terms;- authorizing our board of directors to issue preferred stock with voting or other rights or preferences that could discourage a takeover attempt or delay a change of control;- prohibiting cumulative voting in the election of directors;- providing that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;- prohibiting the adoption, amendment or repeal of our Bylaws or the repeal of the provisions of our Certificate of Incorporation regarding the election and removal of directors without the required approval of at least 66-2/3% of the shares entitled to vote at an election of directors;- prohibiting stockholder action by written consent;- limiting the persons who may call special meetings of stockholders; and - requiring advance notification of stockholder nominations and proposals. These provisions may interfere with attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, the provisions of Section 203 of the Delaware General Corporation Law ("DGCL") govern us. These and other provisions in our Certificate of Incorporation and Bylaws and under the DGCL could discourage potential takeover attempts, reduce the price investors might be willing to pay in the future for shares of our Class A common stock, and result in the trading price of our Class A common stock being lower than it would be without these provisions.
- Share Price & Shareholder Rights - Risk 3Future issuances of our Class A common stock, or securities convertible into or exercisable for our Class A common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause the trading price of our Class A common stock to decline.
We may issue additional securities, or securities convertible into our Class A common stock, in a manner we determine from time to time, including securities pursuant our equity incentive plans. Pursuant to "evergreen provisions" in our 2021 Stock Incentive Plan and 2021 Employee Stock Purchase Plan, on January 1 of each year (commencing in 2022 and ending in 2031), the number of shares of Class A common stock authorized for issuance under the plan is automatically increased by a number equal to the least of: (a) a percentage of the total number of shares of Class A common stock outstanding on December 31 of the preceding calendar year (2% in the case of the 2021 Stock Incentive Plan and 1% in the case of the 2021 Employee Stock Purchase Plan); or (b) a number determined by the Company's board of directors. If we sell shares of our Class A common stock, or securities convertible into or exercisable for our Class A common stock, in subsequent transactions, or if shares of our Class A common stock are issued pursuant to our equity incentive plans, investors may be materially diluted. In addition, new investors in such subsequent transactions could receive securities with rights senior to those of holders of our Class A common stock.
- Share Price & Shareholder Rights - Risk 4Substantial future sales of our Class A common stock, or the perception in the public markets that these sales may occur, could cause our share price to fall.
Sales of a substantial number of shares of our Class A common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares of our Class A common stock intend to sell shares, could reduce the trading price of our Class A common stock. As of December 31, 2022 we had 6,424,840 shares of our Class A common stock outstanding and 19,377,681 authorized but unissued shares of our Class A common stock that would be issuable upon redemption or exchange of Class B units. Additionally, our officers and the Members who convert their Class B common stock to Class A common stock may freely sell shares of our Class A common stock in the public market at any time to the extent permitted by Rules 144 and 701 under the Securities Act. We have entered into the Registration Rights Agreement with certain of the Members, pursuant to which we are required to register the resale shares of Class A common stock issued upon redemption or exchange of Class B units held by them when so requested, subject to certain requirements and limitations set forth therein. All shares sold pursuant to an offering covered by a registration statement would be freely transferable. In all cases, if any of these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our Class A common stock could decline.
- Share Price & Shareholder Rights - Risk 5Our stock is thinly traded and as such may not support active, robust trading
Shares of our Class A common stock trade within a narrow range of trading volume, being of limited issue, and as such may not have sufficient liquidity for large volume trading. This may limit the amount of shares investors can acquire or sell in a given trading session or within a short period of time.
- Share Price & Shareholder Rights - Risk 6The trading price of our Class A common stock may be volatile.
The trading prices of the securities of other newly public companies, including companies in the food industry, have historically been volatile. The trading price of our Class A common stock may be volatile and could be subject to wide fluctuations as a result of numerous factors, including: - actual or anticipated fluctuations in our financial condition, operating results, and liquidity;- any guidance we may provide to the public, any changes in this guidance, or our failure to meet this guidance;- announcements of new products by us or our competitors, and competition from new or existing products;- market conditions or trends in the H&W industry, and in the frozen food category in particular;- economic conditions and trends in the geographic locations in which we operate and where our products are sold;- addition or loss of significant customers, co-manufacturers, suppliers or other business partners;- new laws or regulations applicable to our business or products, or changes to the interpretation of existing laws or regulations;- actual or anticipated changes in our growth rate and financial performance relative to our competitors;- announcements of significant acquisitions, strategic partnerships, or joint ventures by us or our competitors;- announcement or expectation of additional financing efforts;- additions or departures of executive officers or other key personnel;- operating results relative to the expectations of securities analysts and other market participants, and the issuance of new or updated research or reports by such parties;- fluctuations in the valuation of companies perceived by investors to be comparable to us;- outcome of litigation, regulatory matters, enforcement actions, or other disputes that may arise;- the expiration of contractual lock-up agreements with our executive officers, directors, and equity holders;- sales of our Class A common stock, including by our executive officers, directors, or large stockholders;- the size of our public float and factors impacting the trading volume of our Class A common stock;- the impacts and disruptions caused by the COVID-19 pandemic, or any other pandemics, epidemics, disease outbreak, or similar widespread public health concern on our business and operating results; and - general economic, industry, and market conditions. The trading price of our Class A common stock may also fluctuate as a result of the other risks and uncertainties described elsewhere in this Annual Report, and other factors beyond our control. In the past, companies that have experienced volatility in the trading of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management's attention from other business concerns, which could harm our business.
- Share Price & Shareholder Rights - Risk 7We are a "smaller reporting company" under applicable SEC rules, and the reduced disclosure requirements applicable to smaller reporting companies may make our Class A common stock less attractive to investors.
We are a "smaller reporting company" under applicable SEC rules. We may continue to be a smaller reporting company until the market value of our Class A common stock held by non-affiliates is over $250.0 million, or our annual revenue are greater than $100.0 million during the most recently completed fiscal year (or if our annual revenues are less than $100.0 million during the most recently completed fiscal year and our public float is over $700.0 million). If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent years of audited financial statements and only two years of related Management's Discussion and Analysis of Financial Condition and Results of Operations disclosure in our Annual Report on Form 10-K, and we may take advantage of reduced disclosure obligations regarding executive compensation. We cannot predict if investors will find our Class A common stock less attractive because we rely on these reduced reporting obligations. If some investors find our Class A common stock less attractive, there may be a less active trading market for our Class A common stock, which could have an adverse impact on the trading price of our Class A common stock and cause the trading price to be more volatile.
- Share Price & Shareholder Rights - Risk 8We are an "emerging growth company" and the reduced disclosure requirements applicable to emerging growth companies may make our Class A common stock less attractive to investors.
We are an "emerging growth company" as defined in the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies, including: - presenting only two years of audited financial statements and only two years of related Management's Discussion and Analysis of Financial Condition and Results of Operations disclosure;- reduced disclosure about our executive compensation arrangements;- exemption from the requirements to hold non-binding advisory votes on executive compensation;- exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; and - exemption from complying with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of our initial public offering ("IPO") or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company on the earliest of the last day of the fiscal year in which we have more than $1.235 billion in annual revenue, the date we qualify as a "large accelerated filer," with more than $700.0 million in market value of our stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one Annual Report on Form 10-K) or the date on which we will have issued more than $1 billion in non-convertible debt during the prior three years. We may choose to take advantage of some, but not all, of the available exemptions. We have taken advantage of certain reduced reporting obligations in this Annual Report. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock, which could affect the value of your investment in our Class A common stock. We cannot predict if investors will find our Class A common stock less attractive because we rely on these reduced reporting and related obligations. If some investors find our Class A common stock less attractive, there may be a less active trading market for our Class A common stock, which could have an adverse impact on the trading price of our Class A common stock and cause the trading price to be more volatile. Furthermore, to the extent we choose not to use exemptions from various reporting and related requirements under the JOBS Act, or if we no longer can be classified as an "emerging growth company," we expect that we will incur additional compliance costs, which will reduce our ability to operate profitably.
- Share Price & Shareholder Rights - Risk 9We are controlled by holders of our Class B common stock, whose interests may differ from those of our public stockholders.
Members of RGF holding Class B common stock in the Company and Class B units in RGF (our owners prior to the consummation of our public offering, the "Members"), in the aggregate, controlled approximately 76% of the combined voting power of the Company's Class A common stock and Class B common stock immediately following our initial public offering, which has remained relatively unchanged as of December 31, 2022. As a result, based on their ownership of our voting stock, such Members collectively have the ability to exert significant influence over our management and affairs. In addition, these Members are able to determine the outcome of matters requiring stockholder approval, and are able to cause or prevent a change in the composition of the Company's board of directors or a change of control of our Company that could deprive our stockholders of an opportunity to receive a premium for their Class A common stock as part of a sale of our Company and might ultimately affect the trading price of Class A common stock. In addition, as of December 31, 2022, the Members held 76% of RGF's units, taking into account the Class A units and Class B units together. Because they hold their ownership interest in our business through RGF in addition as well as through the public company, they may have conflicting interests with the Company's public stockholders. To illustrate this point, certain of our Members may have different tax positions from the Company, which could influence their decisions regarding whether and when to dispose of assets, whether and when to incur new indebtedness or refinance existing indebtedness, especially in light of the existing Tax Receivable Agreement,which confers certain tax benefits to the Members. As such, the structuring of future transactions may take into consideration the Members' tax or other considerations even where no similar benefit would accrue to us. For additional information, refer to Note 11, Related-Party Transactions, to the consolidated financial statements within this Annual Report.
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