21 September 2021

Real Good Food plc

("RGF" or "the Group")

Final Results for the Year Ended 31 March 2021

Overview

Financial highlights

•     Revenue from continuing businesses decreased by 9.5% to £37.3 million (2020: £41.2 million), in a year affected by covid-19.

•     The Group delivered an adjusted underlying EBITDA* on continuing businesses of £0.2 million (2020: loss of £1.6 million), despite the impact of covid-19 on the continuing business.

•     Cake Decoration, the Group's continuing business, was profitable (before depreciation, amortisation and significant items) and generated an adjusted EBITDA* of £0.8 million (2020: £1.8 million).

•     Central costs reduced significantly by £2.9 million to £0.6 million (2020: £3.5 million).

•     Net debt significantly reduced post year end, following the sale of Brighter Foods in May 2021:

−    Year-end net debt of £48.8 million (2020: £45.4 million).

−    Following the sale of Brighter Foods, net debt was reduced by £26.4 million.

•     The Board renegotiated interest rates on convertible loan notes to a simple 12% per annum with effect from 1 January 2021, and in September 2021 extended the redemption dates to 2023.

•     The shareholder loans were extended in September 2021 to be repayable in May 2023.

Operational highlights

•     Brighter Foods was sold to The Hut Group (THG) on 11 May 2021 for a cash consideration of £43 million. The sale price broadly equated to 8.6 times FY20 EBITDA and 11.7 times (unaudited) EBITDA for the 12 months ended 31 March 2021.

•     Cake Decoration (trading under the brand names of Renshaw and Rainbow Dust Colours) demonstrated an ability to win new business from its streamlined cost base:

−    Launched 66 new products in the year with in-year revenues of c. £1.6 million and secured an important new blue-chip customer.

−    Improved year-on-year frosting revenues by 17%, following investment in its soft icing plant in this growing market.

Current trading

•     Group revenues and profit are in line with Board expectations, and ahead of pre-pandemic levels (FY20), for the first five months of the new financial year, with good retail and international sales.

•     Performance (underlying increased margins and increased revenues) achieved despite the recent logistics challenges seen across the UK economy.

•     Cake Decoration has a solid foundation to launch more innovative products whilst working with customers to maximise its sales opportunities.

•     Renshaw continues to win industry recognition, having been shortlisted in The Grocer, New Product Awards 2021, for its Luxury Bakers Caramel and Silver Shimmer Icing Kit.

•     The Board remains focussed on reviewing all initiatives to continue to improve the capital structure of the Group; including the intention to delist the Group from AIM to save costs and provide greater agility and flexibility to maximise shareholder value.

* Underlying adjusted EBITDA (see note 3)

1 Kantar 52-week YOY to March 21st, 2021

Mike Holt, Executive Chairman commented:

"Much has happened since 31 March 2020 in terms of making progress and restoring shareholder value. The Group has coped with the challenges of covid and has continued to improve underlying profitability. In addition, the debt burden was halved following the successful sale of Brighter Foods. Renshaw and Rainbow Dust Colours, our two remaining businesses, continue to improve their performance, and after a good start to the year, prospects are encouraging."

Enquiries:

Chairman's Statement

Overview

As for most companies, the year to 31 March 2021 was a period of unprecedented uncertainty and challenges due to covid-19 and Brexit. There were three national lockdowns and restrictions on public gatherings impacting revenues and productivity within both the Group's businesses. The priority for the Group during this period was to conserve cash and to keep employees safe and healthy, both physically and mentally. The Group's continuing businesses claimed £1.2m (continuing and discontinued businesses: £1.7m) under the Government's Job Retention Scheme and at its peak 254 employees (48% of staff) were on furlough. Despite these conditions, it is pleasing to be able to report that the Group has continued to progress and to restore shareholder value.

Our plan for the financial year was to accelerate operational changes made within Renshaw and to generate revenue growth from new products and better customer service delivery. Whilst not immediately apparent from our financial results, due to covid-19 and post Brexit disruption, the Group has continued to improve and is moving forward with further operational improvement initiatives within Renshaw and Rainbow Dust Colours. In particular, the management team is leveraging our heritage brand through new and exciting product innovation and customer service. New product launches have been made with Marks and Spencer, Tesco, Asda, Aldi and more recently with Lidl.

New product revenues from the launch of 66 new products, accounted for 7.6% (£1.6 million) of sales last year for Cake Decoration. Currently there are 413 new products in various stages of development. This is important given that the sugar paste market is in gradual decline and the demand for marzipan is not growing.

The plan for the year was also to leverage investments made during FY20 within Brighter Foods.

Shortly after year end, we sold Brighter Foods Limited to The Hut Group for £35.6 million which valued the business at £43 million. Given the high value of indebtedness of the Group, due to some poor acquisitions in the past, the current Board had been minded to dispose of Brighter Foods at the right value. The timing of the sale coincided with the end of the lock-in period of the Chief Executive Officer and Founder of Brighter Foods. At £43 million, the sale represented 8.6 times annualised FY20 EBITDA and 11.7 times (unaudited) FY21 EBITDA.

The sale enabled us to effectively halve the level of shareholder loans (from £45.6 million to £22.0 million) and to eliminate the pension scheme deficit (by the injection of £8.5 million into the scheme's assets).

Dividend

As with previous years, the Board is not recommending the payment of a dividend for the year. The focus is on reducing the level of debt and investing in Renshaw and Rainbow Dust Colours to deliver the best possible returns for shareholders.

Corporate Governance

The Group is governed through the Board and its Audit Committee and Remuneration Committee. The Board is very conscious of its related party connections and dealings. As appropriate, myself, Gail Lumsden (Senior Independent Non-Executive Director) and Maribeth Keeling (Chief Financial Officer) meet independently of the Board to discuss matters concerning Loan Note Holders and major Shareholders.

Strategy

The Group's strategy is set out in more detail later in the Strategic Review. But in summary, the aim is to maximise value for shareholders by leveraging productive capacity by growing revenue (through product innovation and new customers) and improving operational performance. The Group is open to divesting parts of the remaining and continuing businesses for the right value at the right time. The Group has a valued heritage and the strategy is to leverage this with new products and class leading service.

De-listing

As stated at the time of announcing the sale of Brighter Foods Limited on 22 April 2021, the Board has been considering all options to save costs and to return shareholder value. At the AGM, the Independent Directors, with the support of the rest of the Board, will be proposing that the Company cancels the listing of the Company's shares on AIM. This will save approximately £150,000 a year in costs and provide greater agility and flexibility to maximise shareholder value. The volume of shares traded is very small and an AIM listing adds a disproportionate expense and burden on the Company. The Company has arranged for a matched bargain facility to be in place by JP Jenkins.

Outlook

Since year-end, the Group has seen a pick-up in revenues across every sector. After five months of trading, revenues are 33% up on the same period last year and, more importantly, 1.3% ahead of the first five months of FY20. FY22 year-to-date EBITDA is a profit, trading ahead of FY21 EBITDA and FY20 EBITDA; this is particularly pleasing given the short-term challenges and increased costs of logistics due to driver shortages and limited availability of shipping containers.

Prospects for the remainder of the year are good and the Board is confident of reporting further progress. It's also encouraging to note that the business is being recognised for its innovation and quality of new products.

Finally, I would like to thank our employees who have worked hard to overcome various challenges, during the covid-19 crisis, to ensure that products and customer service continued (and continue) to be delivered.

Strategic Review

2020/21 performance

The report includes Cake Decoration as the continuing business.

Overall revenue from continuing businesses decreased from £41.2 million to £37.3 million, a decrease of £3.9 million (9.5%) within Cake Decoration. The business was impacted by covid-19 with overall revenues down in the first half of the year by 23% versus FY20 and recovering in the second half of the year by 3% versus FY20.

The majority of the revenue decline was in the Group's first quarter (which coincided with the first UK lockdown) and predominantly in the Wholesale and Manufacturing sectors which were down by £2.5m (-9%), International revenues were up year-on-year with Europe broadly in line, and the US with a year-on-year increase of £1.1m (+18%). The International sector also had challenges with its export logistics including the global shortage of containers and the impact of border controls owing to Brexit.

The UK came under pressure owing to the declining market for sugarpaste (-8.4%), however, UK Cake Decoration sales of sugarpaste outperformed the market by 2.4% in the year. Frostings revenues rose by 17% versus FY20, which is a growing market where Renshaw is developing and selling premium products.

Retail, despite covid-19, saw revenues increase by 7% year-on-year.

Brighter Foods business was sold in May 2021 for a consideration of £43m. Brighter Foods is included as a discontinued operation in the FY21 accounts. The decrease in revenues of 21.9% versus prior year within Brighter Foods reflects the impact of covid-19 and the closure of the 'food on the go' and health food market. Brighter Foods' largest customer had to close its doors in March 2021 in line with the government covid-19 guidance and had limited sales in the year.

Both businesses used the government job retention scheme claiming £1.7m in total (£1.2m in Cake Decoration). Food Ingredients maintained operating profit as a result of reduced operating costs. In Cake Decoration, underlying adjusted EBITDA decreased from £1.8 million in 2020 to £0.8 million in 2021, due to the covid-19 impact which reduced revenues, partly offset by the lower overhead costs and the furlough income of £1.2m.

The turnaround of the Cake Decoration business continued in FY21, with overhead restructuring being expedited during the year. Overheads are now significantly reduced: the business has restructured the engineering function to meet the demands of the business with maintenance being undertaken outside of production periods. Additionally, there are a number of initiatives ongoing within the Cake Decoration business to improve profitability. The Cake Decoration business has reviewed the overseas businesses improving the customer experience. In America, the warehouse was closed during the year and the customers are now serviced directly from the Liverpool site. Cake Decoration is working with a distributor in Europe for its smaller customers, thereby improving the customer experience. There are also a range of other options being evaluated to enhance returns from this business. One key opportunity for sales growth has been in new product development and customers: indeed a review was undertaken of the current products leading to the delisting of c.110 and introducing c.66 new products to market, and a new blue-chip retailer was also secured. Cake Decoration will continue to evolve and look for opportunities to add value to the business. Importantly, the Cake Decoration infrastructure and operational facilities are able to deliver the sales growth and improved profitability that the Board believe achievable.

The Group's central resources are now limited to finance and the plc board. Opportunities are continually sought to reduce these further, consistent with good governance. The Group shareholder debt remains significant; the debt, however, was reduced by £23.6m following the sale of Brighter Foods, and the interest rates on the loans were reduced from 1 January 2021. The interest burden, almost all of which is rolled-up, will remain for the foreseeable future.

Capital structure

The Group manages the capital structure and reviews the requirements in response to economic conditions.

The Group has a total credit facility of £8.87 million with Leumi ABL Limited. The facilities comprise of a £5.45m revolving credit facility and a £1.3m term loan both on 60 months ending August 2024. There is also a £2.12m plant and machinery facility on 36 months ending August 2022. During the year, the business increased the credit facility by £2.0 million secured on the Brighter Foods' sales. On the disposal of Brighter Foods, this facility was cancelled.

The maximum draw down value during FY21 occurred in December 2020, being £2.3m (FY20 occurred in September 2019, being £2.0m). The lowest month in FY21 was July 2020, being £0.4m (in FY20 it was August 2019, when no draw down was required, as there was a credit balance in the revolving credit facility of £0.4m).

The Board recognises that the Group's level of debt is higher than expected for a business like Real Good Food. However, given its business model and the presence of bank debt, the Group was restricted to asset-backed finance held by J F Renshaw and its revolving credit facility. As at 31 March 2021 there was no bank overdraft. At the same time, the Group's balance sheet retains a significant tangible asset base, goodwill that has been written down to realistic levels, and has net assets significantly in excess of the Group's current stock market capitalisation. This is an important measure in establishing the Group's financial worth in the future.

Operating performance and outlook

Given the impact of covid-19 on the FY21 results, the business has set budgets for FY22 based on FY20.

We prepare the business forecast on varying levels of revenues and have modelled the effect of these to ensure appropriate action can be taken if required. To date, the sales performance of the continuing business is in line with the Board's expectations, and central costs are as expected. The Cake Decoration market in the UK, particularly in the retail sector, is proving increasingly competitive, but we are confident that we can leverage experience and expertise to deliver what our customers need and want. The Group is working to ensure that both businesses have a strong sustainable base to capitalise on opportunities that may arise from the current environment. Brexit and covid-19 caused some uncertainties in FY21, however the expectation is that logistics of moving goods to Europe will ease during FY22.

After a particularly challenging year in the period to 31 March 2021, where employees and all stakeholders have experienced situations never seen before, the Board wishes to thank all the Group's and businesses' stakeholders for their understanding and continued support. Although covid-19 did impact FY21, the Group sales performance in quarter 4 FY21 was ahead of the pre covid-19 sales.

Group strategy

The Board's strategy is to have a profitable cash generative business. Cake Decoration has a new invigorated strategy for the business. The outturn from FY21 has shown a year-on-year increase in revenues for the fourth quarter and this has continued into FY22. The changes made by Cake Decoration in the last couple of years have provided the business with a platform to concentrate on what it is good at. The outsourcing of the warehousing and distribution to a third-party provider continues to result in improvements in customer service. The New Product Development (NPD) and Marketing teams continue to drive focus on innovation and sales growth, and secured a new blue chip customer and delisted c. 110 and brought to market c. 66 new products in the year.

Central resources are now limited to finance and general management.

Summary and Outlook

We believe we have the leadership, the senior management, and the resources capable of delivering a further uplift in performance in the Cake Decoration business, and a central cost base that is more fit for purpose. The Board continues to evaluate a range of options, to maximise shareholder returns.

The country came out of the lockdown period in July 2021, and the business was and continues to be positioned to take advantage of the sales opportunities in new sectors and new innovations with a refocussed sales and marketing team. The Board continues actions to generate and conserve cash. The Group remains focused on continuing to improve its performance, reduce net debt further and thereby increase shareholder value and returns.

The Board is grateful for the continued support of all stakeholders who have shown confidence in the Group during the past year and will make every effort to retain the positive momentum which is now evident in the underlying business. The Board is confident in the future prospects of the Group.

Divisional Business Review

Real Good Food

Cake Decoration

2020/21 Performance

FY20/21 was due to be a transitional year for the Cake Decoration division, with a significant restructure taking place in FY20 and the benefits expected to be seen in FY21. However, with three lockdown periods in the financial year, significantly impacting sales and EBITDA versus FY20. The FY21 result for Cake Decoration showed revenue progress in new product launches and a new blue-chip customer, however this was overshadowed by the shortfall in the wholesale and manufacturing sectors, both of which saw their customers having to close during the lockdown period. The second half of the year saw total revenues increase by 3% versus FY20. This is significant because even though the UK sugarpaste market declined by 8.4%², the UK sugarpaste revenues only declined by 6% and sales of sugarpaste in the second half of the year were up on the previous year by 12%. Renshaw's performance outperformed the underlying market decline. Retail, despite covid-19 saw revenues increase by 7% year on year. The investment in the soft icing plant has resulted in year-on-year improved revenues of 17%, and this is expected to continue to grow in FY22 as frostings and other soft icing products are becoming increasingly popular due to their ease of use for the novice baker and decorator. Although still slightly behind, sales in the wholesale and manufacturing sectors had growing momentum in the final quarter. The International market is an important market for Cake Decoration; in FY20 we signed an exclusive agreement with the largest distributor of cake supplies in the US, Decopac, to help the Cake Decoration business grow market share in the US market. Despite covid-19, the revenues from Decopac increased by 25% year-on-year with further growth expected in FY22. Renshaw Europe recovered from the lockdown period with a good sales performance in the second half of the year. As part of the Cake Decoration strategy, Renshaw Europe appointed a distributor to service the smaller customers in Europe improving the customer service.

During the year, further changes have been made to the overhead structure to reduce costs and focus on customer service. Renshaw remains a strong brand in the sector.

Further work and efforts will continue throughout FY22 to refresh existing products, develop new products, bring new customers on board and streamline our sales and operational processes.

Forward plans

The business continues to pursue a growth strategy focused on increased supply of everyday convenience products under its own and customers' brands. The investment in the soft icings plant saw frostings grow year on year in FY21, and all indications including customer feedback suggest this is expected to continue in FY22. Export growth continues to be focused on North America where the company has identified the greatest potential to grow sales. Following the successful closure of the US based warehouse in FY21, with sales now being shipped directly from the factory in Liverpool to the US, this has streamlined the process and improved customer service. The business continues to implement operational changes including the restructure of the engineering function to carry out planned maintenance outside of production hours and improvements to the factory planning system. These changes will result in a more streamlined business which is focused on growth opportunities, efficiency savings and an improvement in overall performance.

Covid-19

As a food manufacturer, the business remained open during the lockdown period. Our priority is the safety of our staff whilst supplying our customers with the quality product. All required changes to meet covid-19 requirements have been carried out at the sites. Going forward the expectation is that there will be no further lockdown periods and no covid-19 restrictions such as social distancing, that impacted the financial performance of the Group in FY21.

*     See note 3 for reconciliation

2 Kantar 52-week YOY to March 21st, 2021

Real Good Food

Food Ingredients

2020/21 Performance

Brighter Foods creates, develops, and manufactures snack bars for the healthy snacking market from its factories in Tywyn, Gwynedd in mid Wales. Brighter Foods is a multi-award-winning company which produces snacks which are targeted at areas such as diet control, gluten free, lactose free, low or no added sugar, sports nutrition, organic and fair trade and its manufacturing capabilities, and even before recent expansion was highly regarded throughout the industry. As well as manufacturing partner-branded products, Brighter Foods has its own healthier brands such as Wild Trail, which is stocked in retailers and health food stores.

Brighter Foods is classed as a discontinued operation in the FY21 accounts owing to the sale to The Hut Group plc in May 2021.

Forward plans

Brighter Foods was sold to The Hut Group (THG) on 11 May 2021 for a consideration of £43m.

*     See note 3 for reconciliation

Finance Review

Revenue

Group revenue of the continuing businesses for the 12 months ending 31 March 2021 is £37.3 million (2020: £41.2 million), a decrease of 9.5% on revenue to 31 March 2021. Cake Decoration sales were impacted by covid-19, particularly in quarter 1, the initial lockdown period. Wholesale and manufacturing sectors were most affected with many of their customers having to close their operations. The sales re

covered in the second half of the year with revenues ahead of H2 FY20 by 2.5%, retail revenues were 7% ahead of the previous year and the Wholesale and Manufacturing sectors gained momentum in the fourth quarter, although both sectors revenues were down on the prior year.

Profit measure on operations

Gross profit on the continuing businesses for the overall Group was £15.2 million (2020: £17.6 million). At 40.7%, the gross profit in the year, was adverse to the prior year by 2%, owing to the sales mix and the effect of covid-19 including the costs associated with social distancing in the factory. Delivered margin is defined as gross profit less costs of delivery.

The operating loss in the year of £1.3 million is reported after depreciation and amortisation charges of £1.7m, significant items benefit of £0.2m and a furlough payment received of £1.2m. The benefit in the significant costs arises from the revaluation of the Brighter Foods put option of £1.3m; the other significant costs are £1.1m which relate to the restructuring in the Cake Decoration business.

The adjusted EBITDA of the underlying continuing business is £0.2m.

The items adjusted for are:

Significant Items:                                    £(1.1)m

Revaluation of Brighter Put Option         £1.3m

Total                                                       £0.2m

The significant costs incurred relate to the restructuring costs in the Cake Decoration business and head office costs, and are for redundancy costs, project costs and closure costs associated with the warehouse in the US. In Head Office, the costs are for legal and financial costs associated with the disposal of Brighter Foods and benefit from a significant reduction in the provision for the minority shareholders' put option. The number of indirect employees reduced year on year by 17 across the business.

There has been no requirement for an impairment charge on goodwill or fixed assets in FY21. The Board, having considered the trading forecasts, have reasonable expectations that the recoverable amount would support the value in the accounts.

After finance costs of £4.8 million, this resulted in a loss before tax for the year of £6.1 million (2020: loss of £23.1 million) for continuing businesses. This equates to a basic loss per share of 6.50 pence on continuing operations (loss of 22.14 pence in 2020), (see note 9).

Cash flow and net debt

Conserving cash is a key measure for the Group. Covid-19 of course heightened the focus with the UK and European lockdown in March 2021. The business modelling included looking at varying levels of revenues and the effect of movements on cash planning to ensure appropriate action was taken if required.

As part of the cash planning, the Group increased the revolving credit facility by £2m, to include Brighter Foods. This additional facility was completed in August 2020, and following the disposal of Brighter Foods in May 2021, the additional facility was removed.

The Group used the Government job retention scheme (£1.2m in Cake Decoration), and deferred PAYE payments (£0.6m) to conserve cash during the lockdown period. Repayments of the PAYE have been made in line with the government 'time to pay' plan.

The net debt at the end of FY21 stood at £48.8m versus £45.4m in FY20. This is predominantly shareholder loans of which £15.2m is in the form of convertible loan notes.

Net debt is a key performance indicator for the Group and is explained in note 8.

All figures refer to continuing businesses.

*     See note 3 for reconciliation

Going Concern and Post Balance Sheet Events

The Directors have considered the Group's business activities together with the factors likely to affect its planned future performance. The forecasts, agreed with the business consider reasonable possible changes in trading performance.

The forecast for FY22 for the continuing businesses, is based on the national lockdown restrictions being removed in July 2021. Some of the sectors we serve have experienced growth during the covid-19 pandemic, namely retail and international. The sectors most affected by the pandemic owing to their customers having to close their own businesses are wholesale and manufacturing, these sectors are now returning to pre covid sales. The new customers and product launches during FY21 will have a full year impact in FY22. The overhead savings and operational efficiencies made in FY21 will have a full year impact in FY22.

The Board consider the forecasts to be reasonable and these assumptions have been projected.

The Board reviewed the sensitivity of the sales and have modelled the effects of these.

The Directors considered the following scenarios:

Scenario 1:
Reduction in revenue of 5% all year; and

Scenario 2:
Reduction in revenue of 5% and the gross margin reduced by 10% all year.

In Scenario 1 without any mitigating action the Group will not run out of cash and will have sufficient liquidity headroom with the low point for cash being September 2022 when cash would reduce to £2.1million as a result of the stock build for quarter 3, (October to December).

In Scenario 2 without any mitigating action the Group would run out of cash in May 2022, some 14 months from the monthly reduction in revenue and gross margin from the start of FY22. If there was a reduction in gross margin of 10%, this would be as a result of commodity price increases that would be passed onto customers. The mitigating action would be taken quickly and would result in a price increase to customers, with a time lag factored in as negotiations took place with customers. A prudent approach of a 75% recovery in FY22 would result in the business not running out of cash with the low point for cash being September 2022 when cash would be £1.3million, owing to the stock build.

The Group has various levers that it can use to mitigate the shortfall including:

•     Cessation of non-essential spend

•     Review of overhead costs

The banking covenants that are in place for FY22 have been amended taking into account the seasonality of the Cake Decoration business.

The covenants for FY22 are EBITDA being within 75% of the forecast and greater than £5 million tangible net worth. These covenants are not breached on the stressed scenarios referred to above.

The principal shareholders of the Group have shown considerable support for the working capital requirements and as a result have extended the repayment period of the current loans from 19 May 2022 to 19 May 2023.

Having carefully considered the liquidity of the Group and Company in line with the current strategy and future performance, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the next 12 months and therefore continue to adopt the going concern basis in preparing the consolidated financial information.

Pension Scheme

The Group offers a defined contribution scheme for all current employees that is funded on a monthly basis. In addition, the Company operates a defined benefit scheme that was closed to new members in 2000. The defined benefit scheme is the Napier Brown Retirement Pension Plan (the Plan). The IAS 19 pension scheme valuation reported a gross deficit at 31 March 2021 of £7.5 million (2020: £7.9 million). The Plan assets increased by £0.8 million to £14.5 million (2020: £13.7 million) and the Plan liabilities are £21.9 million compared to £20.8 million at 31 March 2020. Following the sale of Brighter Foods on the 11 May 2021, a payment of £8.5 million was made to the Napier Brown Retirement Plan eliminating the current pension scheme deficit liability.

Dividend

The Directors, considering the Group's performance and cash resources, do not recommend the payment of a final dividend for the year ended 31 March 2021 (2020: nil).

Consolidated Statement of Comprehensive Income

Year ended 31 March 2021

*     The result for the year ended 31 March 2020 has been restated to reflect the change in continuing and discontinued operations.

Consolidated Statement of Changes in Equity

Year ended 31 March 2021

Consolidated Statement of Financial Position

Year ended 31 March 2021

Consolidated Cash Flow Statement

Year ended 31 March 2021

Notes to the Financial Information

Year ended 31 March 2021

1. Presentation of financial information

General information

Real Good Food plc is a public limited company incorporated in England and Wales under the Companies Act (registered number 04666282). The Company is domiciled in England and Wales and its registered address is 61 Stephenson Way, Wavertree, Liverpool L13 1HN. The Company's shares are traded on the Alternative Investment Market (AIM).

Basis of preparation

The consolidated financial information is presented on the basis of international accounting standards and has been prepared in accordance with AIM rules and the Companies Act 2006, as applicable to companies reporting under IFRS.

The financial information set out in this preliminary statement does not constitute the Group's statutory accounts for the years ended 31 March 2021 or 2020. Statutory accounts for 2020 have been delivered to the Registrar of Companies, and those for 2021 will be delivered in due course. The auditor has reported on those accounts; their report was (i) qualified - due to Covid-19 restrictions the auditor was not able to observe the counting of physical inventories at 31 March 2020 for inventories held by Brighter Foods Limited, a subsidiary and significant component of Real Good Food plc, due to restrictions in the attendance of external visitors at the company and third-party premises, specifically as a result of Covid-19. They were, unable to satisfy themselves by alternative means concerning the inventory balance held by that component at 31 March 2020, which is included in the consolidated statement of financial position at £2,574,000. They were therefore unable to determine whether any adjustment to this amount was necessary, or what the impact of any such adjustment would be on the consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated statement of financial position or consolidated cash flow statement for the year ended 31 March 2021. Any adjustment to the inventory balance at 31 March 2020 would also have an impact on the comparative figure shown in the consolidated statement of comprehensive income for profit from discontinued operations and on the comparative consolidated cash flow statement for the period then ended. (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. The accounts are prepared on a going concern basis.

These results were approved by the Board of Directors on 20 September 2021.

Discontinued operations

A discontinued operation is a component of the Group's business that represents a separate major line of business or geographical area of operation that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification of a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative income statement is presented as if the operation had discontinued from the start of the comparative period.

During the twelve months to 31 March 2021, the Group did not dispose of any major lines or businesses. However, the Group sold Brighter Foods Limited in May 2021 and this has been classified as held for sale in the accounts. At 31 March 2021, some remaining assets in relation to the previously disposed businesses are classed as held for sale, in addition to the net assets of Brighter Foods Limited.

Any references to discontinued operations throughout this report refers to Brighter Foods Limited.

IFRS standards and interpretations adopted

New standards and amendments which are effective from 1 January 2020, and have been adopted within the Group's accounting policies are:

•     Amendments to IFRS 3 Business combinations - definition of a business (effective for periods beginning after 1 January 2020);

•     Amendments to IAS 1 Presentation of financial statements and IAS 8 Accounting policy changes in accounting estimates and errors - definition of material (effective for periods beginning after 1 January 2020);

•     Amendments to IFRS 9, Financial Instruments, IAS 39 Financial Instruments and IFRS 17 Financial Instruments: disclosures - interest rate benchmark reform (effective for periods beginning after 1 January 2020); and

•     Amendments to the conceptual framework.

The adoption of the amendments to IFRS 3, IAS 1, IAS 8, IFRS 9, IAS 39, IFRS 17 and the conceptual framework have not had an impact on the financial statements of the Group.

The Group does not expect any standards issued by the IASB, but not yet effective, to have a material impact on the Group.

2. Revenue

The revenue for the Group for the current year arose from the sale of goods in the following areas:

3. Segment reporting

Business segments

The divisional structure reflects the management teams in place and ensures all aspects of trading activity have the specific focus they need in order to achieve our growth plans.

The Group operates in one main division: Cake Decoration. The Head Office has a finance function that supports the subsidiary as required.

Geographical segments

The Group earns revenue from countries outside the United Kingdom, as shown below:

The Group has two customers which constitute over 10% of revenue: one providing 21% of revenue, and the other 13%.

The Group has one customer which constitutes over 18% of revenue in the Cake Decoration division.

In line with the Group strategy of allowing each business to understand its true cost base as a stand-alone business, during the 12 months ended 31 March 2021, Head Office costs of £0.8 million (2020: £1.1m) have been re-allocated to the Cake Decoration division.

4. Significant items

*     The significant items for the year ended 31 March 2020 have been restated to reflect the change in continuing and discontinued operations.

The Group's underlying profit figure excludes a number of items which are material and non-recurring and are detailed separately to ensure the underlying operating performance of the businesses is clearly visible, without the distortions of these non-recurring costs.

The year to 31 March 2021 significant item expenditure is explained in the note below:

1.   The legal and due diligence costs involved in preparing the Brighter Food business for disposal.

2.   The legal costs associated with including Brighter Foods in the CID facility with ABL Leumi.

3.   Project management costs for projects running in the Crown Street factory.

4.   Costs associated with closing the Renshaw US warehouse, the lease terminating in July 2021, with stockholding relocated to Crown Street Liverpool.

5.   Redundancy costs of the restructuring plan started in FY20.

6.   Brighter Foods incurred exceptional costs in relation to a proposed sale, as the disposal has occurred, Brighter Foods is now shown as a discontinued operation.

The year to 31 March 2020 had the following significant costs:

1.   The fair value of the CLNs was reduced in FY20 from the FY19 estimate. This was a significant item in the accounts.

2.   Restructure costs relating to the Cake Decorations business and Head Office infrastructure.

5. Operating loss

Operating loss for continuing operations

*     The operating profit note for the year ended 31 March 2020 has been restated to reflect the change in continuing and discontinued operations.

6. Finance costs

**    On 2nd December 2020, a substantial modification to the convertible loan note terms was made requiring derecognition of the existing loans and recognition of new loans. As a result of this modification, the value of the liability increased leading to a loss in the year.

7. Other finance costs

8. Notes supporting the cash flow statement

The cash collateral figure for the Group is £0.2million (FY20 £0.2m). This has been provided to Lloyds Bank plc as security for insurance claims of the Group. This amount is not included in the cash flow.

Group

Net Debt

Net debt is a key performance indicator for the Group. It is defined as short term and long-term borrowings less cash. See table below:

Group

^{1 Includes investor loans of £3.7m and accrued interest of £0.5m repaid in 2020 from new borrowings of £3.6m.}

^{2 Includes additional Accrued interest of £5.0m on investor loans and convertible loan notes and redemption premiums of £3.1m on shareholder loan.}

9. Earnings per share

Basic earnings per share

Basic earnings per share is calculated on the basis of dividing the loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares in issue during the year.

*     The loss after tax attributable to ordinary shareholders for the year ended 31 March 2020 has been restated to reflect the change in continuing and discontinued operations.

The total loss per share for 2021 is (3.87)p for continuing and discontinued operations (2020 continuing and discontinued loss per share: (19.22)p).

Diluted earnings per share

The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of all outstanding share options. The potential ordinary shares are considered anti-dilutive as they decrease the loss per share. Therefore, diluted EPS is the same as basic for continuing operations. However, the discontinued operations can be diluted. The impact of this is earnings per share of 0.82p (2020: 0.96p). If all of the share options had been exercised before the period end, the earnings per share would then have been a loss per share of (6.50)p on the continuing operations and earnings of 2.63p on the discontinued operations (2020: loss of (22.14)p on the continuing operations and earnings of 2.92p on the discontinued operations).

The weighted average number of shares in issue for the year was 99,564,430 and the number of options outstanding was 33,333.
If these were all exercised the cash raised would be equivalent to that which would be raised by issuing 339,750 shares at the average share price during the year. There were also 8,806,571 convertible loan notes outstanding, of which the weighted average number of shares was 220,979,796. Therefore, the weighted average number of dilutive potential ordinary shares is 320,883,976.

10. Borrowings and capital management

*     The investor loans shown consists of £20.6 million principal amount, £6.5 million accrued interest up to 31 March 2021 and redemption premiums of £3.1 million.

**    Convertible loan notes shown at 31 March 2021 consist of £8.8 million investment (2020: £8.8 million), £6.3 million accrued interest (2020: £3.6 million), and £nil million of transaction costs (2020: £(0.1) million) being spread over the remaining life of the liability and a finance cost £0.1m resulting from a substantial modification to the Convertible Loan Note terms requiring derecognition of the existing loans and recognition of new loans.

Government grants represents the amount of grants received for which the criterion to ensure that repayment is not required has not yet been met. Grant monies in respect of which the criteria have been met are included in operating income.

All existing shareholder loans were renegotiated in December 2020 to require repayment in May 2022, and then subsequently post year end extended to May 2023.

Convertible loan notes

In May 2018, the Company secured further funding from each of its major shareholders totalling £8.8 million. NB Holdings Ltd and Omnicane Investors Ltd each providing £3.4 million, and funds managed by Downing LLP provided £1.9 million. This instrument has since, with shareholder approval, been replaced with convertible loan notes ("CLN's") of £8.8 million with a conversion price of 5 pence. The loan is repayable in 3 years from the date of issue or can be converted at any time into shares at the holder's option. In December 2020, the shareholders agreed to amend the repayment date of the loans to 19 May 2022, then subsequently extended post year end to May 2023. Also, the Amendment Deed amends the CLNs minimum annual return from 30% per annum to 12% per annum, effective from 31 December 2020.

The instrument accrues interest at a rate of 12 percent per annum accruing daily and will mature and be due for repayment in full on 19 May 2023, unless they are redeemed before that date. On that date, unless the convertible loan notes are converted into ordinary shares on the conversion date, a redemption premium fee will be payable. The redemption fee will be an amount which, when added to the interest accrued on the relevant notes, provides a total return equal to the amount which would have accrued in respect of such notes from the date of the convertible loan note instrument until and including the date the notes are redeemed in full had the interest rate been 12 per cent per annum.

A host loan at amortised cost and an embedded derivative liability, being measured at fair value with changes in value being recorded in profit or loss, have been recognised. At 31 March 2021, the derivative liability was valued at £17k (2020: £nil).

The convertible loan notes shown consist of a host loan at amortised cost of £8.8 million, £6.3 million of finance costs and £0.1 million of cost resulting from substantial modification to the convertible loan notes up to 31 March 2021.

Features of the Group's borrowings are as follows:

The Group's financial instruments comprised cash, leases, a revolving credit facility, investor loans and various items arising directly from its operations, such as trade payables and receivables. The main purpose of these financial instruments is to finance the Group's operations. The government grant is specific to Brighter Foods.

The main risks from the Group's financial instruments are interest rate risk and liquidity risk. Liquidity risk arises from the Group's management of working capital and the finance charges and principal repayments on its debt instruments. The Group's policy is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due.

The Group also has some currency exposure in relation to its Euro and US Dollar commodity purchases. However, this is mitigated by matching in part against foreign currency sales. The Board reviews and agrees policies, which have remained substantially unchanged for the year under review, for managing these risks.

The Group's policies on the management of interest rate, liquidity and currency exposure risks are set out in the Report of the Directors.

During the year ended 31 March 2021, the Group continued with the borrowing facilities in place and secured loans from investors. As at 31 March 2021, the borrowings comprised:

•     revolving credit facility of £5.45 million with Leumi ABL Limited on a revolving basis with a term of 60 months. This facility is secured against the debtors of JF Renshaw Limited, Rainbow Dust Colours Limited and Brighter Foods Limited with an interest rate of 2.25% above 3-month LIBOR. Because the group retains the risks and rewards of ownership of the underlying debts, these continue to be recognised in the financial information.

•     The Group secured facilities against specific plant and machinery with Leumi ABL Limited £2.1 million for 36 months ending August 2022. The facilities interest payable is 2.75% above LIBOR.

•     The Group secured a £1.3m term loan facility with the term being 60 months.

The three major shareholders, NB Holdings Ltd, Omnicane Investors Ltd, and certain funds managed by Downing LLP, supported the business, and provided significant funding to the Group by way of loans.

The loans at 31 March 2021 were as follows:

*     Interest is payable on a quarterly basis to the MI Downing Monthly Income Fund up to a principal amount of £0.9 million.

At 31 March 2021, Leumi ABL Limited had a debenture incorporating a floating charge over the undertaking and all property and assets present and future including goodwill, book debts, uncalled capital, buildings, fixtures, intangible assets, fixed plant, and machinery. In addition, the banking arrangements with Lloyds Bank plc had a guarantee over the Wavertree property.

Liquidity risk management

Liquidity risk arises from the Group's management of working capital and the finance charges and principal repayments on its debt instruments. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due.

The Board reviews the Group's liquidity position on a monthly basis and monitors its forecast and actual cash flows against maturing profiles of its financial assets and liabilities.

The following table details the Group's maturity profile of its financial liabilities:

The profile of the trade payables has been taken as being consistent with the Group's payment terms to suppliers.

Analysis of market risk sensitivity

Currency risks:

The Group is exposed to currency risks on purchases of commodities from USA and Europe. The risk associated with these purchases is mitigated by sales also made to customers in these countries, however, to the extent that these do not cover each other there is a risk of exposure to the Group.

The effect of the exposure is calculated as being:

•     With an excess of $ assets to $ liabilities, a 10% strengthening of the US dollar would result in an increase in pre-tax profits of £112k. A 10% weakening of the US dollar would result in a decrease of pre-tax profits of £92k.

•     With an excess of € liabilities to € assets a 10% strengthening of the Euro would result in a decrease in pre-tax profits of £37k.
A 10% weakening of the Euro would result in an increase of pre-tax profits of £30k.

Interest rate risks:

The Group has an exposure to interest rate risk arising from borrowings based upon the Bank of England base rate. However, at the balance sheet date, the Group did not have any outstanding balance on these borrowing facilities, and so the impact of an increase in the applicable interest rates would, all other factors remaining unchanged, not have impacted profits.

11. Pension arrangements

Defined Contribution Scheme. The Group operates a defined contribution scheme for all employees, including provision to comply with auto-enrolment requirements laid down by law.

In addition, the Company operates one defined benefits scheme which was closed to new members in 2000 and closed to future accrual with effect from 5 April 2004. The Defined Benefit scheme is a funded arrangement with assets held in a separate trustee-administered fund. Members of the Plan are entitled to retirement benefits based on their final salary at the date of leaving the Plan (or 5 April 2004 if earlier), and length of service.

An arrangement was previously agreed with the Trustees under which employer contributions to the scheme are £1 million per year from 1 August 2019. For the purposes of IAS 19 the data provided for the 31 March 2018 actuarial valuation, has been approximately updated to reflect defined benefit obligations on the accounting basis at 31 March 2021. This has resulted in a deficit in the Plan of £7,505k. The present value of contributions payable exceeds the net liability and, in accordance with IFRIC14, the additional liability has been recognised.

Present values of defined benefit obligations, fair value of assets and deficit

*     Deferred tax rate 2020 & 2021: 19%, 2017, 2018 & 2019: 17%

Reconciliation of opening and closing balances of the present value of the defined benefit obligations

Reconciliation of opening and closing balances of the fair value of Plan assets

The actual return on the Plan assets over the period ended 31 March 2021 was £1,100k (2020: £(82)k).

Total expense recognised in the Statement of Comprehensive Income within other finance income

Statement of recognised income and expenses

Assets

The investment strategy for the Plan is controlled by the Trustees, in consultation with the Company. None of the fair values of the assets shown above includes any of the Group's own financial instruments or any property occupied by, or other assets used by, the Group. Absolute return funds are invested in a diverse range of assets in order to achieve equity-like returns with reduced volatility. Alternative assets include infrastructure and derivatives.

Assumptions

The obligations of the Plan have been calculated by projecting forwards the figures from the initial results of the latest valuation as at 31 March 2018 and then making appropriate adjustments for known experience and for differences in assumptions.

The mortality assumptions adopted at 31 March 2021 and 31 March 2020 imply the following life expectancies from age 65:

The weighted-average duration of the defined benefit obligation at 31 March 2021 was 15 years (2020: 15 years).

Historic funding positions

The funding positions applicable at the start of each period are as follows:

Risks

The scheme is exposed to a number of risks, including:

Asset volatility: The Plan's defined benefit obligation is calculated using a discount rate set with reference to corporate bond yields; however, the Plan invests significantly in equities. These assets are expected to outperform corporate bonds in the long-term but provide volatility and risk in the short term.

Changes in bond yields: a decrease in corporate bond yields would increase the Plan's defined benefit obligation; however, this would be partially offset by an increase in the value of the Plan's bond holdings.

Inflation risk: a proportion of the Plan's defined benefit obligation is linked to inflation; therefore, higher inflation will result in a higher defined benefit obligation (subject to the appropriate caps in place). The majority of the Plan's assets are either unaffected by inflation, or only loosely correlated with inflation, therefore an increase in inflation would also increase the deficit.

Life expectancy: if Plan members live longer than expected, the Plan's benefits will need to be paid for longer, increasing the Plan's defined benefit obligation.

The Trustees and Company manage risks in the Plan through the following strategies:

Diversification: In order to counter asset volatility and changes in bond yields, investments are well diversified, such that the failure of any single investment would not have a material impact on the overall level of assets.

Investment Strategy: The Trustees are required to review their investment strategy on a regular basis and consult with the Company on any changes. The Trustees' investment strategy is set out in the Statement of Investment Principles.

Funding positions: The Trustees are required to assess the funding position annually by means of a formal actuarial report which must be shared with the Company.

Sensitivity analysis

The impact to the value of the defined benefit obligation of a reasonably possible change to one actuarial assumption, holding all other assumptions constant, is presented in the table below:

Small changes to other assumptions, such as the allowance for commutation of pension for cash at retirement, and the proportion of members assumed to be married at retirement, do not have such a significant effect on the obligations of the Plan.

12. Post-year end activities

1.   Disposal of Brighter Foods Limited on 11 May 2021 for an aggregate cash consideration of £43.0 million on a cash free/debt free basis to The Hut Group plc ("THG"). RGF, through its subsidiary NBF, has an interest in 84.334 per cent. of the issued share capital of Brighter Foods Limited with the balance owned by Brighter's Managers. The Group received cash proceeds of £35.64 million.

2.   In May 2021, the Group made a payment of £8.5m net consideration to the Continuing Group's pension scheme (the Napier Brown Retirement Plan) (the "Plan"), which is broadly equivalent to the Plan's low dependency technical provisions basis. As such, it is expected that the Group will not have to pay further deficit contributions, which currently amount to £1.0 million per annum, until a new schedule of contributions is agreed based on the valuation to be agreed as at 31 March 2021 for the Plan; such agreement would take into account this cash injection, which may result in payments of up to £1.5 million (in aggregate) being paid between 1 January 2023 and 30 June 2025 to close the gap towards a buy-out basis.

3.   In May 2021, the Group paid £23.1 million to the Loan Note Holders, reducing the amount repayable from £45.6 million to £22.5 million in respect of the loan notes, resulting in a significant reduction in the financial liabilities attached to the loan notes. Also, in May 2021 the Loan Note Holders waived £0.5m of certain of the outstanding loan notes held by each of the Major Shareholders (the "Loan Note Waivers") reducing the amount of loan notes outstanding to £22.0 million. This waiver has been agreed in respect of certain costs related to the Disposal. The £540,000 attributable to waiver is split between c.£350,000 of capital, £100,000 relating to certain management compensation with the remainder being in respect of interest and redemption premium.

4.   The Company's three major shareholders, NB. Ingredients Limited ("Napier Brown"), Omnicane International Investors Limited ("Omnicane"), and certain funds managed by Downing LLP ("Downing") (together the "Major Shareholders"), have finalised an amendment deed relating to the funding agreements.  The Amendment Deed amends the final repayment dates of each of the Agreements, including the convertible loan notes;  they have all been extended to 19 May 2023 (the "Final Repayment Date") with no further change to the interest rate payable by the Company pursuant to each Agreement.

5.  At the forthcoming AGM, the Independent Directors, with the support of the rest of the Board, will be proposing that the Company cancels the listing of the Company's shares on AIM. This is expected to save approximately £150,000  a year in costs and provide greater flexibility and agility to maximise shareholder value.