Sow Good Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Sow Good sells freeze-dried food products through direct-to-consumer and business-to-business channels. The company reported unaudited results and identified itself as a smaller reporting company.
Financial results and position
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Revenue | $198,930 | $48,372 |
| Gross profit / gross margin | $122,250 / approximately 61% | $881 / approximately 2% |
| Operating expenses | $1,025,444 | $1,449,150 |
| Operating loss | $(903,194) | $(1,448,269) |
| Interest and other expense | $498,336 | $103,793 |
| Net loss / loss per share | $(1,401,530) / $(0.29) | $(1,552,062) / $(0.32) |
| Net cash used in operating activities | $(966,117) | $(1,482,598) |
| Cash at quarter-end | $348,441 | $276,464 at Dec. 31, 2022 |
| Working capital | $1,901,262 per MD&A table | $1,687,880 at Dec. 31, 2022 |
| Total assets / stockholders’ equity | $9,065,138 / $2,408,614 | $8,898,577 / $2,810,887 at Dec. 31, 2022 |
Revenue increased $150,558, or 311%, year over year as product sales and business-to-business activity grew. Cost of goods sold rose 61%, less than revenue, and management attributed improved gross profit to increased sales and economies of scale. Lower salaries and benefits and other general and administrative expenses helped reduce operating expenses. The net loss narrowed 10%, despite a $394,543 increase in interest expense.
Investing cash outflow was $211,906, primarily for construction in progress. Financing provided $1,250,000 from related-party notes. Cash increased $71,977 during the quarter. Current assets were $2,626,248 and current liabilities were $725,016. Debt carrying values were $4,214,013 for related-party notes and $430,402 for other notes, after unamortized discounts; operating lease liabilities totaled $1,341,358. The notes’ stated principal totaled $8,175,000 before discounts.
Material changes, outlook and risks
- The company launched freeze-dried candy in Q1 and reported 14 candy product lines for sale as of May 19, 2023.
- Construction continued on the second and third freeze dryers and facility improvements. Management expected the additional dryers to enter service in Q2 2023.
- Management said cash at March 31 was insufficient to fund operations for the next 12 months under the current business plan. The filing states that recurring losses, negative operating cash flow, and financing needs raise substantial doubt about the company’s ability to continue as a going concern. Additional financing or expense reductions may be needed; success is not assured.
- After quarter-end, the company raised additional funds through promissory notes and warrants. Management reported approximately $1.9 million cash on hand as of May 19 or May 22, 2023; the filing gives differing totals for proceeds raised. The financing included related parties and carries potential dilution through warrants.
- Management cited risks including inadequate liquidity, failure to achieve sufficient sales or distribution, supply-chain delays, higher transportation, labor or raw-material costs, litigation, and OTCQB trading volatility and illiquidity.
- Disclosure controls and procedures were deemed ineffective as of March 31, 2023. Management cited limited finance staffing and inadequate segregation of duties, with audit adjustments and potential for future material misstatement. Management said it performed additional procedures to support the statements.
- The company reported no material litigation, defaults on senior securities, or off-balance-sheet arrangements. It reported $175,245 in cash above FDIC/SIPC insured limits at March 31.
Key investor verification points
- Reconcile post-quarter financing proceeds and timing: the filing variously reports $1.55 million, $1.6 million, and other financing amounts, with different related-party totals and cash measurement dates.
- Confirm available liquidity, expected cash burn, financing availability, and whether the going-concern uncertainty has been alleviated.
- Track whether the new freeze dryers entered service as expected and whether candy and business-to-business sales translate into sustained revenue and margins.
- Review related-party debt terms, the substantial warrant and option overhang, and potential dilution. The filing reports 1,903,750 warrants outstanding and 590,991 options outstanding at March 31.
- Resolve the working-capital discrepancy: the MD&A table gives $1,901,262, while nearby narrative text states $1,901,232.
- Monitor remediation of the ineffective disclosure controls and the risk of future reporting errors.