Sow Good Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This annual filing was signed March 31, 2021. The company changed its name from Black Ridge Oil & Gas, Inc. to Sow Good Inc. in January 2021 and is transitioning from its prior activities into freeze-dried foods.
Business context and material developments
- On October 1, 2020, the company acquired assets and agreements of S-FDF, LLC to enter the freeze-dried food business, issuing 1,120,000 shares at a reported fair value of $6.72 million. An additional 500,973 shares were issued on January 4, 2021. The acquired business had no meaningful operating history or major customers.
- The company plans to sell snacks, smoothies and soups under the Sow Good and Sustain Us brands, through direct-to-consumer and business-to-business channels. It had not launched commercial sales by year-end and reported no 2020 revenue.
- Management reported that the production facility build-out was completed in March 2021 and the first freeze drier completed production testing on March 20, 2021. Product samples had been provided to prospective B2B customers.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $0 | $466,595 |
| Operating expenses | $3.01 million | $3.06 million |
| Operating loss | $3.01 million | $2.60 million |
| Net income (loss) attributable to Sow Good | $(5.32) million | $4.13 million |
| Net cash used in operating activities | $(1.74) million | $(9.71) million |
| Cash and cash equivalents at year-end | $1.91 million | $108,756 |
| Working capital at year-end | $1.77 million | $5.69 million |
- Gross margin is not meaningful because the company had no product sales. The filing does not report a product-sales margin.
- FY2020 net loss included $1.93 million of losses on AESE investments and $386,164 of interest expense, including $377,440 of warrant-related debt discount expense. FY2019 results included a $20.45 million gain on deconsolidation of a subsidiary and discontinued-operation losses; the periods are therefore not directly comparable.
- Investing cash flow was $3.28 million, including $3.18 million from sales of AESE securities and $1.15 million received in the S-FDF acquisition, offset by equipment and construction spending. Financing cash flow was $262,925 net, including $802,025 of borrowings and $539,100 of repayments.
- Year-end notes payable were $262,925: a $150,000 SBA EIDL loan and a $112,925 PPP loan. The PPP loan and accrued interest were forgiven in January 2021. The EIDL bears 3.75% interest, is secured by company assets and has scheduled payments beginning June 2021. The company also recorded $1.44 million of operating lease liabilities; total liabilities were $2.29 million.
- After year-end, the company raised $2.525 million by selling 631,250 shares at $4.00 each. Management reported approximately $2.7 million cash and $650,000 of liquid securities, or $3.35 million combined liquidity, as of March 19, 2021. Some of the financing shares were purchased by related parties.
Outlook, risks and unusual items
- Management expected initial sales in the first half of 2021 and said scaling production and distribution would depend substantially on obtaining additional capital. A second freeze drier could require approximately $1 million of incremental capital.
- The auditor included a going-concern explanatory paragraph: year-end cash was projected to be insufficient for the following 12 months, raising substantial doubt about the company’s ability to continue as a going concern. The post-year-end financing provided additional liquidity, but the company continued to seek capital; the financial statements contain no adjustments for the uncertainty.
- Key risks include the start-up’s lack of sales history, its limited marketing and distribution capabilities and absence of distributor or retailer agreements, financing needs and possible dilution, launch and production execution, COVID-19 impacts, competition, food safety and product liability, and volatility and illiquidity of OTCQB-traded shares.
- The S-FDF acquisition generated $6.41 million of goodwill. The auditor identified acquisition accounting and management’s fair-value judgments as a critical audit matter. No goodwill impairment was recorded for 2020.
- The company leases its 20,945-square-foot facility from an entity owned by Executive Chairman Ira Goldfarb, with reported rent of $10,036 per month and annual escalations. The acquired business was co-owned by Ira and CEO Claudia Goldfarb, making the transaction and governance arrangements important areas for investor review.
- The company reported effective disclosure controls and internal control over financial reporting as of year-end. The auditor issued an unqualified opinion on the financial statements, subject to the going-concern explanatory paragraph; the auditor did not attest to internal controls.
Most important facts to verify
- Whether commercial production and sales began as planned, and whether the company secured meaningful distribution, customer orders and repeat sales.
- Current cash burn, financing availability and runway after the February 2021 share sale, including the effect of future capital needs and dilution.
- The exact acquisition share count and accounting: the filing gives 500,973 additional shares in several places but includes a 500,673-share figure in one note.
- The valuation and recoverability of the $6.41 million goodwill balance and the acquired assets, given the start-up’s lack of sales history.
- Related-party terms and approvals for the S-FDF acquisition, facility lease and share purchases, as well as the full potential dilution from equity plans, options and warrants.