Sow Good Inc. quarterly report, Q3 FY2014

Business context and reporting period

The supplied filing is a Form 10-Q for the quarter ended September 30, 2014. Although the request identifies Sow Good Inc., the filing itself names Black Ridge Oil & Gas, Inc. as the registrant; investors should verify the company and filing match. Black Ridge was a non-operating oil and gas producer focused on the Bakken and Three Forks formations in North Dakota and Montana. Its interim financial statements are unaudited.

Financial and operating results

Third-quarter production was 70,043 Boe, or 761 Boe per day. Nine-month production was 182,313 Boe. Q3 sales price after settled derivatives was $77.41 per Boe; production expense was $9.57 per Boe, production taxes $8.41 per Boe, and G&A $9.85 per Boe.

For the first nine months, operating cash flow was $6.39 million, investing cash outflow was $21.80 million, and financing cash inflow was $14.30 million. Cash declined by $1.12 million to $28,239. At September 30, current assets were $6.18 million and current liabilities $12.55 million, resulting in negative working capital of $6.37 million. Total debt was $48.74 million gross and $46.46 million net of discounts; total liabilities were $63.40 million. The filing reports no current maturities of debt.

Changes versus prior comparable periods

• Q3 oil and gas sales rose 110% year over year; total revenue rose 197%, principally due to higher production and a $2.15 million mark-to-market derivative gain. Production increased 147% year over year, while realized prices before settled-derivative effects fell 15%.
• Q3 net income improved from a $223,664 loss in 2013 to $1.19 million income. However, excluding the after-tax mark-to-market derivative gain, adjusted net income was a loss of $162,082.
• For the nine months, oil and gas sales increased 126% and production increased 140% year over year. Net income improved from a $207,151 loss to $265,796 income, while adjusted net income remained a loss of $397,843.
• Debt net of discounts rose from $30.56 million at year-end 2013 to $46.46 million at September 30, 2014. Net property and equipment increased to $90.97 million from $72.76 million.
• G&A per Boe and depletion per Boe decreased year over year, while absolute production, production-tax, and depletion expenses increased with the larger operating base.

Outlook, risks, contingencies and unusual items

• Management said revenue was not expected to exceed investment in well development and operating costs through the remainder of 2014 and into 2015, but believed credit-facility availability could fund planned activity. Cash needs over the next 12 months were expected to be met through sales, facility borrowings, and potentially stock issuance. No specific earnings or production guidance was provided.
• At September 30, the company reported $17.75 million outstanding on its senior facility and $30.00 million drawn under the subordinated facility, plus $989,227 of PIK interest. The facilities carry financial covenants, including leverage and coverage tests; the company reported compliance at September 30. It also disclosed $30 million of subordinated-facility availability and a $35 million senior borrowing base. It drew a further $2.4 million on the senior facility between October 1 and November 11.
• The company had approximately $5.5 million of additional well-development AFE commitments beyond amounts paid or accrued. A separate riverbed lease is subject to third-party ownership litigation; the company had not recognized related well costs or revenue. It estimated that recognizing the well through September 30 would have added about $1.12 million in sales and $287,000 in operating expenses and production taxes.
• Commodity prices and interest rates are key risks. Derivative contracts reduce downside exposure but also limit potential gains; at quarter-end, open oil swaps covered 294,000 barrels at a weighted average price of about $89.81 per barrel, alongside collars. The filing recorded a $1.05 million nine-month mark-to-market gain and a $449,135 realized derivative loss.
• The board and shareholders had approved authority for a potential reverse split of up to 1-for-10, but the board had not made it effective as of the filing date. The filing reports no material litigation known to the company apart from the described acreage dispute, and no material change to previously disclosed risk factors.

Important facts for investors to verify

• Confirm the registrant identity: the source filing is for Black Ridge Oil & Gas, Inc., not Sow Good Inc.
• Review the effect of derivative accounting on reported revenue and profit; Q3 GAAP income contrasted with adjusted net loss excluding the mark-to-market gain.
• Assess liquidity and refinancing exposure given $28,239 cash, negative working capital, substantial debt, and reliance on credit facilities and future funding.
• Verify covenant calculations and remaining borrowing availability, including the subsequent $2.4 million draw and the company’s dependence on lender redeterminations.
• Evaluate the $5.5 million AFE commitments, planned investment needs, commodity-price sensitivity, and the unresolved riverbed lease dispute.