Sow Good Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2023; filed August 14, 2023. Financial statements are unaudited. Sow Good sells freeze-dried foods through direct-to-consumer and business-to-business channels and has pivoted toward freeze-dried candy.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $1.315 million | $245 thousand | $1.514 million | $293 thousand |
| Gross profit (loss) | $(1.380) million | $94 thousand | $(1.258) million | $95 thousand |
| Operating expenses | $1.093 million | $1.852 million | $2.118 million | $3.301 million |
| Net loss | $(3.321) million | $(2.113) million | $(4.722) million | $(3.665) million |
| Basic and diluted loss per share | $(0.68) | $(0.44) | $(0.97) | $(0.76) |
- Q2 revenue increased 437% year over year; six-month revenue increased 416%, which management attributed to candy sales and expanded B2B sales.
- Gross margin was approximately negative 105% in Q2 and negative 83% for the six-month period. The company recorded a $1.920 million write-down of non-candy inventory; excluding that charge, management reported gross margins of approximately 41% for Q2 and 44% for the six-month period.
- Net loss increased 57% in Q2 and 29% for the six-month period. The inventory write-down and higher interest expense, largely amortization of warrant-related debt discounts, were major contributors. Lower personnel costs partly offset these items.
- At June 30, cash was $293 thousand, current assets $2.059 million, current liabilities $1.384 million, and working capital $675 thousand, down from $1.688 million at December 31, 2022. Total assets were $8.586 million; total liabilities were $7.791 million; stockholders’ equity was $795 thousand.
- Six-month operating cash outflow was $2.421 million, investing cash outflow $362 thousand, and financing cash inflow $2.800 million. Cash increased by $17 thousand from year-end. Operating cash use was slightly higher than in the comparable 2022 period.
- Notes payable had a $5.428 million net carrying amount after debt discounts, including $4.868 million owed to related parties; operating lease liabilities were $1.329 million. Current maturities of notes payable totaled $294 thousand, net of discounts. Total liabilities also include other accrued and operating liabilities.
Changes, outlook, risks and unusual items
- Management said it completed construction of its second and third freeze driers in Q2 and began construction of a fourth and fifth, expected to be completed in Q1 2024. It cited retailer partnerships, including FYE, Big Lots and Hy-Vee, and described candy as an anticipated major growth driver. No quantified revenue or earnings guidance was provided.
- The inventory write-down reflected a decision to dispose of non-candy freeze-dried products and focus on better-selling candy. Inventory fell to $919 thousand from $1.973 million at year-end.
- During the six months, the company raised $2.8 million through notes, including $2.4 million from officers and directors. The notes generally carry 8% interest and were issued with long-term warrants; warrant discount amortization contributed $1.055 million of six-month interest expense. Related-party note funding and associated warrant terms warrant attention.
- The filing states that recurring losses, a $60.402 million accumulated deficit, negative operating cash flows and limited cash raise substantial doubt about the company’s ability to continue as a going concern. Management said June 30 cash was insufficient for the next 12 months and that it expects to seek additional debt or equity financing, or reduce expenses if sales fall short. There is no assurance financing will be available.
- As of August 14, 2023, $1.1 million was held in escrow for a financing and was subject to return if the financing conditions were not completed by August 31, 2023.
- Disclosure controls and procedures were reported ineffective as of June 30. Management cited insufficient finance staffing and segregation of duties, and a possibility of material misstatement in future periods; it said additional analyses and procedures were performed for these statements.
- Management identified risks including inadequate liquidity, weak sales or distribution, supply-chain delays, higher transportation, labor or raw-material costs, stock-price volatility and illiquidity. It reported no material litigation, defaults on senior securities or off-balance-sheet arrangements.
Most important facts to verify
- Whether the escrowed $1.1 million financing closed and the funds became available, and the company’s subsequent cash position and financing needs.
- Whether candy demand, retailer sell-through and production capacity support management’s growth expectations, and whether the fourth and fifth freeze driers are completed as planned.
- The composition and recoverability of receivables, inventory and the allowance for doubtful accounts; the filing records $185 thousand of bad-debt expense and allowance.
- The terms, repayment schedule and related-party concentration of notes, along with the accounting and ongoing expense impact of warrants issued with the debt.
- Plans and progress to remediate ineffective disclosure controls, given limited finance staffing and identified material-misstatement risk.
- Potential dilution: 2.291 million warrants and 637 thousand options were outstanding at June 30; 4.868 million common shares were outstanding.