Sow Good Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. The company sells freeze-dried foods through direct-to-consumer channels and is developing business-to-business sales. Financial statements are unaudited.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $87,741 | $21,137 | $381,056 | $28,213 |
| Gross profit / margin | $22,546 / 26% | $1,741 / 8% | $117,767 / 31% | $3,918 / 14% |
| Operating loss | $(1,299,669) | $(1,580,460) | $(4,505,275) | $(4,191,113) |
| Net loss | $(1,647,272) | $(1,582,157) | $(5,312,123) | $(3,947,828) |
| Net loss per share | $(0.34) | $(0.34) | $(1.10) | $(0.96) |
- For the nine months, operating cash used was $4.15 million; investing cash used was $2.27 million; financing provided $4.45 million. Cash declined $1.97 million to $1.37 million.
- At September 30, current assets were $3.62 million and current liabilities $741,348, for working capital of $2.88 million. Total liabilities were $5.58 million, including $3.52 million of notes payable net of discounts and $1.37 million of operating lease liabilities.
- Gross notes payable were $5.95 million to related parties and $730,000 to other lenders; debt discounts substantially reduce their balance-sheet carrying amounts. Nine-month interest expense was $843,240, including $607,320 amortization of warrant-related debt discounts.
- Capital spending included $2.18 million of construction in progress for additional freeze driers and facility work. Inventory was $1.90 million, up from $1.45 million at year-end.
Changes versus prior periods
- Revenue rose 315% in Q3 and 1,251% for the nine-month period, from a small prior-year base as the company expanded product sales and reported increased B2B demand.
- Gross margins improved, while operating expenses increased 10% for the nine months to $4.62 million, reflecting operating expansion and higher depreciation. Nine-month operating loss widened by $314,162.
- Nine-month net loss increased by $1.36 million. Higher interest expense and the absence of prior-year gains from debt extinguishment and an investment were major contributors; Q3 net loss increased 4% despite lower operating loss.
- Financing shifted from common-stock sales in 2021 to debt in 2022. The company raised $4.45 million in debt proceeds during the nine months and issued long-term warrants with the financings.
Outlook, risks and unusual items
- Management reported growing B2B customer demand and expects the pipeline to support sales growth in coming quarters, but provided no quantified revenue or earnings guidance.
- The filing states that cash on hand was insufficient to sustain operations for the next 12 months under the current plan and raises substantial doubt about the company’s ability to continue as a going concern. Management expects to seek further debt or equity financing or reduce expenses; success is not assured.
- Completing two additional freeze driers was expected to require approximately $500,000, which management expected to fund with financing obtained in August 2022.
- Related-party financing is significant: directors and affiliated parties provided a substantial portion of the notes. The operating facility is leased from an entity owned by the Chairman; related-party lease terms and financing arrangements merit review.
- The August 2022 note offering permits up to $2.5 million; $750,000 was received by quarter-end from two directors. Notes bear 8% interest, mature in 2025, and include warrants exercisable at $2.60. April 2022 notes bear 6% interest and also mature in 2025.
- Other disclosed risks include execution of production and distribution expansion, obtaining financing, sales and customer growth, supply-chain disruption, and increases in labor, transportation, and raw-material costs. Cash deposits exceeded insured limits by $832,600. The company reported no material litigation, no defaults on senior securities, and effective disclosure controls; the CEO also served as interim CFO following the CFO’s April departure.
Most important facts for investors to verify
- Whether B2B demand converts into sustained revenue, improved gross profit, and a workable path to operating profitability.
- Cash runway, actual financing availability, and the terms or dilution associated with additional funding.
- Debt maturities, interest-payment terms, warrant-related discounts, and the extent of related-party lending and governance oversight.
- Completion, cost, and utilization of the additional freeze driers, along with inventory demand and potential obsolescence.
- Potential dilution: 1,528,750 warrants and 631,798 options were outstanding at September 30, 2022; common shares outstanding were 4,847,384.