Sow Good Inc. — Q1 2021 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2021, compared with the same period in 2020. The company changed its name from Black Ridge Oil & Gas, Inc. to Sow Good Inc. on January 21, 2021, reflecting its shift toward freeze-dried foods following its October 2020 acquisition of S-FDF, LLC. The company completed its Irving, Texas production-facility build-out in March; its first freeze dryer passed production testing. Sow Good’s direct-to-consumer brand launch was announced in May, after quarter-end.
Financial performance and position
- Revenue: $0 in both Q1 2021 and Q1 2020; therefore, operating margins are not meaningful.
- Operating expenses and loss: Operating expenses were $1.151 million, up from $418,000. Operating loss widened to $1.151 million from $418,000.
- Net loss: $808,000, or $0.22 per share, compared with $2.646 million, or $1.65 per share. The improvement primarily reflected a $231,000 unrealized gain on AESE shares versus a $2.213 million unrealized loss a year earlier, plus $114,000 of PPP loan-forgiveness gain. The operating loss increased.
- Cash flow: Operating cash use was $1.195 million versus $322,000. Investing cash use was $697,000, mainly facility and equipment construction. Equity financing provided $2.525 million; cash increased by $633,000 to $2.546 million.
- Liquidity: Current assets were $3.567 million and current liabilities $506,000, resulting in working capital of $3.062 million. Cash plus the AESE investment totaled $3.057 million at quarter-end. Management stated quarter-end cash was insufficient for the next 12 months based on its business plan.
- Debt and leases: Notes payable were $150,000, consisting of the SBA EIDL loan; the $113,000 PPP loan and accrued interest were forgiven in January. Operating lease liabilities totaled $1.430 million.
- Other balance-sheet items: Inventory was $457,000, including $314,000 of work in progress. Construction in progress was $2.298 million. Goodwill was $6.411 million. Stockholders’ equity was $12.148 million.
Material changes versus the prior comparable period
- General and administrative expenses increased $729,000, including higher salaries, stock-based compensation, professional fees, and administrative costs as the company developed its food business.
- Stock-based compensation expense rose to $376,000 from $21,000; this included $255,000 for shares issued to officers and directors for services.
- Operating cash use increased by $873,000, principally reflecting inventory purchases and costs associated with moving operations to Texas and developing the new business.
- The company raised $2.525 million by selling 631,250 shares at $4.00 each; officers and directors purchased $900,000 of the offering. Common shares outstanding rose to 3,939,439 from 2,742,890 at year-end.
Outlook, risks, and unusual items
- Going concern: The filing says recurring losses and available cash raise substantial doubt about the company’s ability to continue as a going concern. It is seeking additional capital and intends to sell AESE shares, but financing and sale proceeds are not assured. As of May 6, it reported $1.862 million cash and AESE shares valued at $426,000.
- Business outlook: Management said it expected to add products, including soups, and launch its Sustain Us brand in 2021. A second freeze dryer could require approximately $1 million of additional capital. The company plans to fund operations through existing cash and additional equity or debt financing as needed; no revenue or earnings guidance was provided.
- Execution and market risks: Risks include raising sufficient capital, scaling production and distribution, generating product sales, stock-price volatility and illiquidity, and fluctuations in AESE’s share price. Cash deposits exceeded insured limits by $1.648 million at quarter-end.
- Related-party matters: The company’s facility lease is with an entity owned by Executive Chairman Ira Goldfarb. Officers and directors also participated in the equity financing and received stock-based compensation.
- Disclosure controls: Management concluded disclosure controls were effective as of March 31, 2021; it reported no material change in internal control over financial reporting during the quarter. No material litigation was reported.
Important facts for investors to verify
- Whether the company has secured enough financing to fund operations and address the stated going-concern uncertainty.
- Whether the May brand launch translated into commercial sales, repeat demand, and sustainable gross margins; Q1 revenue was zero.
- The timing, cost, and production capacity of the facility and freeze-drying equipment, including whether a second dryer will be funded.
- The value and saleability of the remaining AESE shares, and the effect of any sale on liquidity.
- The filing’s differing production descriptions: the MD&A says the company was producing its own products, while the inventory note says production had not yet commenced.
- The extent of future dilution from equity financing, officer and director share awards, and outstanding options and warrants.