Sow Good Inc. quarterly report, Q3 FY2018

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Filing identity and reporting period

Important discrepancy: The request identifies Sow Good Inc., but the filing text is for Black Ridge Oil & Gas, Inc. (also referring to Black Ridge Acquisition Corp., or BRAC). This summary reflects the filing provided, not Sow Good Inc. It is an unaudited Form 10-Q for the quarter ended September 30, 2018, filed November 8, 2018.

Black Ridge describes its business as pursuing oil-and-gas investments and managing assets for partners; it also sponsors and manages BRAC, a blank-check company seeking a business combination. Black Ridge consolidates BRAC as a variable-interest entity, while BRAC public shareholders’ interest is presented as redeemable non-controlling interest.

Financial performance and position

  • Revenue: No revenue in the three or nine months ended September 30, 2018. Nine-month 2017 revenue was $1.0 million in management fees; that agreement ended in 2017.
  • Operating results: Third-quarter 2018 operating loss was $546,944, versus $571,764 a year earlier. Nine-month operating loss was $1.752 million, versus $825,261 in 2017. Third-quarter net income attributable to Black Ridge was $1.603 million, versus a $580,477 loss; nine-month attributable income was $438,431, versus an $838,688 loss. 2018 results included substantial interest and settlement income.
  • Unusual income: 2018 included $2.25 million settlement income and $112,500 related settlement expense, for net settlement income of $2.1375 million. Nine-month interest income was $1.722 million and trust-investment gains were $65,618.
  • Expenses and margins: Nine-month operating expenses were $1.752 million, down from $1.825 million. With no 2018 revenue, a revenue margin is not meaningful. Management cited lower salaries and stock compensation, offset by higher professional and other general and administrative costs.
  • Cash flow: Nine-month operating cash flow was positive $473,366, investing cash flow positive $187,773, and financing cash flow positive $450; cash increased $661,589 to $2.139 million. The investing inflow was interest released from the trust for taxes and franchise fees.
  • Liquidity: Current assets were $2.255 million and current liabilities $447,029 at September 30, 2018, yielding working capital of $1.808 million. Separately, $140.580 million of cash and securities was held in trust for BRAC public shareholders and was restricted; it should not be treated as ordinary corporate liquidity.
  • Debt and equity: No long-term liabilities or debt were reported. Total liabilities were $447,029. Shares outstanding were 479,844,900 at September 30, 2018; the filing reports the same number as of November 7, 2018.

Changes versus the prior comparable period

Black Ridge had no management-fee revenue in 2018, compared with $1.0 million in the first nine months of 2017. Despite higher operating losses year over year, net income attributable to Black Ridge improved, primarily because 2018 included the settlement proceeds and BRAC trust-account interest and gains. General and administrative expense declined modestly overall, but professional services and other G&A costs rose as the company supported two public companies and BRAC’s target search. The share count was substantially higher than in 2017 following the 2017 rights offering and backstop financing.

Outlook, risks and contingencies

  • Going concern: Management said the company had no current revenue source and that cash on hand would be insufficient to fund general and administrative expenses over the next year. It is seeking management-fee arrangements, joint ventures, equity financing, debt or other capital, but states it may not obtain sufficient funding. The financial statements include no adjustments for this uncertainty.
  • BRAC transaction risk: BRAC had to complete a business combination within 21 months of its October 2017 IPO or redeem public shares and liquidate, subject to applicable requirements. No successful business combination is assured; public shareholders may redeem, and trust funds may face third-party claims. BRAC’s rights and warrants may expire worthless if it liquidates.
  • Management outlook: The company plans to pursue oil-and-gas opportunities and new partners, and expects to meet cash needs through potential management fees and additional financing. No quantified operating guidance was provided.
  • Other matters: Management reported effective disclosure controls as of September 30, 2018, no material changes in internal control, no material litigation known, and no material subsequent events. It reported no off-balance-sheet arrangements.

Important facts for investors to verify

  1. Confirm the issuer: the supplied filing is for Black Ridge Oil & Gas, Inc., not Sow Good Inc.
  2. Assess whether the company can secure financing or recurring revenue before its stated cash runway becomes inadequate.
  3. Separate Black Ridge’s available cash from BRAC’s restricted trust assets and verify the terms and status of any BRAC business-combination process.
  4. Review the sustainability of reported earnings: 2018 profits depended materially on a one-time settlement and BRAC trust interest, despite no operating revenue.
  5. Check the share count, potential dilution from options and warrants, and the implications of BRAC’s redemption and liquidation provisions.