Sow Good Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2021; filed August 16, 2021. The company had recently shifted from its prior oil-and-gas and SPAC-related activities to developing a freeze-dried food business. It launched its Sow Good direct-to-consumer brand in May 2021.
Financial performance and position
| Metric | Q2 2021 | Six months 2021 | Comparable 2020 |
|---|---|---|---|
| Revenue | $7,076 | $7,076 | $0 |
| Gross profit / margin | $2,177 / approximately 31% | $2,177 | $0 |
| Operating expenses | $1,461,970 | $2,612,830 | $445,464 / $863,082 |
| Net income (loss) | $(1,557,794) | $(2,365,671) | $716,782 / $(1,928,797) |
| Operating cash flow | Not presented quarterly | $(2,764,841) | $(682,885) |
- At June 30, cash was $3.75 million, current assets $4.66 million, current liabilities $390,247, and working capital $4.27 million.
- Total liabilities were $1.92 million, including $150,000 of notes payable and $1.42 million of operating lease liabilities. The SBA EIDL loan bears 3.75% interest; the PPP loan was forgiven in January 2021.
- Six-month investing cash flow was $(390,643), including $805,004 of property and equipment purchases, partly offset by $414,361 from selling Allied Esports securities. Financing provided $4,997,136, primarily from stock sales and subscriptions.
- Inventory rose to $858,774 from $141,371 at year-end, including $574,753 of work in progress. Management said significant production had not yet commenced and no obsolescence reserve was recorded.
Material changes and management commentary
- Q2 revenue began with test-launch online sales. Management attributed higher operating costs to building the freeze-dried business, including increased staffing, infrastructure, stock-based compensation, and depreciation.
- Six-month net loss increased by $436,874 year over year, while operating expenses increased by $1.75 million. Favorable comparison items included a $113,772 PPP forgiveness gain and a $133,944 gain on Allied Esports investments; the company had fully sold that investment by June 30.
- Common shares issued and outstanding increased from 2,742,890 at December 31, 2020 to 3,978,194 at June 30, 2021. The company also reported 593,260 shares payable and substantial outstanding options and warrants.
- After quarter-end, the company reported completion of a stock offering for $3,036,797. Of this, $2,472,136 had been received by June 30 and recorded as a subscription payable; the remaining $564,661 was received in July. Six new gluten-free granola products launched July 23.
- Management anticipated higher revenue during the rest of 2021 but provided no quantified guidance. A second freeze dryer could require approximately $1 million of additional capital.
Risks, contingencies, and unusual items
- Going concern: The filing states that recurring losses, negative operating cash flow, limited revenue visibility, and projected cash needs 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 under its current plan and expected to seek additional equity or debt financing or reduce expenses.
- Business execution depends on scaling production and securing adequate distribution and financing. The company cited risks including weak product sales, limited liquidity, financing availability, stock-price volatility and illiquidity, COVID-19 effects, and OTCQB trading requirements.
- The company had $2,968,617 of cash above stated FDIC/SIPC insured limits. It reported no material litigation and no off-balance-sheet arrangements.
- The Irving facility lease is with an entity owned by executive chairman Ira Goldfarb; the lease liability was $1,420,686. Officers and directors also bought shares in company offerings and received stock-based compensation. These related-party and dilution matters warrant review.
- Management concluded disclosure controls were effective at June 30, 2021; it reported no material changes in internal control over financial reporting during the six-month period.
Important facts for investors to verify
- Whether subsequent sales have materially increased revenue and whether the company can achieve positive gross margins at commercial scale.
- Cash burn, remaining runway, and the timing, terms, and dilution effects of additional financing.
- Reconciliation of June subscription proceeds, July cash receipts, and shares issued or still payable.
- Production capacity, inventory conversion and obsolescence exposure, and capital required for a second freeze dryer.
- Related-party lease terms and ongoing stock- and option-based compensation, including potential dilution.