Sow Good Inc. 2021 Q3 Form 10-Q
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2021, compared with the same 2020 periods. Sow Good is developing a freeze-dried food business following its October 2020 acquisition of S-FDF, LLC; it launched its direct-to-consumer brand in 2021 and added six granola products in July. The company completed its Irving, Texas production-facility build-out and began producing with its first freeze dryer.
Key financial metrics
| Metric | Q3 2021 | Nine months 2021 | Comparable 2020 |
|---|---|---|---|
| Revenue | $21,137 | $28,213 | $0 |
| Gross profit (margin) | $1,741 (about 8%) | $3,918 (about 14%) | $0 |
| Operating expenses | $1,582,201 | $4,195,031 | $981,553 / $1,844,635 |
| Net loss | $1,582,157 | $3,947,828 | $2,492,204 / $4,421,001 |
| Operating cash flow | Not reported quarterly | $(4,304,501) | $(1,111,648) |
At September 30, cash was $2,580,489; working capital was $3,425,459; total current assets and liabilities were $3,832,399 and $406,940. Total assets were $14,608,576 and stockholders’ equity was $12,685,377. Notes payable totaled $150,000, comprising the SBA EIDL loan, bearing 3.75% interest and secured by company assets. Operating lease liabilities were $1,410,653. Cash increased by $667,760 in the first nine months, supported by $5,562,511 in net equity financing; investing cash outflow was $590,250, including $1,004,611 of equipment purchases partly offset by investment-sale proceeds.
Changes versus prior comparable periods
- Revenue began in 2021, but remained at test-launch levels; the filing reports no 2020 revenue.
- Nine-month operating cash use increased by $3,192,853, principally reflecting inventory purchases and costs of developing the Texas operation.
- Nine-month operating expenses rose by $2,350,396, including higher salaries and benefits, infrastructure costs, and depreciation following equipment additions.
- Net loss narrowed year over year, mainly because 2021 included gains on Allied Esports securities and PPP loan forgiveness, whereas 2020 included a substantial investment loss and warrant-related debt-discount expense. These items do not demonstrate improvement in core operating performance.
- The company raised $2,525,000 in February and $3,037,511 in July through share sales. Common shares outstanding increased to 4,727,650 at September 30; 4,750,820 were reported outstanding on November 12.
Outlook, risks, and unusual items
Management anticipated increased revenue over the remainder of 2021 but gave no quantified guidance and cautioned that there was no assurance. It said September cash was insufficient, based on current business-plan projections, to sustain operations for the next 12 months. The filing states that recurring losses, negative operating cash flow, and financing needs raise substantial doubt about the company’s ability to continue as a going concern. Management expects to seek additional equity or debt financing and may reduce expenses if sales fall short; expansion with a second freeze dryer could require about $1 million of incremental capital.
Risks include the ability to generate product sales and distribution, raise capital, scale production, and maintain adequate liquidity, as well as stock-price volatility and low trading volume. The filing reports $1,813,489 of cash above FDIC/SIPC insured limits. It identifies a related-party facility lease with an entity owned by Executive Chairman Ira Goldfarb, and substantial stock-based compensation; officers and directors participated in the 2021 share offerings. Management reported disclosure controls were effective and no material changes to internal control over financial reporting. No material litigation or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether product sales, margins, and distribution have grown enough to reduce cash burn, and the latest cash runway and financing plans.
- Potential dilution from future equity raises and outstanding options and warrants; the filing reports 666,614 options and 106,300 warrants outstanding at September 30.
- The related-party lease terms, lease obligations, and any updates to the disclosed facility arrangement.
- A possible inconsistency in the quarterly statement of changes in stockholders’ equity: its displayed June 30 accumulated deficit equals the September 30 balance, despite the reported Q3 net loss. The filing text does not provide a clear explanation.
- The company’s ability to support the carrying value of $6,411,327 in goodwill as operations develop.