Sow Good Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The company makes freeze-dried foods and pivoted in 2023 from smoothies, snacks and granola to freeze-dried candy. The interim financial statements are unaudited.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $5.03 million | $87,741 | $6.55 million | $381,056 |
| Gross profit | $2.32 million | $22,546 | $1.50 million | $117,767 |
| Net income (loss) | $333,984 | ($1.65 million) | ($4.39 million) | ($5.31 million) |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | ($3.33 million) | ($4.15 million) |
- Management attributes the sharp revenue growth and Q3 return to profit to candy sales, expansion of business-to-business sales, additional freeze-dryer capacity and a shift toward higher-margin candy. The filing reports Q3 gross margin of 49%; gross profit divided by reported revenue is approximately 46%.
- Nine-month gross margin was approximately 23%, compared with approximately 31% in 2022. The 2023 period includes a $2.08 million write-down of non-candy inventory.
- At September 30, cash was $2.10 million, current assets $5.87 million, current liabilities $2.73 million and working capital $3.15 million. Cash increased by $1.82 million from year-end 2022, primarily reflecting financing.
- Nine-month investing cash outflow was $1.33 million, mainly for equipment. Financing provided $6.48 million, including $3.68 million from a private share placement and $2.80 million from notes.
- Balance-sheet total liabilities were $10.65 million, including $7.35 million of notes payable net of discounts and $1.66 million of operating lease liabilities. The company reported $646,382 of accrued interest. Common shares outstanding were 5,603,083 at September 30, up from 4,847,384 at December 31, 2022.
Material changes and unusual items
- Q3 revenue rose by $4.95 million year over year; nine-month revenue increased by $6.17 million. The company launched candy in Q1 2023, discontinued its prior food product lines and put two additional freeze-dryers into production in Q2.
- The $2.08 million inventory write-down reflects the pivot away from non-candy products and is included in cost of goods sold.
- Interest expense for the first nine months increased to $1.35 million from $843,240, largely because of amortization of warrant-related debt discounts. Q3 interest expense was reported as only $3,641, versus $383,995 in Q3 2022; the filing attributes this difference primarily to a credit for amortized interest in the current quarter.
- On August 30, 2023, the company sold 735,000 shares at $5.00 per share in a private placement, raising approximately $3.675 million. Investors included the CEO, Executive Chairman and other board members, as well as accredited investors.
Outlook, risks and contingencies
- Management plans additional production capacity and warehouse space, including construction of the fourth through sixth freeze-dryers, which it expected to complete in Q1 2024. Growth and scaling remain dependent in part on raising additional capital. No quantified revenue or earnings guidance is provided.
- The company disclosed substantial doubt about its ability to continue as a going concern, citing its accumulated deficit of $60.07 million, losses, capital-intensive growth plans and uncertainty about funding operations while pursuing expansion. Management said cash on hand should support the next 12 months under its current projections, but also expects financing may be needed.
- After quarter-end, the company entered a lease for approximately 51,264 square feet of Dallas production space for about five years and two months. Initial base rent is approximately $42,500 per month, rising to approximately $51,700 in the final year; the company must provide a $300,000 letter of credit and pay operating expenses.
- Customer concentration is significant: the top five customers represented 86% of nine-month 2023 revenue. One retail customer accounted for 44% and one distributor for 20%. A supplier accounted for 18% of nine-month vendor purchases; management says it is seeking to diversify suppliers.
- Other cited risks include liquidity and financing needs, production and distribution constraints, supply-chain disruption, higher transportation, labor and raw-material costs, quarterly variability and the low trading volume and liquidity of the company’s OTCQB shares. The company reported no material legal proceedings, defaults on senior securities or off-balance-sheet arrangements.
Most important facts for investors to verify
- Reconcile the Q3 gross-margin disclosure: MD&A states 49%, while reported gross profit and revenue imply approximately 46%.
- Reconcile diluted Q3 share and EPS figures: the statement of operations reports 8,066,577 diluted weighted-average shares and $0.04 diluted EPS, while the EPS note reports 6,481,158 shares and $0.05.
- Check debt disclosures for classification and carrying-value consistency: the balance sheet and fair-value note show $866,620 of non-related-party notes net of discounts, while Note 10 reports $690,830; current-maturity figures also differ.
- Assess whether cash generation, additional financing and execution of planned capacity expansion can address the going-concern uncertainty and upcoming obligations, including the new lease and letter of credit.
- Monitor customer and supplier concentration, candy demand, production ramp-up and inventory after the product-line pivot and write-down.