Sow Good Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited financial statements; comparable period is Q1 2021. Sow Good is developing a freeze-dried food business, selling products through direct-to-consumer channels and pursuing business-to-business customers.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $48,372 | $0 |
| Cost of goods sold | $47,491 | $0 |
| Gross profit / margin | $881 / approximately 2% | $0 |
| Operating expenses | $1,449,150 | $1,150,860 |
| Operating loss | $(1,448,269) | $(1,150,860) |
| Net loss | $(1,552,062) | $(807,877) |
| Basic and diluted loss per share | $(0.32) | $(0.22) |
| Net cash used in operating activities | $(1,482,598) | $(1,194,871) |
Q1 2022 net loss increased 92% year over year. Operating expenses rose $298,290, reflecting increased staffing and administrative infrastructure, as well as higher depreciation from equipment placed in service during 2021. The prior-year period included $344,495 of gains on debt extinguishment and Allied Esports investments; neither recurred in Q1 2022. Interest expense in Q1 2022 was $103,793, including $59,724 of amortized warrant debt discount.
Gross margin was very low as the company began selling its products. Management said it anticipated higher revenue during the remainder of 2022, but provided no quantified forecast or assurance.
Financial position and liquidity
| Metric | March 31, 2022 | December 31, 2021 |
|---|---|---|
| Cash and cash equivalents | $1,814,988 | $3,345,928 |
| Current assets | $3,667,196 | $4,891,264 |
| Current liabilities | $498,344 | $403,057 |
| Working capital | $3,168,852 | $4,488,207 |
| Total assets | $12,837,820 | $14,103,150 |
| Total liabilities | $3,425,213 | $3,282,742 |
| Stockholders’ equity | $9,412,607 | $10,820,408 |
Cash fell by $1,530,940 during the quarter. Operating cash use was $1,482,598 and investing cash use was $48,342; there were no financing cash flows in Q1 2022. Inventory increased to $1,771,856 from $1,451,897. Accumulated deficit was $45,104,556.
Related-party notes had $2,075,000 principal outstanding, reported net of $639,489 unamortized discount, for a carrying amount of $1,435,511. The company also had a $150,000 SBA EIDL loan, secured by company assets. Operating lease liabilities totaled $1,388,927. The related-party notes carry 8% interest and mature December 31, 2024; EIDL payments were scheduled to begin in June 2022.
Material developments, outlook and risks
- Going concern: Management stated that recurring losses, negative operating cash flows and the early stage of the business raise substantial doubt about the company’s ability to continue as a going concern. At March 31, cash might not be sufficient for the next 12 months. Management said it could seek financing or reduce expenses if sales do not develop as expected.
- Subsequent financing: On April 8, 2022, the company raised $3.7 million through promissory notes and warrants. The notes bear 6% interest and mature April 8, 2025; warrants cover 925,000 shares at $2.35 each. $3.12 million of the notes were sold to officers or directors. Management reported approximately $4.4 million of cash on hand as of May 1, 2022.
- Capital needs: Management said scaling production and distribution depends substantially on additional capital. A possible third freeze dryer could require approximately $1 million of incremental investment.
- Operations: The company continued online sales and development of business-to-business customers. It expanded the Sustain Us brand during the quarter and was developing additional freeze-drying capacity.
- Governance and related parties: The production facility is leased from an entity owned by Executive Chairman Ira Goldfarb. The CEO and Executive Chairman were also among the lenders in the related-party financings. On April 30, CFO Brad Burke resigned; CEO Claudia Goldfarb became interim CFO. Burke’s separation terms included three months of base salary and accelerated vesting of options covering 75,000 shares.
- Other risks and contingencies: Management identified risks including insufficient product sales and distribution, supply-chain delays, higher transportation, labor and raw-material costs, liquidity, stock-price volatility and OTCQB trading requirements. The company reported no material litigation and no off-balance-sheet arrangements. It had $1,266,071 of cash above FDIC/SIPC insured limits at quarter-end.
- Controls: Management concluded disclosure controls were effective as of March 31, 2022 and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track sales growth, customer and channel mix, and whether the roughly 2% initial gross margin improves as production scales.
- Reconcile cash burn and working-capital needs against the April financing proceeds, subsequent cash balance, and management’s going-concern assessment.
- Review the full terms, related-party participation, warrant dilution and repayment obligations of the 2021 and April 2022 notes.
- Assess production capacity, utilization, inventory levels and the funding requirement and economics of any additional freeze dryer.
- Review related-party lease terms and governance implications, and monitor the CFO transition and separation costs.