Sow Good Inc. (PNK:SOWG) Q3 2023 Earnings Call Transcript

Sow Good Inc. (PNK:SOWG) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: Good day, and thank you for standing by. Welcome to the Sow Good Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jackie Keshner. Please go ahead.

Jackie Keshner: Thank you. Good morning everyone, and thank you for participating in today’s conference call to discuss Sow Good’s financial results for the third quarter ended September 30, 2023. Joining us today are Sow Good’s Co-Founder, CEO, and Interim CFO, Claudia Goldfarb; and the company’s Co-Founder and Executive Chairman, Ira Goldfarb. Certain statements made during this call are forward-looking statements, including those concerning our financial outlook, our market opportunities, and the impact of the global economic environment on our business. These statements are based on currently available information and assumptions, and we undertake no duty to update this information except as required by law. These statements are also subject to a number of risks and uncertainties, including those highlighted in today’s earnings release and our filings with the SEC.

Additional information concerning these statements and the risks and uncertainties associated with them is highlighted in today’s earnings release and in our filings with the SEC. Copies are available from the SEC or on our Investor Relations website. Furthermore, we will discuss adjusted EBITDA, a non-GAAP financial measure, on today’s call. A reconciliation of adjusted EBITDA to net loss, the nearest comparable non-GAAP financial measure discussed on today’s call, is available in our earnings press release at our Investor Relations website. With that, I will turn the call over to Claudia.

Claudia Goldfarb: Thank you, Jackie, and good morning, everyone. I do apologize for the delay. We were having some technical difficulties, but we ironed them out. I am thrilled to speak with all of you on our very first earnings call and share some really exciting updates that we hope you’ll agree are so good. I will be happy to answer any questions at the end of the call. Sow Good has seen astronomical growth since launching our freeze-dried candy line earlier this year. Our third quarter revenue of $5 million highlights a robust increase on both a year-over-year and quarter-over-quarter basis, and it showcases the strength and acceleration of consumer demand for our freeze-dried candy. We have made continued investments in our production and operational infrastructure to support this momentum and facilitate the next stages of our growth trajectory.

But before I dive into our progress and third quarter results, I want to give some insights into the Sow Good story and how we’ve come to where we are today. Our Chairman and Co-Founder, Ira Goldfarb, and I have spent the last 15-plus years specializing in freeze-dried food manufacturing, product development, formulating innovative go-to-market strategies and implementing best-in-class quality food systems. We established our previous company, Prairie Dog Pet Products, as the leading pet food and treat manufacturing company by identifying growing niche trends and making them an everyday item. In growing this business, not only did we fall in love with freeze-dried technology, but we also honed our ability to manage food manufacturing at scale and gained vital insights into the technology and demand dynamics behind freeze-dried products.

After selling Prairie Dog to Kinderhook Industries in 2020, we knew we had only scraped the surface of freeze-dried technology’s potential. Sow Good became publicly listed in January 2021 after we merged with an OTCQB listed company called Black Ridge Oil & Gas. After closing the merger, we changed the company name and ticker symbol to reflect our entrance into the freeze-dried CPG food products market. Our initial SKUs launched in the summer of 2021 and consisted of freeze-dried fruits, vegetables and other health food snacks. We’ve spent the last two years building our state-of-the-art manufacturing facility, which is one of our biggest differentiators from competitors. We custom built our freeze drier and 20,000 square foot plus freeze-dried facility in Irving, Texas, which became both an FDA registered and a Safe Quality Food’s two certified facility.

At each stage of our production process, we prioritized food safety, quality and operational efficiencies from tailoring our proprietary freeze-drying technology specifically to our products, to hand packaging our products to protect their structural integrity, to investing in dehumidifying equipment to prevent moisture reintroduction. To drive our expansion, we were actively evaluating additional product categories that we felt was primed for innovation. Earlier this year, our customers and retailers asked us about a certain novel food trend that was rapidly going viral on social media, freeze-dried candy. Seeing the significant opportunity to capitalize on this trend when no other major players have entered the space yet, we’ve leveraged our advanced manufacturing infrastructure and freeze-drying expertise to pioneer this category quickly and decisively.

We launched our first nine candy SKUs in Q1 of this year and have seen monumental early results. Our quarterly revenue has grown sequentially from approximately $199,000 in Q1 to $1.3 million in Q2 and now $5 million in Q3. Demand continues to surge significantly, highlighting that freeze-dried candy is not a flash in the pan, but a stable category that is here today. With this strong market response, Sow Good is now focused entirely on freeze-dried candy. To facilitate these increased production demand, we completed construction on our second and third freeze driers in Q2 of this year, and we expect to have three additional freeze driers completed and operational by the first quarter of next year. Bringing these incremental freeze driers online is expected to double our production capacity from a current $35 million level to $70 million.

To further expand production capacity, we have entered co-manufacturing agreements with third-party manufacturers, whose freeze-drying facilities meet our exacting production, sanitation and allergen control requirements as well as our food quality and safety standards. We are currently due to receive and evaluate the initial product test shipments from these arrangements over the coming weeks, and we’ll focus on expediting subsequent shipments once we completed our quality control approval. From a sales perspective, we have facilitated our expansion through growing our B2B channel, where we initially distributed most of our products directly to our customers. We’ve quickly expanded our partner base to include retailers like Five Below, Target, [indiscernible], Circle K, Misfits Market, [indiscernible], Cracker Barrel and more.

Our treats have consistently sold out and outpaced sales projection in these retailers. Notably, we have expanded our portfolio at Five Below from two to five SKUs after surpassing their initial sales forecast. We believe that the diversity of our retail channel is a strong competitive advantage for Sow Good, as our exposure to conventional specialty grocery, club and convenience stores gives us a large addressable market compared to food brands that are solely focused on the grocery channel. We expect our partnership pipeline to continue growing, both from expansions with current partners such as Five Below and Circle K and launches with the new partner. Our next major new partner launch will be with Kroger with our first shipment currently scheduled for late Q1 of 2024.

As evidenced by our premium growing partner base and manufacturing capacity, we believe we have an early mover advantage in our ability to lead and compete in the freeze-dried candy space. Relative to competitors, many of whom are smaller or more locally focused, we believe our freeze-drying expertise and production expansion initiatives enable us to address current demand more effectively and stay agile with new product development. In addition to growing our candy product line to a total of 12 SKUs since our Q1 debut, we launched our new freeze-dried ice cream line, Crunch Cream, just last month. By leveraging our retail relationships and production and R&D capabilities, we believe we are well positioned to stay at the forefront of product innovation and dominate the freeze-dried candy market.

Now that you have the Sow Good origin story and some of our key competitive advantages, I’ll now provide a few financial highlights from our third quarter 2023 performance. Revenue: As I mentioned earlier, revenue for the third quarter of 2023 increased significantly to $5 million compared to approximately $87,700 for the third quarter of 2022. This growth is attributed to our strategic freeze-dried candy pivot and year-over-year expansion of our B2B sales during the current period. Another major driver of this growth is our expanded production capacity after the addition of the two new freeze driers in the second quarter of 2023. Gross profit for the third quarter of 2023 increased significantly to $2.3 million compared to approximately $22,500 for the third quarter of 2022.

Gross margin in the third quarter of 2023 increased significantly to 46% compared to 26% in the third quarter of 2022. The increased profit margin was due to the higher gross margin profile of our candy products relative to the original food product lines we sold last year, which we have now discontinued. While we currently expect to continue generating strong demand and sales growth for our candy products, we expect our quarterly margin profile to moderate from current levels as we ramp our co-manufacturing partnerships over time. Operating expenses for the third quarter of 2023 were $2 million compared to $1.3 million for the year-ago comparable period. During the third quarter and throughout 2023 thus far, we have expanded our team and administrative infrastructure to support our very significant growth.

Our headcount has grown four-fold since March 2023, comprising 137 full-time employees as of September 30. Subsequent to the third quarter, we also leased approximately 51,000 square feet of additional warehouse and distribution space in Irving, which will be reflected in our expense line item next quarter. We expect this additional space to enhance our ability to handle heightened order volumes and to optimize our shipping and logistics. Net income for the third quarter of 2023 was [$0.5 million] (ph) compared to a net loss of $1.6 million for the third quarter of 2022. This improvement was primarily due to the higher level of gross profit we generated during the quarter, which was partially offset by our increased operating expenses and interest expenses.

Adjusted EBITDA for the third quarter of 2023 improved to negative $0.6 million compared to negative $1.1 million for the third quarter of 2022. At September 30, 2023, cash and cash equivalents were $2.1 million compared to approximately $0.3 million at December 31, 2022. As we announced on September 6, we completed a $3.7 million private placement raised from 735,000 newly issued shares on August 25 at a per share price of $5. This price represented an 18% premium to our last equity raise in 2021. The additional capital we have received is targeted towards our production capacity expansion, and we remain opportunistic on this front. We are incredibly proud of the momentum we have sustained since the launch of our candy lines earlier this year, growing customer demand and our continued production expansion that we anticipate, allowing us to exit 2023 with a very strong finish and poising us for increased success for 2024.

We believe freeze-drying has an incredibly bright and prosperous future. To support the ongoing high demand for our candy products, we are placing a strong priority on completing and ramping up our production capacity over the coming months. We are bringing the three additional freeze driers online in Q1 of 2024, which, again, is expected to double our capacity, and we anticipate even more expansion from our new co-manufacturing agreements we have in place. Growing our manufacturing operations enables us to continue pursuing sales growth opportunities, such as expanding our retail partner base and developing new high-quality products that appeal to a broad consumer base. As we close today’s call, I’d like to conclude with a brief review of Sow Good’s core pillars.

These are core to our near- and long-term growth objectives as well as our overall company mission. First, we are committed to innovation, creating novel products that delight our consumers. We enhance the speed and effectiveness of our innovation cycle through our second pillar, scalability, which entails our commitment to building strong business and manufacturing foundation to support rapid growth and accelerated retail launches. In our third pillar, manufacturing excellence, we use our manufacturing expertise to refine our production to maximize efficiencies and reduce energy waste. We expect the continued scaling of our manufacturing footprint to reduce our costs, margin performance and sustainability practices over time. Reaching our growth potential is made possible by our team.

This underscores the importance of our fourth pillar, meaningful employment opportunities. We strive to cultivate a growth-oriented opportunity-rich workplace for our employees at each level of our organization. We are proud that several of our employees have already been able to advance within our company in the early months of their time with us to leadership roles. Our fifth and final pillar is our focus on maintaining high-quality standards, which speaks for a meticulous focus on quality control throughout our organization. We protect our product integrity by investing in humidity control equipment through our production facility and custom building our freeze driers and corresponding software to tailor the entire freeze drying process to each of our products.

We also hand pack all of our products, which takes additional time and expense compared to automated processes, but this ensures better quality control. As the freeze-dried candy space is in its early stages, providing a consistently high-quality product optimizes our ability to earn and retain customer loyalty and achieve greater market share. Sow Good has generated significant growth since our freeze-dried candy debut earlier this year, and we believe our strategic efforts to build a state-of-the-art manufacturing facility, scale our operational capacity to meet growing customer demand, and develop a strong network of retailer and wholesale distribution channels has positioned us to transform freeze-dried candy from a niche trend to a staple everyday category.

We’d like to thank our team and shareholders for their continued support, and we aim to build upon our progress and further cement our leadership in the freeze-dried candy category in the upcoming months. Thank you.

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Q&A Session

Operator: Thank you. [Operator Instructions] And we’ll take our first question from David Lavigne from Trickle Research. Your line is open.

David Lavigne: Hi, everybody. Quite stunning quarter. You don’t see that very often. I’m wondering if you could — I just want to clarify, by the end of Q1 next year, you should have six driers, correct?

Claudia Goldfarb: That’s correct.

David Lavigne: Okay. So, the other thing I’m wondering is could you go back over — you read some of your customers, and I think there were some new ones in there that maybe haven’t shown up in some of the announcements. Could you just go through those again?

Claudia Goldfarb: Kroger is launching in the first quarter of next year. We’ve recently launched into Circle K. So that might be what you’re thinking of, David?

David Lavigne: Yeah. That was one of them. I thought the — yes, I think those are the — probably two that I haven’t heard. So, can you speak to the issue of whether the Circle K relationship, did that come through one of the larger C-store distributors, or is that something you did directly?

Claudia Goldfarb: That is something that came through one of our distributors.

David Lavigne: Okay. And I guess my last question is in some of the other announcements, you kind of alluded to some international sales. Is that something that you’re willing to expand on a little bit, or not so much?

Claudia Goldfarb: David, right now, what we’re really focused on is increasing our production capacity. We are completely sold out. And so, international expansion is definitely that’s on the horizon. As soon as we’re able to meet all the consumer demand here in the U.S., ramp up our production capacity and then move on into international markets.

David Lavigne: Okay. So, now you just brought me down another path. So, I just want to make sure I understand this right. So, you have — with 6 driers, that’s going to be — that’s going to put you at a capacity of $35 million to $70 million. And I realize that sort of is a function of product mix. But — so in addition to that, you’re also out signing co-packaging agreements as well, which sort of, I guess, should give us some sense of a roadmap to where you plan on being 12 months from now. Is that a fair assessment?

Claudia Goldfarb: That is a fair assessment.

David Lavigne: Great. Once again, stellar quarter. Thank you.

Claudia Goldfarb: Thank you, David.

Operator: Thank you. [Operator Instructions] Thank you. And I am showing no further questions from our phone lines. I would like to turn the conference back over to Claudia for any further closing remarks.

Claudia Goldfarb: Thank you. And everyone, thank you very much for attending the call today. We look forward to speaking with our investors and analysts when we report our fourth quarter and our full year results in March. Have a good day, everyone.

Operator: Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.