Sow Good Inc. (PNK:SOWG) Q4 2023 Earnings Call Transcript

Sow Good Inc. (PNK:SOWG) Q4 2023 Earnings Call Transcript March 22, 2024

Sow Good Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the Sow Good Fourth Quarter and Full Year 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, Director of Investor Relations. Please go ahead.

Jackie Keshner: Good morning everyone, and thank you for participating in today’s conference call to discuss Sow Good’s financial results for the fourth quarter and full year ended December 31, 2023. Joining us today is Sow Good’s Co-Founder, CEO, and Interim Chief Financial Officer, Claudia 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.

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Claudia Goldfarb: Thank you, Jackie, and good morning, everyone. I’m thrilled to be here today and share exciting updates since our last call. In early 2023, we helped launch the freeze-dried candy category quickly becoming the market leaders. We have since experienced incredible growth, which continued into the fourth quarter of 2023. We achieved record quarterly revenue of $9.5 million representing substantial year-over-year growth and an 89% sequential increase above our third quarter results. When we first launched our novel treats, we had our sights set on repeating management history of identifying and growing niche trends into everyday categories. We entered the market with best-in-class freeze drying technology, and the manufacturing and leadership expertise needed to sustain a high growth consumer brand.

Our success to date reflects the strength of our growth strategies and the customer demand for our innovative snackable treat. In 2024, we are focused on increasing our market share as well as capturing the expansive growth opportunities accompanying the nascent, but booming freeze-dried candy space, which we helped pioneer. Excitingly, our treats have continued outperforming sales forecast across our retail base. Customers are increasing their order quantities, expanding their SKU portfolio, and working closely with us to develop new and seasonal treats. To meet this increasing demand, we’ve implemented numerous strategies to grow our production capacity. As we previously shared, during the fourth quarter, we leased a 51,000 square foot distribution and warehousing facility in Irving, Texas, optimizing our capacity for heightened order volumes.

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Q&A Session

We completed construction of our fourth freeze drier in February, with our fifth and sixth freeze driers expected to be completed and operational by the third quarter of this year. Our co-manufacturing arrangement with freeze drying facilities in China are aiding our efforts to meet growing demand. This helped meet our sales needs in December of 2023 as we received, packaged, and sold initial product shipments from China. We also began working with the freeze drying facility in Colombia, and the first shipment arrived in February of 2024. These facilities all passed our rigorous foreign supplier approval and quality control programs. Leveraging co-manufacturers allows us the flexibility to fulfill high demand for our most popular products while also freeing up our internal capacity to manufacture our more difficult products in larger quantities, allowing for a more diverse SKU portfolio at scale.

We are also evaluating additional international possibilities with respect to manufacturing facilities. This would enable us to further increase production while maintaining our exacting quality and food safety standards. In January, we opened a low cost shared service center in Monterrey, Mexico and we’ll hire employees there to help support our accounting, marketing, and sales department. As we progress in this build-out of our additional capacity, we will provide further updates. Expanding our production capacity allows us to support our existing traction and further diversify both our SKU assortment and our customer base. From Q3 of 2023 to mid Q1 of 2024, we paused onboarding of all new customers as we increased production capacity to meet our existing customers’ demand.

Our increased in-house and co-manufacturing production has enabled exciting expansions, including increasing Circle K store counts to approximately 2,000 stores, increasing SKU portfolios at Cracker Barrel and Five Below, launching into 300 SESCO (ph) convenience stores in February, launching four SKUs in Target in March and expanding into an anticipated 1,859 Target stores in June. We also have pending launches in Party City, Kroger, 7-Eleven, Dollar General and Hobby Lobby. Expanding production capacity has allowed us to launch new SKUs. Recent SKU expansions included sour and sweet spheres, which are jumbo versions of our bites, Sweeter Geeks, Crunchy Crocs (ph) and Jumbo Vanilla and Neapolitan crunch cream freeze dried ice cream sandwiches.

Growing our SKU portfolio not only appeals to a broader customer demographic, but also serves as a key point of differentiation from competitors and answers the significant demand from our retail buyers. Our success is made possible by our team, which has remained lean and efficient even as our revenue has grown exponentially. Over the past six months, our production team has more than doubled, and we expect it will continue growing throughout 2024. Our corporate team has also received powerful new additions, including a Director of Co-Manufacturing in Latin America, a Director of Accounting for Latin America and a Director of Food Safety and Quality. Throughout Q1, the expansion of our operational infrastructure, internal team and external co-manufacturing partnerships has built a robust foundation that positions us for aggressive yet sustainable growth in 2024.

Strategically pausing the onboarding of new customers in Q3 through Q1 provided the necessary room to enhance our resources and establish this foundation. While this approach resulted in smaller sequential expansion relative to the fourth quarter of 2023, it was deliberately executed with the foresight that laying the groundwork now would enable us to effectively manage and support much greater growth in Q2 and the second half of this year. With the culmination of our efforts in Q1 of this year to maximize production capacity both in-house and through co-manufacturers, we have equipped ourselves to meet the demands of our aggressive sales growth trajectory. We are currently aiming to be able to produce 4.25mn units in Q1, growing to 7.2 million units in Q2, 9 million units in Q3 and 9.55 million units in Q4 for a total of approximately 30 million units in 2024.

We built swift and significant momentum in 2023 and are excited for the opportunities that lie ahead. But before I describe those in greater detail, I’d like to review our fourth and full year 2023 financial results. Moving into our financial performance. Revenue in the fourth quarter of 2023 increased significantly to $9.5 million compared to $47,100 for the same period in 2022 and $5 million for the third quarter of 2023. For the full year, revenue increased significantly to $16.1 million compared to $428,100 in 2022. Our strong quarter-over-quarter top line growth continues to be driven by our strategic freeze-dried candy pivot and the growing market for freeze dried candy. Along with capacity expansion from the addition of two new freeze driers in the second quarter of 2023 and the first of our co-manufacturing arrangements coming online.

Gross profit in the fourth quarter of 2023 increased significantly to $3.4 million compared to $2,100 the same period in 2022. Fourth quarter gross margin was 35% compared to 4% in the prior year period. As we move into 2024, we aim to have our quarterly gross margin improve as we continue to increase our capacity and carefully manage our pricing. Full year gross profit increased significantly to $4.9 million compared to $119,800 in 2022. Gross margin for the year was 30% compared to 28% in 2022. Our year-over-year gross margin expansion was driven by the higher margin profile of our candy products relative to the original food product lines we sold in the comparable prior year periods, which have been discontinued. Operating expenses in the fourth quarter of 2023 were $1.6 million compared to $6.4 million for the same period in 2022.

As previewed on our last call, our Q4 operating expenses included our lease of additional warehouse and distribution space in Irving, Texas. For the full year, operating expenses were $6.1 million compared to $11 million in 2022. Operating expenses in the fourth quarter of 2022 included a $4.9 million goodwill impairment charge related to our 2020 acquisition of S-FDF LLC, which impacts the year-over-year comparisons for both the quarter and full year. GAAP net income for the quarter was $1.3 million compared to a net loss of $6.8 million for the same period in 2022. The improvement reflects the higher gross profit which we generated during the quarter. We are aiming to drive further profitability improvements over the coming quarters of 2024.