Sow Good Inc. (SOWG) Earnings Call Transcript & Summary

Hello, and welcome to Sow Good's First Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jackie Keshner, Director of Investor Relations. You may begin.

Good morning, everyone, and thank you for participating in today's conference call to discuss Sow Good's financial results for the first quarter ended March 31, 2024. Joining us today are Sow Good's Co-Founder and CEO, Claudia Goldfarb; and Interim Chief Financial Officer, Brendon Fischer. 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 on SEC's website 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.

Thank you, Jackie, and good morning, everyone. We appreciate you joining us today to discuss our first quarter 2024 financial results. I want to start by thanking our Sow Good team for their unwavering commitment to Sow Good and our vision in creating one of the most innovative and disruptive companies in the candy industry. We are just beginning to scratch the surface of the innovative and disruptive power of freeze-dried technology and are excited to continue to shake up the candy industry. We achieved quite a few milestones since our year-end call and are on track to deliver an exceptional 2024. We delivered $11.4 million in revenue in the first quarter of '24, representing substantial year-over-year growth and a 20% sequential increase relative to the fourth quarter of '23, as well as $2.45 million in adjusted EBITDA, with an adjusted EBITDA margin of 21.5%. Our strong first quarter financial results demonstrate that freeze-dried candy continues to grow as a category and that our strategies of expanding internal production and co-manufacturing capacity, growing and strengthening our distribution networks and continuing product innovation are working. But before I delve deeper into our operational strides in the first quarter, I want to highlight a key corporate milestone we recently achieved. As we announced a few weeks ago, we have now uplisted our stock to Nasdaq with our shares trading on the Nasdaq Capital Market as of May 2, 2024. Along with the uplist, we completed a public offering of 1.38 million shares of common stock, raising approximately $13.8 million in aggregate gross proceeds. Our interim CFO, Brendon Fischer, will provide additional detail on the offering later in the call. We believe our Nasdaq listing allows us to expand our investor base and market visibility while driving improvements in liquidity and long-term shareholder value. We really look forward to leveraging the advantages of Nasdaq's platform in support of our ongoing growth strategy. The proceeds from the public offering places us in an excellent position to help us achieve our strategic objectives for 2024. Our key objectives are to continue increasing our in-house and co-manufactured production capacity, strengthening and diversifying our distribution partnerships, laying the groundwork for a strong marketing and branding strategy for the second half of this year, and further disrupting the candy category with innovative treats. For our Q1 production capacity, we surpassed our projections of 4.25 million units to over 4.5 million units. We accomplished this milestone by building a strong culture within Sow Good that prioritizes manufacturing excellence and efficiency as well as investing strongly in increasing our in-house production capabilities and strengthening our co-manufacturing relationships in China and Colombia. We completed the installation of our fifth freeze dryer, which is now operational, and our sixth freeze dryer is on track to becoming operational by the third quarter of this year. In addition, we recently placed deposits on 3 additional freeze dryers, which are expected to be operational within the next 9 months. As discussed on the last call, we strategically paused new customer on-boarding in the third quarter of '23 to focus our efforts on growing our production capacity. Though this approach resulted in smaller sequential expansion relative to what we achieved between the third and fourth quarters of '23, we determined that laying our production groundwork now would enable us to effectively manage and support much greater growth in the second half of this year. With our capacity increasing as projected, we have begun resuming new customer on-boarding as planned. We are thrilled with the progress we have made with both existing and new customers. Recent updates to our customer launches and expansions include adding 5 new SKUs in Big Lots in May and launching Sow Good displays in 300 of their stores for increased exposure and brand building, anticipated launch of our displays in 1,897 Kroger stores beginning early summer, anticipated increases in our Target store presence to nearly 2,000 stores this summer after outperforming sales forecast in our initial 200-store launch, launching 4 SKUs at Dollar General in May, anticipated launch of 3 SKUs in The Fresh Market in June, anticipated launch of 4 SKUs in nearly 8,000 7-Eleven stores in June, and an anticipated launch of 3 SKUs at Ross in June. We're very proud of the milestones we continue to achieve as we ramp up production and sales. But before I discuss our goals in greater detail, I would like to introduce our Interim Chief Financial Officer, Brendon Fischer, whose appointment we announced early last month. Brendon first joined our team in June 2023, bringing over 20 years of leadership experience in financial analysis, shareholder communications and regulatory compliance with public and private companies. Before joining Sow Good, he served as the CIO, Managing Director and Chief Compliance Officer of Fischer Capital Management, an investment advisory firm he founded in 2018. He was previously an assistant investment officer and portfolio manager at Rocky Mountain Advisors, managing a $1.3 billion publicly traded fund that was formerly known as the Boulder Growth & Income Fund. Throughout his time with the company, Brendon has been instrumental in helping us advance our strategic growth initiatives in support of the high market demand for freeze-dried candy. We are beyond thrilled that he is part of the Sow Good team and will be instrumental in our future growth. I will now welcome him to the call to walk through our first quarter financial results. Brendon, over to you.

Thank you, Claudia. It's a pleasure to join Sow Good's leadership team and continue my work with the company during this exciting chapter. Moving into our financial performance. Revenue in the first quarter of 2024 increased significantly year-over-year to $11.4 million compared to approximately $198,900 in the prior year period. On a sequential basis, revenue this quarter increased approximately 20% over the $9.5 million generated in the fourth quarter of 2023. Overall, our top line growth continues to be driven by our strategic pivot to the production of freeze-dried candy and our increased ability to meet growing market demand through the expansion of our production capacity. Gross profit in the first quarter of 2024 increased significantly to $4.6 million compared to approximately $114,900 for the same period in 2023. Our first quarter gross margin was 40.6%, compared to 57.8% in the prior year period. Relative to the first quarter of last year, our business is now operating at a much greater scale with increased labor and related production costs reflected in our year-over-year margin comparison. In order to meet growing demand, we will continue to invest in our operations to increase our production capacity. And we expect these investments to provide a near-term headwind to quarterly gross margin. Operating expenses in the first quarter of 2024 were $3.7 million, compared to $1.0 million for the same period in 2023. The year-over-year increase was primarily driven by higher compensation and professional services expenses as we scaled up the business and invested in systems and process improvements in anticipation of being listed on Nasdaq. Net income for the quarter was approximately $510,600 compared to a net loss of $1.4 million for the same period in 2023. The improvement reflects the higher gross profit we generated during the quarter, and we aim to drive further profitability improvements over the coming quarters of 2024. Adjusted EBITDA in the first quarter of 2024 improved to $2.45 million compared to approximately $171,300 for the same period in 2023. Moving to the balance sheet. We ended the first quarter of 2024 with cash and equivalents of $6.8 million compared to $2.4 million as of December 31, 2023. This increase in cash and cash equivalents was primarily driven by a private placement we completed in March of 2024, which raised approximately $3.7 million in proceeds from the issuance of 515,597 new shares. Subsequent to the quarter end of March 31, 2024, we took additional actions to further strengthen the company's financial foundation. On April 15, we completed a warrant exercise transaction. To provide some background, the company had issued notes payable with attached warrants during the period between December 2021 and May of 2023. The company reached an agreement with these note holders to exercise their warrants by allowing for the partial prepayment of principal and/or accrued interest in an aggregate amount equal to the exercise prices of the holders' warrants. As a result, the company issued 2,186,250 shares of its common stock, and the company's debt was reduced by $5.2 million and accrued interest payable was reduced by $98,750. Additionally, as Claudia mentioned earlier, we closed an underwritten public offering of 1.38 million shares of common stock early last week. The offering was completed at a price of $10 per share, yielding approximately $13.8 million in gross proceeds before offering expenses and underwriting discounts and commissions. We intend to use the net proceeds from this offering for general corporate purposes, which may include capital expenditures for the expansion of production capacity, funding working and growth capital, expanding our sales and marketing efforts, and reducing certain tranches of indebtedness. We would like to thank our new and existing investors for their support and look forward to further enhancing our foundation for growth. This concludes my prepared remarks. And I would now like to turn the call back to Claudia for closing remarks. Claudia?

Thank you, Brendon. As we've discussed throughout this call and over the past few quarters, we have made rapid progress since launching our first 9 candy SKUs in the first quarter of '23. In just this first year of focusing on freeze-dried candy, we have meaningfully expanded our production infrastructure, our retail customer and distributor network, and our SKU and store count. This is just the beginning stages of our growth trajectory. As we look to the coming quarters, I'd like to close today's call with a quick overview of our key strategic pillars for 2024. Our first and foremost priority continues to be expanding our production capacity in support of customer demand. We expect to maintain our progress here through bringing our 6th freeze dryer online by Q3 of this year, placing orders for an additional 3 freeze dryers, and continuing to ramp our international co-manufacturing agreement. This work to grow and optimize our in-house and international capacity will allow us to continue meeting the growing demand for our current most popular SKUs while aiming to improve our ability to produce larger quantities of our other more laborious treats, without compromising any of our margins or efficiencies. We continue to diversify our customer base and SKU portfolio, maintaining the advantageous breadth we have built on both of these fronts. In addition to the retail launches I mentioned earlier, we're also planning to introduce holiday and seasonal SKUs later this year. We will share updates on these and other new product innovations over the coming quarters. We have been incredibly fortunate to see the organic reviews, content creation and general positive reception of our treats on social media by our customers. This consumer support has translated into strong organic sales velocity. But to further support this demand, develop this category and cement our position as the category maker and leader, we will be unveiling a comprehensive marketing strategy later this calendar year. To date, we're focused on establishing our advantage in the freeze-dried candy space through building a strong brand, scaling our production and distribution capabilities, and diversifying our distribution strategy across all channels. We grew this economic moat before making any significant marketing investments. And now with our operational foundation in place and primed for further growth, we are eager to strengthen these barriers to entry via our investments in marketing and branding. We have entered 2024 with significant momentum and expect to continue building upon our innovative product portfolio, our production capacity and our customer base. We look forward to sharing more updates with you on our trajectory over the coming quarters, and thank you very much for being here with us today. Operator, we'll now open up the call for Q&A.

[Operator Instructions] Our first question comes from the line of George Kelly with ROTH.

Congrats on a really strong quarter. So there's a lot to go through. I'm going to ask maybe 2 or 3 questions, and then I'll hop back in the queue. But I was hoping to start with some of the retail -- new retail partnerships that you announced. And I was hoping to, I guess, just get more context about how much growth you're going to drive this year, door growth. So I was curious if you could give us like how many doors or distribution points did you have at the end of Q1? And just using round numbers, not looking for specific guidance, but how much should that grow by year-end?

So George, on the door count, I don't have it off the top of my head. Claudia, you may have it.

So at the end of Q1, George, I don't have the numbers in front of me, but somewhere around 6,500. And the growth in the second half of this year is going to be significantly more than that.

So more than doubling of your door count?

That's what we're anticipating.

Okay. And then could you fill us in with a little more detail just on a couple of your announced partners, Dollar General and 7-Eleven? How much -- I know you're in some 7-Elevens, I believe. Like how much -- I think you said 8,000 doors, if I heard that right. How many SKUs will be in 7-Eleven? And then if we could -- if you could do a kind of similar discussion on Dollar General.

Yes. So for 7-Eleven, we're anticipating 4 SKUs in all 8,000. As you know, some of them are franchise versus non-franchise. So for the non-franchise -- for the franchise stores, it's up to the independent operator, but that's what we're anticipating. On Dollar General, we're looking to start with 2 SKUs. They're going to be a smaller bag size. So they're going to be somewhere between 0.8 ounces to 1.2 ounces. We're still solidifying what the final weight count is going to be, and it's going to be a sour bite and a sweet bite.

Okay. And then the full list that you gave, is that all signed contracts? Or I guess, how much confidence or visibility do you have on those launches?

They are all signed contracts.

Okay. That's excellent. And then one of my questions for you...

And by signed contracts, we have POs, and we have the on-boarding documents.

Okay. Understood. And then other topic I wanted to cover is gross margin and EBITDA margin. There was language in the press release about investments in capacity and infrastructure and everything. And gross margin though, in the quarter, was well above my estimate. So I guess the question is, where do you expect gross margin to trend over the next couple of quarters? And if there's a dip anticipated, how long do you think it will take to get back to a kind of high 30s range for gross margin?

Yes, that's a great question, George. A couple of things happened. We were surprised by the strength of the gross margin this quarter as well, so you weren't the only one. And really, what drove that was we had very strong sales mix during the quarter, which helped boost margins, and we also did a really good job in managing labor costs. Whether or not we're growing business, there's a lot of things that are variable, especially with the market we're in. It's in its infancy. So we'll expect some variability on those two factors, especially on the sales mix, as we add new customers, that's going to kind of tweak things on the sales mix side. So we do expect some variability in margin related to that. We expect some additional margin from where we were this quarter, driven by the fact that we had some increased costs that we experienced in recent months, primarily on the shipping cost side. We all know the shipping freight situation, how that market has gotten more expensive over the last several months. Those costs that we experienced really haven't flown through the income statement yet, and we expect that to start to catch up in Q2. So we do expect some pressure there. And then combine that with the fact that we are in the growth phase of the business, we are going to be investing in labor, we're going to be investing in production capacity. As those things come online, we're obviously not going to be utilizing that 100% efficiency. We're going to have to kind of grow into them and scale into them. So that's going to lead to a little bit near-term margin pressure. Now where that all ends out, we're probably looking somewhere in the mid- to high 30% range for the near term on gross margin.

Our next question comes from the line of Eric Des Lauriers with Craig-Hallum.

Congrats on the very impressive results here. My first question is just overall about capacity to add additional freeze dryers. So 4 at the beginning of the year and now guidance for 9 by -- I guess, within the next 9 months here. How much space do you have to continue adding freeze dryers in your Irving Texas facility?

So in the Irving facility, we are running out a space, but we're -- I guess the best way to put it is we're a growing business. We're look -- we're going to have space with those freeze dryers. We're looking -- part of the project, the capacity expansion on the production side, it includes increase in square footage.

Okay. And I guess that kind of leads into my next question here, just overall facilities. In the 10-Q, you mentioned you're looking for additional packaging facilities. Maybe you could just give us a high level on your overall facility plans. Where are you looking to increase capacity or get into new facilities? And, I guess, for any potential new facilities, is this sort of all coming through the sort of viewpoint of adding capacity? Or is there any near-term plans for like geographic diversification at all? Just kind of wondering how you're thinking about your facility footprint overall in the near term.

Eric, great question. And right now, we're really focused on the Dallas area. After looking through different options that we had going international, going outside of the Dallas area, we've decided to keep everything under one roof. And so all of that production capacity is going to happen very close to where our Irving, Texas facility is currently located. Most of that footprint is going to be used for production capacity and packaging capacity expansion with the remainder being raw material storage and all of the other things that you need to distribute the product.

Got it. That's very helpful. And then just last question from me here. So in the press release, you highlighted Big Lots, 5 new SKUs and these Sow Good displays as well. I think these displays are relatively new. Is this the first instance of these displays and getting them in at Big Lots? And I guess, if not, do you have any sort of early insight on the impact here? And maybe just help us understand if this is more of like a strategy to increase velocity of your SKUs? Or is this a way for you to increase the number of SKUs at a given retailer? Just any sort of color on the impact of these displays would be great.

Yes. Definitely. I think, first and foremost, brand building is one of the things that we're really focused going into the second half of 2024. And so the displays are incredibly colorful and really just speak to our branding and marketing efforts. But the strategy for them being in store is, yes, definitely SKU assortment, expanding the SKU assortment, but velocity is definitely increasing. They've been in just a few tests. Circle K, 7-Elevens have outperformed expectations. I don't have the exact numbers that I can share with you today. They're going into Big Lots. They're going into Five Below. And so probably by the next earnings call, we'll have more color as to exactly how well they're performing. But initial test launches have them performing very well.

Next question comes from the line of David Lavigne with Trickle Research.

I'm just wondering if you can tell me how many SKUs there are now and kind of where you expect that to be maybe as you exit the year. And the other thing I'm curious about is just how we should think about SG&A going forward. I know that you kind of talked about having to load the margin side of it a little bit with expenses just for growth. So I'm kind of thinking -- wondering how that may impact SG&A as well.

Yes. So right now, we're sitting at about 14 SKUs. We're going to end the year somewhere in the 20 range because we're launching holiday SKUs as well. Those have been just really well received. I'm actually at a trade show in Indianapolis right now. So we're getting to meet with retailers here. I think as we go forward, innovation is just a key cornerstone as to what we're going to be doing. What is really just resonating with customers everywhere is we have a core kind of 6 products. And then in addition to that, new flavors, novel flavors, novel shapes are just being incredibly well received.

Yes. And to go on the operating question -- expense question on the SG&A side. A couple of things to point out in this quarter is that we did -- this is a quarter we usually pay bonuses. So this is about $0.25 million that fell into this quarter that obviously, we won't see in the next 3 quarters. It's more of a first quarter situation for us. So take that into account. As well as on the other G&A side, it's usually when we pay the annual compensation for the Board. So you'll see that fall out in the next couple of quarters until next [indiscernible] adding additional personnel as we build out our operations. So we'll have some increase from SG&A on that. And then the other part of it is we'll have some increased rental expenses too as we build out facilities and take on new facilities. So those are two big things that will increase in the near future. And one other thing I'd point out -- yes, go ahead, Claudia.

Yes. No. And historically, as we've mentioned, we've spent 0 on marketing. Everything we've been able to do has been organic social media, word-of-mouth and just having a really engaged customer base. Going forward, that is going to change. So you're going to see those expenses start popping up probably in the third quarter of this year. And so I know that [indiscernible] from supporting our retailers so that we continue to see the velocities we're seeing on shelf, some greater investments in social media, and probably some small influencer involvement on a go-forward basis.

So that reminded me of another question I had. Are you starting to see -- I mean, you talked about the moat and you talked -- now you're talking about accelerating marketing. Are you starting to see any sorts of competitors? I mean the space is pretty new, and it seems like some sort of competitors popping up here and there are -- is inevitable. And obviously, that's going to require that they'd be able to scale the business like you have. But I'm just curious if you've seen any sort of indications along those lines.

Yes. No, definitely. At the trade show, I'm seeing competitors here. And one of the things that has been reassuring as we've been here is that those moats that we built are really effective. I'll give you an anecdotal story. One of the 7-Eleven buyers walked into the booth yesterday. And we're like, hey, you want to try a new SKU we were launching? And she said, no, I don't like freeze-dried candy. We said, okay, which ones have you tried that you haven't liked? And she said, oh, well, I've never tried yours. I've tried the competitors of yours. We said, okay, that's the issue. Come on in, give our stuff a try. And she's like, oh, wow, now I get why everyone keeps telling me that the only candy to carry is Sow Good. So those moats of quality, focusing on production capacity and production excellence have really proven to be effective. The marketing spend is just so that we can continue to kind of scream that from the rooftops. There is a difference with Sow Good candy that is apparent at first bite. And so I think once we really get [indiscernible] those moats are just going to continue to become much more effective.

[Operator Instructions] Our next question comes from the line of Steve Emerson with Emerson Investment Group.

What kind of revenue run rate does 4.5 million pieces capacity at this time represent? And the 30 million year-end run rate pieces?

Yes. So we're not giving any specific guidance on revenue, and we don't reveal kind of our unit pricing for competitive reasons. But you can kind of back into that 4.5 million that we had in capacity and kind of refer that back to our revenue to get an idea of where we are on a unit basis. It's not going to be perfect, obviously, because we don't -- sales and capacity don't always match up. But kind of what we're expecting from -- I can't talk about revenue cadence, but I can point you to our production capacity cadence that we've provided before, where we expect to see that capacity ramp up to 7.2 million units in 2Q, 9 million in 3Q and 9.6 million in Q4, which gets you to that 30 million number for the full year. Now what you really need to do is adjust for the fact that there's going to be a delay between when new capacity comes online and the potential for new sales to occur. But really, what we're looking for is to see a similar growth cadence for revenue this year that we do on the production capacity side.

Our next question comes from the line of Gregg Kitt with Pinnacle Fund.

Claudia and Brendon, congratulations on a great quarter. Kind of following up on Steve's question, is there a way to think about how much of the business in the first quarter was fulfilled through internal owned manufacturing versus co-man?

Again, we're not going to be providing that type of detail. But I mean, you can look again to the production capacity chart we had, and that should give you a general idea of where we are.

As you start to ramp with a lot of these customers, you talked about Kroger and Dollar General, 7-Eleven, Fresh Market and Ross, and then expansions with some existings. Do you think that, that mix could change to be slightly greater than 50% co-man, while you're waiting for some of your additional freeze dryers to come online?

Yes. At the end of the day, we're going to make sure we can service our customers. And whether that's going to be from domestic production or the co-man, whatever the situation in the short term, we're just going to make sure we get product to customers. So we do expect some variability. And I think the bigger thing to kind of think about is longer term is that we want to grow the domestic side of the business, to own and control that type of manufacturing for us. So I would expect over the long term, the co-manufacturing obviously is going to be a part of our business going forward. But we're going to be getting a bigger and bigger share coming from the domestic as we grow the business.

Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Claudia for closing remarks.

Well, thank you, everyone, for being a part of this call. We greatly appreciate it. We're incredibly excited as to where we are right now and where the rest of this year is going to take us. And we look forward to giving you another update in 3 months.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.