Q3 2024 Sow Good Inc Earnings Call
Good morning, everyone and thank you for participating in today's conference call to discuss so good its financial results for the third quarter ended September 30th 'twenty 'twenty four.
Joining us today are so good co founder and CEO Claudia Goldfarb.
And interim Chief Financial Officer, Brendan Fisher.
Speaker Change: Following their remarks, we'll open the call for analyst questions.
Speaker Change: Before we go further I would like to turn the call over to Mr. Shlomi <unk> as he reads the company's safe Harbor statement within the meaning of the private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward looking statements.
Speaker Change: Please go ahead.
Mr. Shlomi: Good morning, everyone and thank you for joining us in today's conference call to discuss so good financial results for the third quarter ended September 32020 for certain statements made during this call are forward looking statements, including those concerning our financial outlook, our competitive landscape market.
Mr. Shlomi: <unk> 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.
Mr. Shlomi: 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 the Sec's website or on our industrial relations website. Furthermore, we will discuss adjusted EBITDA.
Mr. Shlomi: Our non-GAAP financial measure on today's call a reconciliation of adjusted EBITDA to net income or loss.
Claudia: Nearest comparable non-GAAP financial measures 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: Thank you Cody and good morning, everyone. We appreciate you joining us today.
In the first nine months ending September 30th 2024, we achieved $36 million in revenue.
Claudia: Substantial increase from $6 5 million in the same period last year.
Claudia: This growth is a testament to our bold approach and bringing innovative and differentiated products to a previously stagnant category.
Claudia: Pioneering a new segment in an industry dominated by some of the worlds biggest CPG companies, it's no small feat and it comes with significant risks and challenges.
Claudia: It's not for the pain to part with few undertaking such an endeavor often deterred by the complexities uncertainties and the daunting prospect of competing with companies that have far deeper pockets and well established distribution channels.
Speaker Change: So good we are driven by an entrepreneurial spirit and are steadfast in our mission to leverage our powerful innovative technology to disrupt the status quo.
Speaker Change: We are committed to creating exceptional new products and bringing fresh experiences to consumers.
Pungently pushing the boundaries of what existed before our entrance into the candy category.
Speaker Change: As we navigate the second half of the year, we have encountered unique challenges largely stemming from our careful decision to pause shipments during the third quarter and early October to protect product quality amid extreme summer heat.
Speaker Change: While shipments resumed in October some melted products did reach retail shelves, which has temporarily affected sales velocity we.
Speaker Change: We're working closely with our retail partners to remove these affected items and where store regular ourselves momentum.
Speaker Change: Moving forward, we are implementing temperature control distribution to prevent similar issues next year.
Speaker Change: Reinforcing our commitment to consistently delivering high quality products to our customers.
Speaker Change: Looking ahead, we recognize that we're in the early innings of a long game navigating both challenging and exciting opportunities as we continue to pioneer this rapidly growing and evolving pre strike candy category.
Speaker Change: Entry of some of the world's largest CPG companies and to the space. We helped create underscores the legitimacy and consumer demand for pre strike candy is an everyday indulgence.
Speaker Change: Well these giants leverage substantial market power and budgets to secure shelf space at their competitors expense their efforts only highlight the strength of our brand and the exceptional quality of our products, which are already recognized as formidable players in this competitive landscape.
Speaker Change: Despite these challenges we remain dedicated to our long term growth strategy. We now have six <unk> operating at our Union Bauer facility and that rock quarry, we've received our seventh freeze dryer, along with our <unk> can be making machine.
Speaker Change: <unk> eight through 12 or set to arrive within the next eight weeks with our automated packaging machine, arriving in eight to 12 weeks.
Speaker Change: We'll have more to say about this in our strategic growth plan in my closing remarks, but first I'll pass the call over to Brendan to give you more detail on our quarterly performance Brendan.
Brendan Fisher: Thank you Claudia jumping right into our financial performance.
Brendan Fisher: Revenue in the third quarter of 2024 was $3 6 million compared to $5 million in the prior year period.
Brendan Fisher: The decline was primarily driven by our decision to delay the majority of product shipments to customers as the extreme heat during the quarter was negatively impacting the quality of the candy shipments.
Speaker Change: Claudia mentioned spike halting shipments some retailers continue to distribute products to stores, resulting in notebooks stock on shelf.
Speaker Change: Impacted sell through rates beyond our expectations further contributing to the lower revenue.
Speaker Change: We've been in continuous discussions with our retail partners turmoil noted stock.
Speaker Change: Has progressed slower than we would have anticipated as such we expect this to affect sales philosophies for at least the next one to two months.
Speaker Change: Gross profit in the third quarter of 2024 was <unk> 6 million compared to $1 3 million for the same period in 2023.
Speaker Change: Gross margin was 16% in the third quarter of 2024 compared to 27% in the year ago period.
The decrease in margin was largely due to higher cost of goods sold as a percentage of sales.
Speaker Change: Operating expenses in the third quarter of 2024.
Speaker Change: The $3 8 million compared to <unk> 3 million for the same period in 2023.
Speaker Change: The increase was primarily driven by higher compensation and other general and administrative expenses as we scaled our business.
Speaker Change: In addition, we experienced an increase in bad debt expense due in part to a customer bankruptcy in the period.
Speaker Change: Net loss in the third quarter of 2024 was $3 4 million.
Speaker Change: 33 cents per diluted share compared to net income of <unk> $3 million.04 per diluted share for the same period in 2023.
Speaker Change: Adjusted EBITDA in the third quarter of 2024 was negative $1 9 million compared to <unk> 6 million for the same period in 2023.
Speaker Change: Moving to the balance sheet.
Ended the third quarter of 2024 with cash and cash equivalents of $6 9 million.
Speaker Change: <unk> to $2 4 million as of December 31, 2023.
This increase was primarily driven by the public offering we completed in the second quarter. When we raised $12 8 million in proceeds net of underwriting fees.
Speaker Change: Inventory at the close of Q3 was $19 4 million, marking a $9 1 million sequential increase.
Speaker Change: This rise is largely attributed to our decision to hold shipments during the quarter.
Speaker Change: Given the extended shelf life of our products, we anticipate working with inventory down to more typical levels over time as we address short term sales challenges.
Speaker Change: Converting this inventory to cash will not only reinforce our cash position, but also enable us to continue implementing our long term strategic initiatives.
Speaker Change: This concludes my prepared remarks, I'll now turn the call back to cardiac.
Speaker Change: Yes.
Speaker Change: Thank you Brandon I'd like to share the decisive actions, we're taking to address current revenue pressures, while remaining fully committed to our long term growth strategy.
Speaker Change: Strategy, we believe continues to hold tremendous untapped potential.
First on resolving melted products and restoring sell through we expect to see a full resolution on shelves within the coming weeks.
Speaker Change: The impact on sell through has been significant so we're launching targeted promotions to drive strong reengagement and boost momentum.
Speaker Change: This November and December we will run focused campaigns with five below HEB and other retailers to reignite sales momentum.
Speaker Change: Cracker barrel, we're replacing two skus to spark trial and are excited about the recent launch of our many meant to be skew a fresh. In addition, we believe will enhance their assortment.
Speaker Change: Despite competitive pressures, we remain from Rutland, and our strategy to innovate and secure shelf space.
We have strengthened our sales team with two top tier salespeople to rapidly open new retail doors aiming to increase our market share from our current approximate 10% penetration.
Speaker Change: We are also launching a full marketing campaign that highlights our dedication to innovation entrepreneurship and disruption.
We are here to change the game not nearly to play by its established rules.
Speaker Change: Bringing to candy production in house excites us it allows us to innovate flavors textures and improve ingredients and important competitive advantage that further differentiates us from our competitors.
Speaker Change: Despite short term headwinds, we believe we are only beginning to tap into the broader potential within the candy category.
Speaker Change: Okay.
Speaker Change: Internationally, we're enthusiastic about expansion opportunities in Europe, and the Middle East we are on the cusp of final regulatory approval for our 2025 launch positioning us to enter these markets before any significant competitors.
Speaker Change: Domestically, we're intensifying our footprint expansion across regional grocers convenience stores travel hubs and non traditional retail outlets were also mindful of the tremendous growth within U S ethnic markets as the Lumpiness I am personally inspired by this wave of margin growth.
Speaker Change: We recently launched our <unk> products at five below with the launch HEB planned by year's end. These items are a natural fit for the expanding ethnic market and we're working closely with broker partnerships to target these channels effectively.
Speaker Change: Given recent results. We're also taking proactive steps to strengthen our operational resilience and flexibility.
Speaker Change: Operating expense optimization, we're carefully evaluating our operating expenses to achieve savings that enhance efficiency without impacting production innovation or quality.
Speaker Change: Second the launch of our proprietary Kandi and.
Speaker Change: In collaboration with our retail partners and key brokers, we're seizing the opportunity to introduce our unique rock candy in the first quarter of 2025, then Suzy awesome around our turmoil gummy and its non prescribed natural format has been encouraging and reaffirming our commitment.
Speaker Change: And to growing the candy category with products that stand out both in form and flavor.
Speaker Change: Well initially modest in revenue fast tracking this candy format enhances our retail presence build brand recognition and if 400 access for those budget conscious consumers.
Speaker Change: Third our private label expansion.
Speaker Change: The increased production capacity, we are re engaging customers, who only operate in the private label space.
Speaker Change: This creates a new revenue stream and supports our margins by reaching markets otherwise inaccessible under our brand.
Speaker Change: Positions us uniquely among our competitors as we are not only our brand but expert manufacturers.
Speaker Change: Our U S based manufacturing capabilities enable us to gain additional market share producing high quality products across brands.
Speaker Change: Matt <unk> with <unk>.
Speaker Change: <unk> enters the market.
Speaker Change: Okay.
Speaker Change: These actions underscore our unyielding commitment to sustainable scalable growth and our focus on cost efficiency within our fast paced market.
Speaker Change: So good is committed to expanding our offerings thoughtfully to meet a range of consumer needs at various price points.
Celebrating our entry into traditional candy formats positions us strategically enhancing our competitive advantage.
Speaker Change: Not just participating in this industry, we are defining its future.
Speaker Change: <unk> by our advanced technology and manufacturing expertise, we're delivering best in class products with pricing and quality that distinguishes us.
Speaker Change: Aware of the challenges that come with pioneering in a traditionally diagnostic category ruled by corporate Giants were energized by what lies ahead.
Speaker Change: <unk> and our ability to serve a broader market, we're prepared to meet the evolving needs of consumers with unmatched creativity quality and care.
Operator, we'll now open the call for Q&A.
Speaker Change: Thank you Madam.
Speaker Change: As a reminder to ask a question you will need to press star one on your telephone.
Speaker Change: Move yourself from the queue you May press Star one again.
Speaker Change: Please standby, while we compile the Q&A roster.
Speaker Change: Our first question.
Speaker Change: Comes from the line of Eric <unk> of Craig Hallum Capital Group.
Speaker Change: Please go ahead Eric.
Speaker Change: Great. Thank you for taking my questions.
Speaker Change: I guess first just on the impact of melted products.
Speaker Change: You said that some of your customers pushed them to shelves and obviously impacted sales velocity.
Speaker Change: We think of this as kind of.
Speaker Change: A broad based.
Speaker Change: Dynamic or perhaps targeted to just a few customer I am just kind of wondering.
Speaker Change: Yes, this is sort of across the customer base.
Speaker Change: More limited in its impact.
Speaker Change: Hi, Eric Yeah, No great question I think that.
Speaker Change: Were primarily seen in three customers, which would be five below cracker barrel and HEB.
As we mentioned in the comments you know we thought we would be able to move through these.
Melted issues much quicker than we have been able to and hindsight is 2020 right. We felt like we made the correct decision and pause in shipments in the third quarter.
Speaker Change: And you know.
Speaker Change: In retrospect, we probably should've done is taken product back from the retailers so that they weren't pushing out to the stores, but they chose to push it out to the stores and because of that there is multiple products on the shelves, we're seeing that in very specific items. So if we look at quarter over quarter performed.
Speaker Change: That's on a SKU basis, we're seeing that really impact the crunchy worms with sweet worms, the sour worms.
Speaker Change: We were down 30% on the crunchy worms from Q2 to Q3 on Pfizer IRI same thing with the suite. So we're seeing the impact on those melted items you know at the same time, we're seeing increases in our sweep bites are sour sphere.
Speaker Change: So.
Short term impact on some of our top sellers that are more susceptible to heat but from a.
Sell through data at the retail level those items that are impacted by hee are continuing to do well now I understand I looked at the stock. This morning, I thought you guys had already priced in the third quarter.
Speaker Change:
Speaker Change: Issues.
Speaker Change: We created this category it's brand new.
Speaker Change: We're 16 months into doing it there's going to be fits and starts there's going to be stumbles theres going to be headwinds and one of the things that I want to make it really clear.
Speaker Change: Everyone on this call we are going to do what is in the best long term interest for this company, we are not going to play a quarterly game because if we do that we lose we're really focused on continuing to innovate to not ship. It there is a he issue we.
Speaker Change: Resolve the heat issue for next year, we're going to be in temperature controlled environments, but can be making machine is coming in house. So that we can continue to innovate and as these corporate pressures come in trying to get us off shelf theyre not going to be able to because we will have the most innovative product which is what.
Consumers are saying they want so that's really what our focus is on with five below cracker barrel HEB, we're working through promotional actions I'm trying to get product pulled off shelves so that.
Speaker Change: We can resolve this and get back to a regular.
Speaker Change: Sales cadence across all Skus and I, probably gave you more info than you wanted Eric.
Alright, I appreciate the color there.
Speaker Change: I guess some of your other customers.
Speaker Change: 711 target, where sort of big big wins.
Speaker Change: Earlier in the year could you maybe just comment on how we should think about.
Speaker Change: You sort of dynamics impacting there should we think about these as kind of short term as well and I guess just more broadly speaking.
Speaker Change: Those customers that you just called out like how should we think about.
Shelf space.
Speaker Change: Have you been able to sort of defend the shelf space that you won with them. If you lost any accounts just kind of wondering how we should think about the sort of.
The customer base going forward more broadly speaking.
Speaker Change: Yeah, no. So we're aggressively going after shelf space.
Speaker Change: Just yesterday, we got appeal for toys R Us Canada.
Speaker Change: We've hired two top tier salespeople, whose.
Speaker Change: Only mandate is boots on the ground get us shelf space, because if we can get on shelf space, we feel like we are.
Win that battle.
Speaker Change: In regards to customers.
Speaker Change: Five below.
711.
Speaker Change: Cracker barrel some of those key accounts that we've had for a long time are growing with us and growing with us through these.
Challenges because they understand what we understand right. They helped US pioneered this category. They understood that there were we werent going to have the answer to every single question. So they've been incredibly flexible and have partnered closely with us as we continue to innovate and grow this category.
Speaker Change: In regards to circle K and target I don't have good answers for you on those.
Speaker Change: There are a large.
Speaker Change: Large CPG competitors that are entering the landscape and you know our.
Speaker Change: <unk> have been that.
Speaker Change: They may want to be the only prescribed product on shelf at certain retailers.
Speaker Change: And the position that we're taking is we have the best product the best assortment, the best pricing and if you.
You choose to go in a different direction with some exclusivity is or what whatever relationships you're going to we're just going to pick up other shelves elsewhere because across the board. What we're hearing from retailers is what their customers want is this broad assortment of freeze dried candy and that.
Speaker Change: Why our assortment is so important and continuing to innovate.
Speaker Change: That assortment is going to be key for us to continue long term growth I mean, the growth right now.
Third quarter wasn't fun it wasn't great, but it was still the right decision.
And.
Speaker Change: How do we continue to operate from here is really going to dictate our long term success.
Speaker Change: Alright, I appreciate that color just two more from me.
Speaker Change: So obviously inventories and pick it up no surprise given these dynamics.
Speaker Change: But how should we think about your production plans going forward. I mean are you still I should we should we think about this is still in full production are you kind of pausing production to work through any of the inventory.
Speaker Change: How should we be thinking about that going forward.
Speaker Change: Yeah.
Speaker Change: We are pausing production.
Speaker Change: And then we're continuing production on certain line items like the meant to be is just coming out and so that's what we're producing right now are everyday skews that we have sufficient inventory because.
Speaker Change: The inventory thats on the balance sheet, we had anticipated it being gone by the third quarter right.
Speaker Change: So all of those items, we are not continuing to produce until we need it the nice thing about that inventory and that's already paid for so you know the minute. It sold its just converted into cash.
Speaker Change: As a long shelf life, it's got a two year shelf life. So it's not like we're in a time crunch.
Speaker Change: To to move it as quickly as possible and.
Speaker Change: We're continuing to use the free stars on the items that we're innovating and launching.
Speaker Change: In my remarks, one of the things we mentioned is there a retailers out there that only live in the private label World right. They don't bring brands into their retailers. Since we now have the production capacity because of the slow down in the third quarter. Those are conversations that we are a reentry.
Speaker Change: Because why not its not a market we can access if we don't go to private label route with them. So we're going to take that approach.
Speaker Change: Keeping the pretty sharp full with branded and private label products, where appropriate where it's not going to affect our branded strategy.
Speaker Change: Got it and then just last one from me.
Speaker Change: Can you comment I guess broadly on fixed cost leverage in the model.
Speaker Change: The overall impact of sales volumes on gross margins you have seen some.
Speaker Change: Some pretty significant volatility there, 58% last quarter, 16% this quarter.
Speaker Change: How should we think about appropriate gross margin levels going forward.
Speaker Change: Yes, so we're going to continue to see.
Speaker Change: Variability in the gross margin just because of the changing dynamics are facing the industry.
Speaker Change: Just last quarter, we had a step down and that was primarily due to some protection yield variances, we experienced and that's driven by a multitude of things, but primarily.
We believe it was in the quarter was higher levels of product loss from breakage and Thats, just due to increased product handling as a new facilities.
We had some unfavorable still variances, so thats kind of what impacted us on top of the deleverage on the sales impact as well as far as the fixed cost leverage going forward.
Speaker Change: Look at what our.
Speaker Change: What makes up our cards.
Speaker Change: The Big thing there are labor and our overhead which is primarily rent and the labor. Obviously, if we're pulling back production that will come down but the ramp obviously it will be there'll be a deleverage there if there is a sales decline.
Alright, Thank you for taking my questions.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Our next question.
Speaker Change: It comes from the line of George Kelly of Roth Capital Partners. Your question. Please George.
Hey, everybody thanks for taking my questions.
Speaker Change: Maybe to start.
Speaker Change: I know you mentioned that you still have there is heat affected.
Affected.
Speaker Change: At retail.
Speaker Change: But I'm curious even outside of that.
Speaker Change: What are your retail inventory levels look like do you have a good.
Speaker Change: Sense of that and is there still a fair amount of kind of excess inventory at retail.
So what we're seeing Georgia in regards to Reorders at this point is the products that were not affected by heat.
Speaker Change: And so that's why you know.
Speaker Change: Pulling the heat affected product running those promotions is really important because it makes sense right. If someone goes to a shelf when they see them.
Speaker Change: Mounted worms, theyre, not going to want to buy them and so that's really our focus right now, let's get those off shelf, let's get fresh product in and.
Speaker Change: Kick start that sales momentum on those items again.
Speaker Change: But for example, you know on the bites and all the other items, that's where we're seeing stronger reorders.
Speaker Change: Okay understood and then.
Speaker Change: You.
Speaker Change: Do you have any data.
What can you share just with respect to the broader category.
Speaker Change: Im curious if youre seeing any signs of just in general the whole freeze dried candy category is showing signs of velocity.
Speaker Change: Sort of slowness or any data you can share there would be helpful.
Yeah, I think that we're starting to see pre strike candy and tourists steady state.
If we hadn't had this he issue I think we would have a much better sense of what.
Speaker Change: Everyday velocities at retail we're going to be like.
Speaker Change: But.
Speaker Change: Frenzy.
Speaker Change: The fourth quarter of last year.
Speaker Change: It has definitely died down and now we're entering into how it's going to perform every day.
Speaker Change: And I think that getting the melted product off the shelf.
Speaker Change: Getting back to a steady state with those items will give us a really good sense of.
Speaker Change: On a go forward basis, what the category is going to do.
Speaker Change: In a normal cadence.
Okay.
And then maybe last question for me.
Speaker Change: On private labeling.
Speaker Change: How big of an opportunity is that and might you also consider I don't think this is what.
Speaker Change: In response to one of the questions earlier.
Speaker Change: You mentioned the opportunity that you are currently assessing but I'm wondering if you're also considering becoming more of a manufacturing partner for other branded.
Speaker Change: Companies.
Right now, we're really focused on the private label opportunities in order to fully utilize our free stars right now at the end of the day you know what we've said from the beginning what we are is manufacturers were expert manufacturers and so we're there.
Speaker Change: The opportunities are that are going to help support our long term growth is where we're going to go co manufacturing for other brands at this point, we feel would be detrimental to the so good brand that has a really strong.
Speaker Change: Presence.
Amongst retailers and customers so focusing on those private label opportunities, where we will not be able to access them in anything other than our private label format is where we're going to start.
Speaker Change: Okay understood. Thank you.
Speaker Change: At this time. This concludes our question and answer session I would now like to turn the call back over to Claudio for closing remarks.
Claudio: Well you guys. Thank you very much for your time I know third quarter was disappointing, but if there's anything I can leave you with is the fact that we are incredibly focused on the continued opportunities we see in candy. This was a huge speed bumps and theirs.
Claudio: That said it.
Claudio: That's all it was and now what we have to do is focus on the long term growth focus on implementing the strategy. We have to continue to innovate and dominate this category and that's gonna take vision dedication and a lot of great and Thats, what our management team and our board has.
Claudio: And that's what we're going to deliver on in the long term. So thank you very much everyone have a great day, and we will speak soon.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
Claudio: Okay.
Claudio: Okay.
Claudio: [music].
Claudio: Yeah.
Okay.
Claudio: Yes.
Claudio: [music].
Claudio: Yeah.
[music].
Claudio: Sure.
Claudio: Yes.
Okay.
Claudio: [music].
Claudio: Okay.
Claudio: Okay.
Claudio: [music].
Claudio: Okay.
Claudio: [music].
Claudio: Okay.
Claudio: So.
Claudio: Hum.
Claudio: Yes.
Claudio: [music].
Okay.
Claudio: [music].
Claudio: Okay.
Yes.
Claudio: Okay.
Claudio: [music].