Sow Good Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Cautionary Statements We are including the following discussion to inform our existing and potential security holders generally of some of the risks and uncertainties that can affect our company and to take advantage of the “safe harbor” protection for forward-looking statements that applicable federal securities law affords. From time to time, our management or persons acting on our behalf may make forward-looking statements to inform existing and potential security holders about our company. All statements other than statements of historical facts included in this report regarding our financial position, business strategy, plans and objectives of management for future operations and industry conditions are forward-looking statements. When used in this report, forward-looking statements are generally accompanied by terms or phrases such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “target,” “plan,” “intend,” “seek,” “goal,” “will,” “should,” “may” or other words and similar expressions that convey the uncertainty of future events or outcomes. Items making assumptions regarding actual or potential future sales, market size, collaborations, trends or operating results also constitute such forward-looking statements. Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our control) that could cause actual results to differ materially from those set forth in the forward-looking statements include the following: · the effect of the coronavirus (“COVID-19”) pandemic on our ability to obtain funding through various financing transactions or arrangements; · volatility or decline of our stock price; · low trading volume and illiquidity of our common stock; · potential fluctuation in quarterly results; · low trading volume and price of our investment in AESE Shares; · inability to maintain adequate liquidity to meet our financial obligations; · failure to obtain sufficient sales and distributions of our freeze-dried fruit product offerings; · litigation, disputes and legal claims involving outside parties; and · risks related to our ability to be traded on the OTCQB and meeting trading requirements We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. Accordingly, results actually achieved may differ materially from expected results in these statements. Forward-looking statements speak only as of the date they are made. Readers are urged not to place undue reliance on these forward-looking statements. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, other than as may be required by applicable law or regulation. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the United States Securities and Exchange Commission (the “SEC”) which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected. 24 Overview and Outlook On March 20, 2021, our first freeze drier successfully completed its production testing. The company is now producing its own freeze-dried fruits and vegetables from individual quick freeze (IQF) raw materials. Freeze dried food production also continues to be supplemented by our relationships with co-manufacturing partners. In addition, we completed the build-out of our production facility in March, and have finalized products and packaging, while delivering samples to potential B2B customers. During the second quarter of 2021, we launched our direct-to-consumer freeze-dried consumer packaged goods (CPG) food brand, under our Sow Good brand. Sow Good launched its first line of non-GMO products including six ready-to-make smoothies and nine snacks. The smoothie lineup offers a mix of both new and familiar flavors: Açaí of Relief (açaí, blueberry); Mint to Be (banana, coconut, mint); and Berry Apeeling (banana, strawberry). Sow Good packaged snack lineup includes single-ingredient fruits and vegetables such as Mon Cherry (cherries); Cool Beans (edamame); and What’s Apple’n (apples). On July 23, 2021, we launched six new gluten-free granola products under the Sow Good brand. Sow Good’s granola products are made with health-conscious ingredients such as freeze-dried fruit, almonds, hemp hearts, and coconut oil. Granola products are initially being sold direct-to-consumer and will later be targeted to the business-to-business segment. Our unique food products are targeting the large, and growing, freeze-dried food products market. The global freeze-dried food products market is estimated by Technavio to total nearly $60B in 2020, with the United States representing almost 30% of the total. Technavio further projects market growth to continue at over 8% per year through 2024. With the extensive freeze-dried manufacturing and food product-focused business development experience of our senior management team, we believe we are well positioned to lead the Company's growth and development in the freeze-dried food industry. Going Concern Uncertainty As of September 30, 2021, the Company had incurred recurring losses from operations resulting in an accumulated deficit of $40,626,166, and had cash on hand of $2,580,489. We are too early in our development stage to project revenue with a necessary level of certainty; therefore, we may not have sufficient funds to sustain our operations for the next twelve months and we may need to raise additional cash to fund our operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company has commenced sales and continues to develop its operations. In the event sales do not materialize at the expected rates, management would seek additional financing or would attempt to conserve cash by further reducing expenses. There can be no assurance that we will be successful in achieving these objectives. The Company has incurred recurring losses from operations resulting in an accumulated deficit, experienced net negative cash flows from operations, and, as set forth above, the Company’s cash on hand may not be sufficient to sustain operations. We continue to pursue sources of additional capital through various financing transactions or arrangements, including equity financing or other means. We may not be successful in identifying suitable financing transactions in a sufficient time period or at all, and we may not obtain the capital we require by other means. If we do not succeed in raising additional capital, our resources may not be sufficient to fund our business. Our ability to scale production and distribution capabilities and further increase the value of our brands, is largely dependent on our success in raising additional capital. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. The unaudited financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 25 Results of Operations for the Three Months Ended September 30, 2021 and 2020. The following table summarizes selected items from the statement of operations for the three months ended September 30, 2021 and 2020, respectively. Three Months Ended September 30, Increase / 2021 2020 (Decrease) Revenues $ 21,137 $ – $ 21,137 Cost of goods sold 19,396 – 19,396 Gross Profit 1,741 – 1,741 Operating expenses: General and administrative expenses: Salaries and benefits 936,783 805,938 130,845 Professional services 108,186 130,234 (22,048 ) Other general and administrative expenses 472,369 45,001 427,368 Total general and administrative expenses 1,517,338 981,173 536,165 Depreciation and amortization 64,863 380 64,483 Total operating expenses 1,582,201 981,553 600,648 Net operating loss (1,580,460 ) (981,553 ) 598,907 Other income (expense) Interest expense (1,697 ) (1,695 ) 2 Other income – 14 (14 ) Loss on disposal of property and equipment – (5,369 ) (5,369 ) Loss on investment in Allied Esports Entertainment, Inc. securities – (1,503,601 ) (1,503,601 ) Total other income (expense) (1,697 ) (1,510,651 ) (1,508,954 ) Net loss $ (1,582,157 ) $ (2,492,204 ) $ (910,047 ) Revenues Revenues commenced during the current year, which were generated by online sales of our freeze-dried foods products. The revenues were $21,137 for the three months ended September 30, 2021, as we test launched our products. The Company did not earn any revenues during the comparative three months ended September 30, 2020. We anticipate increased revenues over the remainder of the year, although there can be no assurance. 26 Cost of Goods Sold Cost of goods sold for the three months ended September 30, 2021 were $19,396, primarily consisting of material costs and labor on the sales of freeze-dried food products, resulting in a gross profit of approximately 8% during the quarter. The Company did not have any cost of goods sold during the comparative three months ended September 30, 2020. General and administrative expenses Salaries and benefits Salaries and benefits for the three months ended September 30, 2021 were $936,783, compared to $805,938 for the three months ended September 30, 2020, an increase of $130,845, or 16%, Salaries and benefits included stock-based compensation expense for the three months ended September 30, 2021 of $306,018, compared to $322,888 for the three months ended September 30, 2020, a decrease of $16,870, or 5%. Stock-based compensation consists of $145,566 and $322,888 of stock options expense incurred in the three months ended September 30, 2021 and 2020, respectively, and $160,452 of expense related to shares of common stock issued to officers and consultants in the current period for services rendered. The increase in salaries and benefits was primarily due to increased operations as we developed our freeze-dried food operations and stock-based compensation, as management accepted stock-based compensation in lieu of cash. Professional services Professional services were $108,186 for the 2021 period, compared to $130,234 for the 2020 period, a decrease of $22,048, or 17%. The decrease was primarily due to legal fees incurred in connection with our asset purchase agreement with S-FDF, LLC in the comparative period that were not necessary in the current period. Other general and administrative expenses Other general and administrative expenses for the three months ended September 30, 2021 was $472,369, compared to $45,001 for the three months ended September 30, 2020, an increase of $427,368, or 950%. The increase is primarily attributable to increased administrative infrastructure as we seek to scale the production and sales of our freeze-dried products. Depreciation Depreciation expense for the three months ended September 30, 2021 was $64,863, compared to $380 for the three months ended September 30, 2020, an increase of $64,483, or 16,969%. The increase is attributable to the addition of new equipment placed in service in late 2020 and early 2021. Other income (expense) In the three months ended September 30, 2021, other expense was $1,697, consisting entirely of interest expense on our EIDL loan with the SBA. During the comparative three months ended September 30, 2020, other expense, on a net basis, was $1,510,651, consisting of $1,695 of interest expense derived from the business loans the Company received from Cadence Bank, N.A and RBC Capital Markets, LLC and additional operating loans from the PPP and EIDL programs, a loss on the disposal of equipment of $5,369, and a net loss on investments in Allied Esports Entertainment, Inc. securities of $1,503,601, as offset by $14 of interest income. Net loss Net loss for the three months ended September 30, 2021 was $1,582,157, compared to $2,492,204 during the three months ended September 30, 2020, a decreased net loss of $910,047, or 37%. The decreased net loss was due primarily to our loss on investments in Allied Esports Entertainment, Inc. securities in the comparative period. 27 Results of Operations for the Nine Months Ended September 30, 2021 and 2020. The following table summarizes selected items from the statement of operations for the nine months ended September 30, 2021 and 2020, respectively. Nine Months Ended September 30, Increase / 2021 2020 (Decrease) Revenues $ 28,213 $ – $ 28,213 Cost of goods sold 24,295 – 24,295 Gross Profit 3,918 – 3,918 Operating expenses: General and administrative expenses: Salaries and benefits 2,610,884 1,330,135 1,280,749 Professional services 270,779 327,090 (56,311 ) Other general and administrative expenses 1,183,453 186,380 997,073 Total general and administrative expenses 4,065,116 1,843,605 2,221,511 Depreciation and amortization 129,915 1,030 128,885 Total operating expenses 4,195,031 1,844,635 2,350,396 Net operating loss (4,191,113 ) (1,844,635 ) 2,346,478 Other income (expense) Interest expense, including $377,440 of warrants issued as a debt discount for the nine months ending September 30, 2020 (4,431 ) (384,456 ) (380,025 ) Other income – 16 (16 ) Loss on disposal of property and equipment – (5,369 ) (5,369 ) Gain on early extinguishment of debt 113,772 – 113,772 Gain (loss) on investment in Allied Esports Entertainment, Inc. securities 133,944 (2,186,557 ) 2,320,501 Total other income (expense) 243,285 (2,576,366 ) 2,819,651 Net loss $ (3,947,828 ) $ (4,421,001 ) $ (473,173 ) Revenues Revenues commenced during the current year, which were generated by online sales of our freeze-dried foods products. The revenues were $28,213 for the nine months ended September 30, 2021, as we test launched our products. The Company did not earn any revenues during the comparative nine months ended September 30, 2020. We anticipate increased revenues over the remainder of the year, although there can be no assurance. 28 Cost of Goods Sold Cost of goods sold for the nine months ended September 30, 2021 were $24,295, primarily consisting of material costs and labor on the sales of freeze-dried food products, resulting in a gross profit of approximately 14% during the period. The Company did not have any cost of goods sold during the comparative nine months ended September 30, 2020. General and administrative expenses Salaries and benefits Salaries and benefits for the nine months ended September 30, 2021 were $2,610,884, compared to $1,330,135 for the nine months ended September 30, 2020, an increase of $1,280,749, or 96%, Salaries and benefits included stock-based compensation expense of $1,015,233, compared to $393,831 for the nine months ended September 30, 2020, an increase of $621,402, or 158%. Stock-based compensation consists of $407,031 and $393,831 of stock options expense incurred in the nine months ended September 30, 2021 and 2020, respectively, and $608,202 of expense related to shares of common stock issued to officers and consultants in the current period for services rendered. The increase in salaries and benefits was primarily due to increased operations as we developed our freeze-dried food operations and stock-based compensation, as management accepted stock-based compensation in lieu of cash. Professional services Professional services were $270,779 for the 2021 period, compared to $327,090 for the 2020 period, a decrease of $56,311, or 17%. The decrease was primarily due to legal fees incurred in connection with our asset purchase agreement with S-FDF, LLC in the comparative period that were not necessary in the current period. Other general and administrative expenses Other general and administrative expenses for the nine months ended September 30, 2021 was $1,183,453, compared to $186,380 for the nine months ended September 30, 2020, an increase of $997,073, or 535%. The increase is primarily attributable to increased administrative infrastructure as we seek to scale the production and sales of our freeze-dried products. Depreciation Depreciation expense for the nine months ended September 30, 2021 was $129,915, compared to $1,030 for the nine months ended September 30, 2020, an increase of $128,885, or 12,513%. The increase is attributable to the addition of new equipment placed in service in late 2020 and early 2021. 29 Other income (expense) In the nine months ended September 30, 2021, other income was $243,285, consisting of a gain on investments in Allied Esports Entertainment, Inc. securities of $133,944 and a gain on early extinguishment of debt of $113,772 related to the forgiveness of the PPP loan, as offset by $4,431 of interest expense derived from the operating loans the Company received from the PPP and EIDL programs. During the comparative nine months ended September 30, 2020, other expense was $2,576,366, consisting of $384,456 of interest expense derived from the business loans the Company received from Cadence Bank, N.A, RBC Capital Markets, LLC and additional operating loans from the PPP and EIDL programs, including $377,440 of expense related to the amortization of warrants issued in consideration of personal guarantees provided for debt financing, along with a net loss on investments in Allied Esports Entertainment, Inc. of $2,186,557, as offset by $16 of interest income. Net loss Net loss for the nine months ended September 30, 2021 was $3,947,828, compared to $4,421,001 during the nine months ended September 30, 2020, a decrease of $473,173, or 11%. The decreased net loss was primarily due to our gain on early extinguishment of debt and gain on investments in Allied Esports Entertainment, Inc. securities, compared to our prior period loss on investments, as partially offset by increased stock-based compensation and costs associated with the development of our freeze-dried food operations. Liquidity and Capital Resources The following table summarizes our total current assets, liabilities and working capital at September 30, 2021 and December 31, 2020, respectively. September 30, December 31, 2021 2020 Current Assets $ 3,832,399 $ 2,390,944 Current Liabilities $ 406,940 $ 622,791 Working Capital $ 3,425,459 $ 1,768,153 As of September 30, 2021, we had working capital of $3,425,459. The following table summarizes our cash flows during the nine months ended September 30, 2021 and 2020, respectively. Nine Months Ended September 30, 2021 2020 Net cash used in operating activities $ (4,304,501 ) $ (1,111,648 ) Net cash provided by (used in) investing activities (590,250 ) 1,157,076 Net cash provided by financing activities 5,562,511 262,925 Net change in cash and cash equivalents $ 667,760 $ 308,353 30 Net cash used in operating activities was $4,304,501 and $1,111,648 for the nine months ended September 30, 2021 and 2020, respectively, a period over period increase of $3,192,853. The increase was primarily due to an increase of $1,021,099 in inventory purchases, as well as, increased costs as we moved our operations from Minnesota to Texas to develop our new freeze-dried food business. Net cash used in investing activities were $590,250 for the nine months ended September 30, 2021. Cash used in investing activities were comprised of $1,004,611 of fixed asset purchases, as we built out our freeze-dried foods warehouse and equipment, as partially offset by $414,361 of proceeds received from the sale of investments in Allied Esports Entertainment, Inc. securities during the nine months ended September 30, 2021. Net cash provided by financing activities was $5,562,511 and $262,925 for the nine months ended September 30, 2021 and 2020, respectively. All of the 2021 activity was the result of the $2,525,000 we raised from the sale of an aggregate 631,250 shares of the Company’s common stock at $4.00 per share, and another $3,037,511 raised from the sale of an aggregate 714,701 shares sold at $4.25 per share , compared to $262,925 of net proceeds received and repayments on notes payable in the comparative nine months ended September 30, 2020. Satisfaction of our cash obligations for the next 12 months As of September 30, 2021, our balance of cash was $2,580,489 and we had total working capital of $3,425,459. B ased on projections of cash expenditures in the Company’s current business plan, the cash on hand as of September 30, 2021 would be insufficient to sustain operations over the next year. We expect to incur significant costs related to the development and operation of our freeze-dried foods business which will put a strain on our cash resources. Should the Company be successful in launching its products, we may pursue the expansion of our production capabilities through the construction of a second freeze drier. Adding a second freeze drier would require approximately $1 million of incremental capital and would likely require the Company to identify additional sources of funding . O ur plan for satisfying our cash requirements for the next twelve months is through cash on hand and additional financing in the form of equity or debt as needed . Our ability to scale production and distribution capabilities and further increase the value of our brands is largely dependent on our success in raising additional capital . Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Critical Accounting Policies and Estimates Our management’s discussion and analysis of financial conditions and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements required us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results and experiences may differ materially from these estimates. Our critical accounting policies are more fully described in Note 2 of the footnotes to our financial statements appearing elsewhere in this Form 10-Q, and Note 2 of the footnotes to the financial statements provided in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. 31 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item