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: · volatility or decline of our stock price; · low trading volume and illiquidity of our common stock; · potential fluctuation in quarterly results; · inability to maintain adequate liquidity to meet our financial obligations; · failure to obtain sufficient sales and distributions for our freeze dried product offerings; · supply chain disruption and delay; · transportation, labor, and raw material cost increases; · 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. 27 Overview and Outlook We continue to sell our products online via our direct-to-consumer channels, in addition to our growing pipeline of business-to-business customers. In March of 2021, we completed the construction of our first freeze drier and, in anticipation of the increased production demands for our products and freeze drying expertise, we are in the development process of our second and third freeze driers. During the second quarter of 2022, we saw a significant increase in demand for our products from large business-to-business customers. We expect our growing pipeline of business-to-business customers to drive sales growth in the coming quarters. We also continued the expansion of our ‘Sustain Us’ brand, which offers a line of granolas, snacks, and soups that are marketed toward outdoor adventure activities, everyday snacking and meal prep needs, and long-term food storage. During 2021, we completed the build-out of our production facility and launched our direct-to-consumer freeze dried consumer packaged goods (CPG) food brand, under our Sow Good brand. Sow Good launched eleven ready-to-blend smoothies, nine fruit snacks, and six vegetable 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’s packaged snack lineup includes fruits and vegetables such as Mon Cherry (cherries) and What’s the Dill (sweet potato chips with dill). We also launched four 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 fruits, almonds, and hemp hearts. Our unique food products are targeting the large, and growing, freeze dried food market. With the extensive freeze dried manufacturing and business development experience of our senior management team, we are confident that we are well positioned to lead the Company's growth and development in the freeze dried food industry. Going Concern Uncertainty As of June 30, 2022, the Company had incurred recurring losses from operations resulting in an accumulated deficit of $47,217,345, and had cash on hand of $2,756,534. 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. 28 Results of Operations for the Three Months Ended June 30, 2022 and 2021 The following table summarizes selected items from the statement of operations for the three months ended June 30, 2022 and 2021, respectively. Three Months Ended June 30, Increase / 2022 2021 (Decrease) Revenues $ 244,943 $ 7,076 $ 237,867 Cost of goods sold 150,603 4,899 145,704 Gross Profit 94,340 2,177 92,163 Operating expenses: General and administrative expenses: Salaries and benefits 1,242,900 916,957 325,943 Professional services 53,295 60,694 (7,399 ) Other general and administrative expenses 487,789 424,263 63,526 Total general and administrative expenses 1,783,984 1,401,914 382,070 Depreciation and amortization 67,693 60,056 7,637 Total operating expenses 1,851,677 1,461,970 389,707 Net operating loss (1,757,337 ) (1,459,793 ) 297,544 Other income (expense) Interest expense (355,452 ) (1,222 ) 354,230 Loss on investment in Allied Esports Entertainment, Inc. securities – (96,779 ) (96,779 ) Total other income (expense) (355,452 ) (98,001 ) 257,451 Net loss $ (2,112,789 ) $ (1,557,794 ) $ 554,995 Revenues Revenues consist primarily of online freeze dried foods product sales. The revenues were $244,943 for the three months ended June 30, 2022, compared to $7,076 for the three months ended June 30, 2021, an increase of $237,867, or 3,362%. Revenues increased as we continued to launch our product lines and significantly increased our business-to-business sales during the second quarter of 2022. We had minimal revenues during the comparative period, as we had just commenced sales. 29 Cost of Goods Sold Cost of goods sold for the three months ended June 30, 2022 were $150,603, compared to $4,899 for the three months ended June 30, 2021, an increase of $145,704, or 2,974%. Cost of goods sold, primarily consisting of material costs and labor on the sales of freeze dried food products, resulted in a gross profit margin of approximately 39% during the quarter, compared to 31% during the comparative period. General and administrative expenses Salaries and benefits Salaries and benefits for the three months ended June 30, 2022 were $1,242,900, compared to $916,957 for the three months ended June 30, 2021, an increase of $325,943, or 36%. Salaries and benefits included stock-based compensation expense for the three months ended June 30, 2022 of $431,370, compared to $333,324 for the three months ended June 30, 2021, an increase of $98,046, or 29%. Stock-based compensation consists of $386,372 and $140,244 of stock options expense incurred in the three months ended June 30, 2022 and 2021, respectively, and $44,998 and $193,080 of expense related to shares of common stock issued to officers and consultants for services rendered in the three months ended June 30, 2022 and 2021, respectively. The increase in salaries and benefits was primarily due to increased operations as we developed our freeze dried food operations. Professional services Professional services were $53,295 for the 2022 period, compared to $60,694 for the 2021 period, a decrease of $7,399, or 12%. The decrease was primarily due to legal fees incurred in connection with creating our brand 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 June 30, 2022 was $487,789, compared to $424,263 for the three months ended June 30, 2021, an increase of $63,526, or 15%. The increase is primarily attributable to increased administrative infrastructure as we continue to scale the production and sales of our freeze dried products. Depreciation Depreciation expense for the three months ended June 30, 2022 was $67,693, compared to $60,056 for the three months ended June 30, 2021, an increase of $7,637, or 13%. The increase is attributable to the addition of new equipment placed in service throughout 2021. Other income (expense) In the three months ended June 30, 2022, other expense was $355,452 consisting entirely of interest expense on our EIDL loan with the SBA and loans from our officers and directors, including $262,074 related to the amortization of warrants issued as a debt discount on loans. During the comparative three months ended June 30, 2021, other expense was $98,001, consisting of $1,222 of interest expense derived from the operating loans the Company received from the PPP and EIDL programs and a $96,779 net loss on investments in Allied Esports Entertainment, Inc. securities. Net loss Net loss for the three months ended June 30, 2022 was $2,112,789, compared to $1,557,794 during the three months ended June 30, 2021, an increased net loss of $554,995, or 36%. The increased net loss was due primarily to $297,544 of increased operating losses over the prior year, as we ramped up our operations, increased interest expense of $354,230, including $262,074 of amortization on warrants issued as a debt discount, as partially offset by a $96,779 loss on the sale of our investments in Allied Esports Entertainment, Inc. securities in the comparative period that were not incurred in the current period. 30 Results of Operations for the Six Months Ended June 30, 2022 and 2021 The following table summarizes selected items from the statement of operations for the six months ended June 30, 2022 and 2021, respectively. Six Months Ended June 30, Increase / 2022 2021 (Decrease) Revenues $ 293,315 $ 7,076 $ 286,239 Cost of goods sold 198,094 4,899 193,195 Gross Profit 95,221 2,177 93,044 Operating expenses: General and administrative expenses: Salaries and benefits 2,159,055 1,674,101 484,954 Professional services 115,988 162,593 (46,605 ) Other general and administrative expenses 892,865 711,084 181,781 Total general and administrative expenses 3,167,908 2,547,778 620,130 Depreciation and amortization 132,919 65,052 67,867 Total operating expenses 3,300,827 2,612,830 687,997 Net operating loss (3,205,606 ) (2,610,653 ) 594,953 Other income (expense) Interest expense (459,245 ) (2,734 ) 456,511 Gain on early extinguishment of debt – 113,772 (113,772 ) Gain on investment in Allied Esports Entertainment, Inc. securities – 133,944 (133,944 ) Total other income (expense) (459,245 ) 244,982 (704,227 ) Net loss $ (3,664,851 ) $ (2,365,671 ) $ 1,299,180 31 Revenues Revenues consist primarily of online freeze dried foods product sales. The revenues were $293,315 for the six months ended June 30, 2022, compared to $7,076 for the six months ended June 30, 2021, an increase of $286,239, or 4,045%. Revenues increased as we continued to launch our product lines and significantly increased our business-to-business sales during the second quarter of 2022. We had minimal revenues during the comparative period, as we had just commenced sales. Cost of Goods Sold Cost of goods sold for the six months ended June 30, 2022 were $198,094, compared to $4,899 for the six months ended June 30, 2021, an increase of $193,195, or 3,944%. Cost of goods sold, primarily consisting of material costs and labor on the sales of freeze dried food products, resulting in a gross profit margin of approximately 32% during the current period, compared to 31% during the comparative period. General and administrative expenses Salaries and benefits Salaries and benefits for the six months ended June 30, 2022 were $2,159,055, compared to $1,674,101 for the six months ended June 30, 2021, an increase of $484,954, or 29%, Salaries and benefits included stock-based compensation expense for the six months ended June 30, 2022 of $575,631, compared to $709,215 for the six months ended June 30, 2021, a decrease of $133,584, or 19%. Stock-based compensation consists of $520,633 and $261,465 of stock options expense incurred in the six months ended June 30, 2022 and 2021, respectively, and $54,998 and $447,750 of expense related to shares of common stock issued to officers and consultants for services rendered in the six months ended June 30, 2022 and 2021, respectively. The increase in salaries and benefits was primarily due to increased operations as we developed our freeze dried food operations. Professional services Professional services were $115,988 for the 2022 period, compared to $162,593 for the 2021 period, a decrease of $46,605, or 29%. The decrease was primarily due to legal fees incurred in connection with creating our brand in the comparative period that were not necessary in the current period. Other general and administrative expenses Other general and administrative expenses for the six months ended June 30, 2022 was $892,865, compared to $711,084 for the six months ended June 30, 2021, an increase of $181,781, or 26%. The increase is primarily attributable to increased administrative infrastructure as we continued to scale the production and sales of our freeze dried products. Depreciation Depreciation expense for the six months ended June 30, 2022 was $132,919, compared to $65,052 for the six months ended June 30, 2021, an increase of $67,867, or 104%. The increase is attributable to the addition of new equipment placed in service throughout 2021. 32 Other income (expense) In the six months ended June 30, 2022, other expense was $459,245, consisting entirely of interest expense on our EIDL loan with the SBA and loans from our officers and directors, including $321,798 related to the amortization of warrants issued as a debt discount on loans. During the comparative six months ended June 30, 2021, other income, on a net basis, was $244,982, consisting of a $113,772 gain on early extinguishment of debt and a net gain on investments in Allied Esports Entertainment, Inc. securities of $133,944, as offset by $2,734 of interest expense derived from the operating loans the Company received from the PPP and EIDL programs. Net loss Net loss for the six months ended June 30, 2022 was $3,664,851, compared to $2,365,671 during the six months ended June 30, 2021, an increased net loss of $1,299,180, or 55%. The increased net loss was due primarily to $594,953 of increased operating losses over the prior year, as we ramped up our operations, increased interest expense of $456,511, including $321,798 of amortization on warrants issued as a debt discount, and prior years gains of $113,772 and $133,944 on the forgiveness of our PPP loan and gains on the sale of our investments in Allied Esports Entertainment, Inc. securities in the comparative period. Liquidity and Capital Resources The following table summarizes our total current assets, liabilities and working capital at June 30, 2022 and December 31, 2021, respectively. June 30, December 31, 2022 2021 Current Assets $ 4,906,515 $ 4,891,264 Current Liabilities $ 1,357,912 $ 403,057 Working Capital $ 3,548,603 $ 4,488,207 As of June 30, 2022, we had working capital of $3,548,603. The following table summarizes our cash flows during the six months ended June 30, 2022 and 2021, respectively. Six Months Ended June 30, 2022 2021 Net cash used in operating activities $ (2,274,361 ) $ (2,764,841 ) Net cash used in investing activities (2,015,033 ) (390,643 ) Net cash provided by financing activities 3,700,000 4,997,136 Net change in cash and cash equivalents $ (589,394 ) $ 1,841,652 Net cash used in operating activities was $2,274,361 and $2,764,841 for the six months ended June 30, 2022 and 2021, respectively, a period over period decrease of $490,480. The decrease was primarily due to our increased revenues that began to diminish our operating expenditures. 33 Net cash used in investing activities were $2,015,033 and $390,643 for the six months ended June 30, 2022 and 2021, respectively, a period over period increase of $1,624,390. Cash used in investing activities were comprised of $124,384 of fixed asset purchases and $1,884,720 of construction in progress, as we built out our 2 nd and 3 rd freeze dried freezers and leasehold improvements on our office space, and $5,929 of purchases on trademarks during the six months ended June 30, 2022, compared to $805,004 of fixed asset purchases, as partially offset with $414,361 of proceeds received from the sale of securities during the six months ended June 30, 2021. Net cash provided by financing activities were $3,700,000 and $4,997,136 for the six months ended June 30, 2022 and 2021, respectively, a period over period decrease of $1,297,136. The $3,700,000 of financing received in 2022 was comprised of debt financing, and the 2021 financing proceeds were the result of the $4,997,136 we raised from the sale of an aggregate 631,250 shares of the Company’s common stock at $4.00 per share, and another 581,675 shares sold at $4.25 per share . Satisfaction of our cash obligations for the next 12 months As of June 30, 2022, our balance of cash was $2,756,534 and we had total working capital of $3,548,603. B ased on projections of cash expenditures in the Company’s current business plan, the cash on hand as of June 30, 2022 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. We are currently in the process of expanding our production capabilities through the construction of a third freeze drier, which will require approximately $1 million of incremental capital and will 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, 2021. 34 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