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. 26 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 third 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 September 30, 2022, the Company had incurred recurring losses from operations resulting in an accumulated deficit of $48,864,617, and had cash on hand of $1,374,816. 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. 27 Results of Operations for the Three Months Ended September 30, 2022 and 2021 The following table summarizes selected items from the statement of operations for the three months ended September 30, 2022 and 2021, respectively. Three Months Ended September 30, Increase / 2022 2021 (Decrease) Revenues $ 87,741 $ 21,137 $ 66,604 Cost of goods sold 65,195 19,396 45,799 Gross Profit 22,546 1,741 20,805 Operating expenses: General and administrative expenses: Salaries and benefits 788,450 936,783 (148,333 ) Professional services 61,209 108,186 (46,977 ) Other general and administrative expenses 403,429 472,369 (68,940 ) Total general and administrative expenses 1,253,088 1,517,338 (264,250 ) Depreciation and amortization 69,127 64,863 4,264 Total operating expenses 1,322,215 1,582,201 (259,986 ) Net operating loss (1,299,669 ) (1,580,460 ) (280,791 ) Other income (expense) Interest expense (383,995 ) (1,697 ) 382,298 Gain on disposal of property and equipment 36,392 – 36,392 Total other income (expense) (347,603 ) (1,697 ) 345,906 Net loss $ (1,647,272 ) $ (1,582,157 ) $ 65,115 Revenues Revenues consist primarily of online freeze dried foods product sales. The revenues were $87,741 for the three months ended September 30, 2022, compared to $21,137 for the three months ended September 30, 2021, an increase of $66,604, or 315%. Revenues increased as we continued to launch our product lines and significantly increased our business-to-business sales during the third quarter of 2022, compared to the same period in the prior year. We had minimal revenues during the comparative period, as we had just commenced sales. 28 Cost of Goods Sold Cost of goods sold for the three months ended September 30, 2022 were $65,195, compared to $19,396 for the three months ended September 30, 2021, an increase of $45,799, or 236%. 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 26% during the quarter, compared to 8% during the comparative period. General and administrative expenses Salaries and benefits Salaries and benefits for the three months ended September 30, 2022 were $788,450, compared to $936,783 for the three months ended September 30, 2021, a decrease of $148,333, or 16%. Salaries and benefits included stock-based compensation expense for the three months ended September 30, 2022 of $155,868, compared to $306,018 for the three months ended September 30, 2021, a decrease of $150,150, or 49%. Stock-based compensation consists of $130,868 and $145,566 of stock options expense incurred in the three months ended September 30, 2022 and 2021, respectively, and $25,000 and $160,452 of expense related to shares of common stock issued to officers and consultants for services rendered in the three months ended September 30, 2022 and 2021, respectively. The decrease in salaries and benefits was primarily due to decreased stock-based compensation awards. Professional services Professional services were $61,209 for the 2022 period, compared to $108,186 for the 2021 period, a decrease of $46,977, or 43%. 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 September 30, 2022 was $403,429, compared to $472,369 for the three months ended September 30, 2021, a decrease of $68,940, or 15%. The decrease is primarily attributable to decreased administrative infrastructure as we continue to scale the production and sales of our freeze dried products. Depreciation Depreciation expense for the three months ended September 30, 2022 was $69,127, compared to $64,863 for the three months ended September 30, 2021, an increase of $4,264, or 7%. The increase is attributable to the addition of new equipment placed in service during prior periods. Other income (expense) In the three months ended September 30, 2022, other expense was $347,603 consisting of $383,995 of interest expense on our EIDL loan with the SBA and loans from our officers and directors, including $285,522 related to the amortization of warrants issued as a debt discount on loans, as partially offset by a gain on disposal of property and equipment of $36,392. During the comparative three months ended September 30, 2021, other expense was $1,697, consisting entirely of interest expense derived from the operating loans the Company received from the PPP and EIDL programs. Net loss Net loss for the three months ended September 30, 2022 was $1,647,272, compared to $1,582,157 during the three months ended September 30, 2021, an increased net loss of $65,115, or 4%. The increased net loss was due primarily to increased interest expense of $382,298, including $285,522 of amortization on warrants issued as a debt discount, as partially offset by $280,791 of decreased operating losses over the prior year. 29 Results of Operations for the Nine Months Ended September 30, 2022 and 2021 The following table summarizes selected items from the statement of operations for the nine months ended September 30, 2022 and 2021, respectively. Nine Months Ended September 30, Increase / 2022 2021 (Decrease) Revenues $ 381,056 $ 28,213 $ 352,843 Cost of goods sold 263,289 24,295 238,994 Gross Profit 117,767 3,918 113,849 Operating expenses: General and administrative expenses: Salaries and benefits 2,947,505 2,610,884 336,621 Professional services 177,197 270,779 (93,582 ) Other general and administrative expenses 1,296,294 1,183,453 112,841 Total general and administrative expenses 4,420,996 4,065,116 355,880 Depreciation and amortization 202,046 129,915 72,131 Total operating expenses 4,623,042 4,195,031 428,011 Net operating loss (4,505,275 ) (4,191,113 ) 314,162 Other income (expense) Interest expense (843,240 ) (4,431 ) 838,809 Gain on disposal of property and equipment 36,392 – 36,392 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) (806,848 ) 244,982 (1,050,133 ) Net loss $ (5,312,123 ) $ (3,947,828 ) $ 1,364,295 30 Revenues Revenues consist primarily of online freeze dried foods product sales. The revenues were $381,056 for the nine months ended September 30, 2022, compared to $28,213 for the nine months ended September 30, 2021, an increase of $352,843, or 1,251%. Revenues increased as we continued to launch our product lines and significantly increased our business-to-business sales during the third 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 nine months ended September 30, 2022 were $263,289, compared to $24,295 for the nine months ended September 30, 2021, an increase of $238,994, or 984%. 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 31% during the current period, compared to 14% during the comparative period. General and administrative expenses Salaries and benefits Salaries and benefits for the nine months ended September 30, 2022 were $2,947,505, compared to $2,610,884 for the nine months ended September 30, 2021, an increase of $336,621, or 13%, Salaries and benefits included stock-based compensation expense for the nine months ended September 30, 2022 of $731,499, compared to $1,015,233 for the nine months ended September 30, 2021, a decrease of $283,734, or 28%. Stock-based compensation consists of $651,501 and $407,031 of stock options expense incurred in the nine months ended September 30, 2022 and 2021, respectively, and $79,998 and $608,202 of expense related to shares of common stock issued to officers and consultants for services rendered in the nine months ended September 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, as partially offset by a reduction in stock-based compensation awards. Professional services Professional services were $177,197 for the 2022 period, compared to $270,779 for the 2021 period, a decrease of $93,582, or 35%. 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 nine months ended September 30, 2022 was $1,296,294, compared to $1,183,453 for the nine months ended September 30, 2021, an increase of $112,841, or 10%. 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 nine months ended September 30, 2022 was $202,046, compared to $129,915 for the nine months ended September 30, 2021, an increase of $72,131, or 56%. The increase is attributable to the addition of new equipment placed in service during prior periods. 31 Other income (expense) In the nine months ended September 30, 2022, other expense was $843,240, consisting of $843,240 of interest expense on our EIDL loan with the SBA and loans from our officers and directors, including $607,320 related to the amortization of warrants issued as a debt discount on loans, as partially offset by a gain on disposal of property and equipment of $36,392. During the comparative nine months ended September 30, 2021, other income, on a net basis, was $243,285, 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 $4,431 of interest expense derived from the operating loans the Company received from the PPP and EIDL programs. Net loss Net loss for the nine months ended September 30, 2022 was $5,312,123, compared to $3,947,828 during the nine months ended September 30, 2021, an increased net loss of $1,364,295, or 35%. The increased net loss was due primarily to $314,162 of increased operating losses over the prior year, as we ramped up our operations, increased interest expense of $838,809, including $607,320 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 in the comparative period that were not present in the current period. Liquidity and Capital Resources The following table summarizes our total current assets, liabilities and working capital at September 30, 2022 and December 31, 2021, respectively. September 30, December 31, 2022 2021 Current Assets $ 3,619,620 $ 4,891,264 Current Liabilities $ 741,348 $ 403,057 Working Capital $ 2,878,272 $ 4,488,207 As of September 30, 2022, we had working capital of $2,878,272. The following table summarizes our cash flows during the nine months ended September 30, 2022 and 2021, respectively. Nine Months Ended September 30, 2022 2021 Net cash used in operating activities $ (4,149,046 ) $ (4,304,501 ) Net cash used in investing activities (2,272,066 ) (590,250 ) Net cash provided by financing activities 4,450,000 5,562,511 Net change in cash and cash equivalents $ (1,971,112 ) $ 667,760 32 Net cash used in operating activities was $4,149,046 and $4,304,501 for the nine months ended September 30, 2022 and 2021, respectively, a period over period decrease of $155,455. The decrease was primarily due to our increased revenues that began to diminish our operating expenditures. Net cash used in investing activities were $2,272,066 and $590,250 for the nine months ended September 30, 2022 and 2021, respectively, a period over period increase of $1,681,816. Cash used in investing activities were comprised of $154,853 of fixed asset purchases, $2,175,241 of construction in progress, as we built out our 2 nd and 3 rd freeze dried freezers and commenced leasehold improvements on our office space, and $5,929 of purchases on trademarks, as partially offset by $63,957 of proceeds received from the disposal of property and equipment during the nine months ended September 30, 2022, compared to $1,004,611 of fixed asset purchases, as partially offset with $414,361 of proceeds received from the sale of securities during the nine months ended September 30, 2021. Net cash provided by financing activities were $4,450,000 and $5,562,511 for the nine months ended September 30, 2022 and 2021, respectively, a period over period decrease of $1,112,511. The $4,450,000 of financing received in 2022 was comprised of debt financing, and the 2021 financing proceeds were the r esult of $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 . Satisfaction of our cash obligations for the next 12 months As of September 30, 2022, our balance of cash was $1,374,816 and we had total working capital of $2,878,272. B ased on projections of cash expenditures in the Company’s current business plan, the cash on hand as of September 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 two additional freeze driers, which will require approximately $500,000 to complete, of which we expect to pay for with the financing obtained on August 23, 2022 . 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. 33 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