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. 24 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 are marketing our line of products via our direct-to-consumer focused website, as well as via the business-to-business sales channel. In the first quarter of 2023, we launched a freeze-dried candy product offering that we expect will be a major driver of our growth going forward. As of May 19, 2023, we have 14 candy product lines for sale. In 2022, we commenced the construction of our second and third freeze driers in anticipation of the increased production demands for our products and freeze-drying expertise. We expect to place these additional freeze driers in service during the second quarter of 2023. On April 25, 2023 and May 11, 2023, we raised an aggregate $1.55 million from the sale of Promissory Notes and Warrants, including $1.15 million received from related parties, resulting in approximately $1.9 million of cash on hand as of May 19, 2023. Our business operates under two distinct brands, Sow Good and Sustain Us. Our unique food products are targeting the large, and growing, freeze-dried food products market. With the extensive freeze-dried manufacturing and food product-focused business development experience of our senior management team, including recent additions, 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 March 31, 2023, the Company had incurred recurring losses from operations resulting in an accumulated deficit of $57,081,092, and had cash on hand of $348,441. 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. On April 25, 2023 and May 11, 2023, we raised an aggregate $1.55 million from the sale of Promissory Notes and Warrants, including $1.15 million received from related parties, resulting in approximately $1.9 million of cash on hand as of May 19, 2023. 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 March 31, 2023 and 2022 The following table summarizes selected items from the statement of operations for the three months ended March 31, 2023 and 2022, respectively. Three Months Ended March 31, Increase / 2023 2022 (Decrease) Revenues $ 198,930 $ 48,372 $ 150,558 Cost of goods sold 76,680 47,491 29,189 Gross Profit 122,250 881 121,369 Operating expenses: General and administrative expenses: Salaries and benefits 544,553 916,155 (371,602 ) Professional services 46,206 62,693 (16,487 ) Other general and administrative expenses 358,467 405,076 (46,609 ) Total general and administrative expenses 949,226 1,383,924 (434,698 ) Depreciation and amortization 76,218 65,226 10,992 Total operating expenses 1,025,444 1,449,150 (423,706 ) Net operating loss (903,194 ) (1,448,269 ) (545,075 ) Other expense: Interest expense (498,336 ) (103,793 ) 394,543 Total other expense (498,336 ) (103,793 ) 394,543 Net loss $ (1,401,530 ) $ (1,552,062 ) $ (150,532 ) Revenues Revenues consist primarily of online freeze dried foods product sales. The revenues were $198,930 for the three months ended March 31, 2023, compared to $48,372 for the three months ended March 31, 2022, an increase of $150,558, or 311%. Revenues increased as we ramped up sales on our product lines and expanded our business-to-business sales during the first quarter of 2023, compared to the same period in the prior year. Cost of Goods Sold Cost of goods sold for the three months ended March 31, 2023 were $76,680, compared to $47,491 for the three months ended March 31, 2022, an increase of $29,189, or 61%. 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 61% during the quarter, compared to 2% during the comparative period. Cost of goods sold and our gross profit increased as we began to realize economies of scale pursuant to our increased sales. 26 General and administrative expenses Salaries and benefits Salaries and benefits for the three months ended March 31, 2023 were $544,553, compared to $916,155 for the three months ended March 31, 2022, a decrease of $371,602, or 41%. Salaries and benefits included stock-based compensation expense for the three months ended March 31, 2023 of $126,836, compared to $144,261 for the three months ended March 31, 2022, a decrease of $17,425, or 12%. Stock-based compensation consists of $126,836 and $134,261 of stock options expense incurred in the three months ended March 31, 2023 and 2022, respectively, and $10,000 of expense related to shares of common stock issued to officers and consultants for services rendered in the three months ended March 31, 2022. The decrease in salaries and benefits was primarily due to decreased personnel, in addition to our CEO absorbing the role of interim CFO. Professional services Professional services were $46,206 for the 2023 period, compared to $62,693 for the 2022 period, a decrease of $16,487, or 26%. 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 March 31, 2023 was $358,467, compared to $405,076 for the three months ended March 31, 2022, a decrease of $46,609, or 12%. 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 March 31, 2023 was $76,218, compared to $65,226 for the three months ended March 31, 2022, an increase of $10,992, or 17%. The increase is attributable to the addition of new equipment placed in service during prior periods. Other expense In the three months ended March 31, 2023, other expense was $498,336, consisting of $127,658 of interest expense on our EIDL loan with the SBA and loans from our officers and directors, and $370,678 related to the amortization of warrants issued as a debt discount on the loans from our officers and directors. During the comparative three months ended March 31, 2022, other expense was $103,793, consisting of $44,069 of interest expense on our EIDL loan with the SBA and loans from our officers and directors, and $59,724 related to the amortization of warrants issued as a debt discount on the loans from our officers and directors. Net loss Net loss for the three months ended March 31, 2023 was $1,401,530, compared to $1,552,062 during the three months ended March 31, 2022, a decreased net loss of $150,532, or 10%. The decreased net loss was due primarily to $150,558 of increased revenues and $371,602 of improved labor costs, as partially offset by $394,543 of increased interest expense over the comparative period. 27 Liquidity and Capital Resources The following table summarizes our total current assets, liabilities and working capital at March 31, 2023 and December 31, 2022, respectively. March 31, December 31, 2023 2022 Current Assets $ 2,626,248 $ 2,578,057 Current Liabilities $ 725,016 $ 890,177 Working Capital $ 1,901,262 $ 1,687,880 As of March 31, 2023, we had working capital of $1,901,232. The following table summarizes our cash flows during the three months ended March 31, 2023 and 2022, respectively. Three Months Ended March 31, 2023 2022 Net cash used in operating activities $ (966,117 ) $ (1,482,598 ) Net cash used in investing activities (211,906 ) (48,342 ) Net cash provided by financing activities 1,250,000 – Net change in cash and cash equivalents $ 71,977 $ (1,530,940 ) Net cash used in operating activities was $966,117 and $1,482,598 for the three months ended March 31, 2023 and 2022, respectively, a period over period decrease of $516,481. The decrease was primarily due to our increased revenues and diminished labor costs that began to improve our operations. Net cash used in investing activities were $211,906 and $48,342 for the three months ended March 31, 2023 and 2022, respectively, a period over period increase of $163,564. Cash used in investing activities were comprised of $211,906 of construction in progress payments as we continued to build out our 2 nd and 3 rd freeze dried freezers and improve our office space during the three months ended March 31, 2023, compared to $44,726 of fixed asset purchases and $3,616 of purchases on trademarks during the three months ended March 31, 2022. Net cash provided by financing activities were $1,250,000 for the three months ended March 31, 2023, which was comprised entirely of debt financing received from our officers and directors. There was no cash provided by financing activities during the comparative three months ended March 31, 2022. Satisfaction of our cash obligations for the next 12 months As of March 31, 2023, our balance of cash was $348,441 and we had total working capital of $1,901,232. B ased on projections of cash expenditures in the Company’s current business plan, the cash on hand as of March 31, 2023 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. 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. On April 25, 2023 and May 11, 2023, we raised an aggregate $1.6 million from the sale of Promissory Notes and Warrants, including $1,200,000 received from related parties, resulting in approximately $1.9 million of cash on hand as of May 22, 2023. 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 . 28 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, 2022. 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