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. Overview and Outlook Sow Good is an innovative, highly adaptive leader in the freeze dried food industry in both the direct-to-consumer and business-to-business sales channels. Beginning in the plant-based, better-for-you space in 2021, the Company built-out its manufacturing facility and completed construction of its first freeze drier. In the first quarter of 2023, anticipating rising market trends and a significant opportunity with disrupting the candy category, Sow Good launched its freeze dried candy line. The Company has entered into partnerships with major retailers such as FYE, Big Lots, and Hy-Vee, and has a growing pipeline of other large retailers. With this launch, Sow Good constructed an additional two freeze driers during the second quarter of 2023 to meet the rapidly increasing retail demand. With its continuous growth and consistent sell-out within retailers, Sow Good anticipates freeze dried candy to be a major driver of its growth and has begun the process of constructing an additional fourth and fifth freeze drier to meet anticipated demand. 27 Going Concern Uncertainty As of June 30, 2023, the Company had incurred recurring losses from operations resulting in an accumulated deficit of $60,401,992, and had cash on hand of $293,024. 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. Results of Operations for the Three Months Ended June 30, 2023 and 2022 The following table summarizes selected items from the statement of operations for the three months ended June 30, 2023 and 2022, respectively. Three Months Ended June 30, Increase / 2023 2022 (Decrease) Revenues $ 1,315,347 $ 244,943 $ 1,070,404 Cost of goods sold 2,695,820 150,603 2,545,217 Gross profit (loss) (1,380,473 ) 94,340 (1,474,813 ) Operating expenses: General and administrative expenses: Salaries and benefits 538,916 1,242,900 (703,984 ) Professional services 63,329 53,295 10,034 Other general and administrative expenses 483,260 487,789 (4,529 ) Total general and administrative expenses 1,085,505 1,783,984 (698,479 ) Depreciation and amortization 7,413 67,693 (60,280 ) Total operating expenses 1,092,918 1,851,677 (758,759 ) Net operating loss (2,473,391 ) (1,757,337 ) 716,054 Other expense: Interest expense (847,509 ) (355,452 ) 492,057 Total other expense (847,509 ) (355,452 ) 492,057 Net loss $ (3,320,900 ) $ (2,112,789 ) $ 1,208,111 28 Revenues Revenues consist primarily of online freeze dried foods product sales. The revenues were $1,315,347 for the three months ended June 30, 2023, compared to $244,943 for the three months ended June 30, 2022, an increase of $1,070,404, or 437%. Revenues increased as we pivoted to sales of our freeze dried candy and expanded our business-to-business sales during the current period, compared to the same period in the prior year. Cost of Goods Sold Cost of goods sold for the three months ended June 30, 2023 were $2,695,820, compared to $150,603 for the three months ended June 30, 2022, an increase of $2,545,217, or 1,690%. Cost of goods sold, primarily consisting of material costs and labor on the sales of freeze dried food products and a one-time inventory write down of $1,919,686 as we disposed of non-candy freeze dried products to pivot exclusively to our better selling candy products. Our gross profit margin was approximately negative 105% during the quarter, compared to 39% during the comparative period, and would have been 41%, compared to 39%, without the inventory impairment. Cost of goods sold and our gross profit decreased primarily due to this inventory impairment. General and administrative expenses Salaries and benefits Salaries and benefits for the three months ended June 30, 2023 were $538,916, compared to $1,242,900 for the three months ended June 30, 2022, a decrease of $703,984, or 57%. Salaries and benefits included stock-based compensation expense for the three months ended June 30, 2023 of $257,070, compared to $431,370 for the three months ended June 30, 2022, a decrease of $174,300, or 40%. Stock-based compensation consists of $131,841 and $386,372 of stock options expense incurred in the three months ended June 30, 2023 and 2022, respectively, and $125,229 and $44,998 of expense related to shares of common stock issued to officers and consultants for services rendered in the three months ended June 30, 2023 and 2022, respectively. 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 $63,329 for the 2023 period, compared to $53,295 for the 2022 period, an increase of $10,034, or 19%. The increase was primarily due to increased recruiting fees in the current period. Other general and administrative expenses Other general and administrative expenses for the three months ended June 30, 2023 was $483,260, compared to $487,789 for the three months ended June 30, 2022, a decrease of $4,529, or 1%. 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 June 30, 2023 was $7,413, compared to $67,693 for the three months ended June 30, 2022, a decrease of $60,280, or 89%. The decrease is attributable to increased overhead allocations to inventory during the current period, compared to the prior period. 29 Other expense In the three months ended June 30, 2023, other expense was $847,509, consisting of $163,365 of interest expense, including interest on our EIDL loan with the SBA and loans from our officers and directors, and $684,144 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 June 30, 2022, other expense was $355,452, consisting of $93,378 of interest expense, including interest on our EIDL loan with the SBA and loans from our officers and directors, and $262,074 related to the amortization of warrants issued as a debt discount on the loans from our officers and directors. Interest expense increased by $492,057, or 138%, primarily due to the increased amortization of warrants issued in-the-money on loans from our officers and directors in the current period. Net loss Net loss for the three months ended June 30, 2023 was $3,320,900, compared to $2,112,789 during the three months ended June 30, 2022, an increased net loss of $1,208,111, or 57%. The increased net loss was due primarily to $1,919,686 of inventory impairment and $492,057 of increased interest expense on debt financing issued with in-the-money warrants during the current period, as partially offset by $703,984 of improved labor costs and $1,070,404 of increased revenues over the comparative period. Results of Operations for the Six Months Ended June 30, 2023 and 2022 The following table summarizes selected items from the statement of operations for the six months ended June 30, 2023 and 2022, respectively. Six Months Ended June 30, Increase / 2023 2022 (Decrease) Revenues $ 1,514,277 $ 293,315 $ 1,220,962 Cost of goods sold 2,772,500 198,094 2,574,406 Gross profit (loss) (1,258,223 ) 95,221 (1,353,444 ) Operating expenses: General and administrative expenses: Salaries and benefits 1,083,469 2,159,055 (1,075,586 ) Professional services 109,535 115,988 (6,453 ) Other general and administrative expenses 841,727 892,865 (51,138 ) Total general and administrative expenses 2,034,731 3,167,908 (1,133,177 ) Depreciation and amortization 83,631 132,919 (49,288 ) Total operating expenses 2,118,362 3,300,827 (1,182,465 ) Net operating loss (3,376,585 ) (3,205,606 ) (170,979 ) Other expense: Interest expense (1,345,845 ) (459,245 ) 886,600 Total other expense (1,345,845 ) (459,245 ) 886,600 Net loss $ (4,722,430 ) $ (3,664,851 ) $ 1,057,579 30 Revenues Revenues consist primarily of online freeze dried foods product sales. The revenues were $1,514,277 for the six months ended June 30, 2023, compared to $293,315 for the six months ended June 30, 2022, an increase of $1,220,962, or 416%. Revenues increased as we pivoted to sales of our freeze dried candy and expanded our business-to-business sales during the current period, compared to the same period in the prior year. Cost of Goods Sold Cost of goods sold for the six months ended June 30, 2023 were $2,772,500, compared to $198,094 for the six months ended June 30, 2022, an increase of $2,574,406, or 1,300%. Cost of goods sold, primarily consisting of material costs and labor on the sales of freeze dried food products and a one-time inventory write down of $1,919,686 as we disposed of non-candy freeze dried products to pivot exclusively to our better selling candy products. Our gross profit margin was approximately negative 83% during the current period, compared to 32% during the comparative period, and would have been 44%, compared to 32%, without the inventory impairment. Cost of goods sold and our gross profit decreased primarily due to this inventory impairment. General and administrative expenses Salaries and benefits Salaries and benefits for the six months ended June 30, 2023 were $1,083,469, compared to $2,159,055 for the six months ended June 30, 2022, a decrease of $1,075,586, or 50%. Salaries and benefits included stock-based compensation expense for the six months ended June 30, 2023 of $383,906, compared to $575,631 for the six months ended June 30, 2022, a decrease of $191,725, or 33%. Stock-based compensation consists of $258,677 and $520,633 of stock options expense incurred in the six months ended June 30, 2023 and 2022, respectively, and $125,229 and $54,998 of expense related to shares of common stock issued to officers and consultants for services rendered in the six months ended June 30, 2023 and 2022, respectively. 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 $109,535 for the 2023 period, compared to $115,988 for the 2022 period, a decrease of $6,453, or 6%. 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, 2023 was $841,727, compared to $892,865 for the six months ended June 30, 2022, a decrease of $51,138, or 6%. 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 six months ended June 30, 2023 was $83,631, compared to $132,919 for the six months ended June 30, 2022, a decrease of $49,288, or 37%. The decrease is attributable to increased overhead allocations to inventory during the current period, compared to the prior period. 31 Other expense In the six months ended June 30, 2023, other expense was $1,345,845, consisting of $291,023 of interest expense, including interest on our EIDL loan with the SBA and loans from our officers and directors, and $1,054,822 related to the amortization of warrants issued as a debt discount on the loans from our officers and directors. During the comparative six months ended June 30, 2022, other expense was $459,245, consisting of $137,447 of interest expense on our EIDL loan with the SBA and loans from our officers and directors, and $321,798 related to the amortization of warrants issued as a debt discount on the loans from our officers and directors. Interest expense increased by $886,600, or 193%, primarily due to the increased amortization of warrants issued in-the-money on loans from our officers and directors in the current period. Net loss Net loss for the six months ended June 30, 2023 was $4,722,430, compared to $3,664,851 during the six months ended June 30, 2022, an increased net loss of $1,057,579, or 29%. The increased net loss was due primarily to $1,919,686 of inventory impairment and $886,600 of increased interest expense on debt financing issued with in-the-money warrants during the current period, as partially offset by $1,075,586 of improved labor costs and $1,220,962 of increased revenues over the comparative period. Liquidity and Capital Resources The following table summarizes our total current assets, liabilities and working capital at June 30, 2023 and December 31, 2022, respectively. June 30, December 31, 2023 2022 Current Assets $ 2,058,508 $ 2,578,057 Current Liabilities $ 1,383,976 $ 890,177 Working Capital $ 674,532 $ 1,687,880 As of June 30, 2023, we had working capital of $674,532. The following table summarizes our cash flows during the six months ended June 30, 2023 and 2022, respectively. Six Months Ended June 30, 2023 2022 Net cash used in operating activities $ (2,421,260 ) $ (2,274,361 ) Net cash used in investing activities (362,180 ) (2,015,033 ) Net cash provided by financing activities 2,800,000 3,700,000 Net change in cash and cash equivalents $ 16,560 $ (589,394 ) 32 Net cash used in operating activities was $2,421,260 and $2,274,361 for the six months ended June 30, 2023 and 2022, respectively, a period over period increase of $146,899. The increase was primarily due to increased inventory purchases, as partially offset by our increased revenues and diminished labor costs that began to improve our operations. Net cash used in investing activities were $362,180 and $2,015,033 for the six months ended June 30, 2023 and 2022, respectively, a period over period decrease of $1,652,853. Cash used in investing activities were comprised of $3621,80 of fixed asset additions, as we completed our 2 nd and 3 rd freeze dried freezers and finalized our office leasehold improvements during the six months ended June 30, 2023, compared to $2,009,104 of fixed asset purchases and $5,929 of purchases on trademarks during the six months ended June 30, 2022. Net cash provided by financing activities were $2,800,000 for the six months ended June 30, 2023, which was comprised of $2,400,000 of debt financing received from our officers and directors and $400,000 received from others under the same terms, compared to $3,700,000 , comprised of $3,120,000 of debt financing received from our officers and directors and $580,000 received from others under the same terms, for the six months ended June 30, 2022. Satisfaction of our cash obligations for the next 12 months As of June 30, 2023, our balance of cash was $293,024 and we had total working capital of $674,532. B ased on projections of cash expenditures in the Company’s current business plan, the cash on hand as of June 30, 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. 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, 2022. 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