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 2nd and 3rd 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 result 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. Based 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. Our 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.
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