conference podium.
Okay.
So you can either click this, if you wanna, like, walk around, and it'll show up here in a minute. Just trust me.
I'll walk with you.
Or you can just go like this.
Awesome.
So 25 minutes, allotted time, timer will go. You can either talk for 25 minutes, or you can talk for 10 and do Q&A. I'll have the mic. I'll pass it around to people. If people are shy, I'll throw you some softballs.
Yeah.
Yeah, we just have to have it wrapped up in 25 minutes.
Okay, I can do that.
A lot of people will probably be muted, so-
Okay
Anybody who's here is here.
Okay.
All right, we should probably get started here. I know everybody's coming back from lunch, so appreciate it. So for our next presentation, we're really excited to have Sow Good, and representing the company, Claudia Goldfarb, CEO, and I will hand it to Claudia. Thank you.
Awesome. Thank you, Cody. Oh, yeah. Keep going, keep going. No, I'm kidding. So I'm gonna assume all of you know nothing about me and start you guys from scratch, and please feel free to ask as many questions as you'd like. So Claudia Goldfarb, founder, CEO. My executive management team is my better half, just because he's not here, Ira Goldfarb and Brendon Fischer, our interim CFO. So what is freeze-dried candy? Fourteen months ago, when I first spoke with Cody, no one knew what freeze-dried candy was, right? It was something that hadn't been on the market. But what it is, is you take an original product, you know, gummy worms, gummy bears, chew candy, and you put them into these proprietary freeze dryers that we've built, and you take 99% of the moisture out of it.
What that does is that creates a hyper crunchy, hyper flavorful, super dry product. Because you've taken all the water out of it, the only thing that's left is the flavor. And who is Sow Good? You know, how did we come about and create this category? Ira and I, 14 years ago, started a pet food company. During that time, we created three categories in the pet space. The first was antlers, the second was jerky, and the third was freeze-dried pet food. When we did the freeze-dried pet food, we invested $4 million in four freeze dryers, took them off the shelf, and you think, "Wow, okay, awesome. I've got great freeze dryers. I'm gonna turn them on, we're gonna get the line going, and we're gonna launch this category." So we go to turn them on.
At any given moment, only one of our freeze dryers would be working. So not the best ROI on equipment investment. So we did what we always do: we problem-solved. We brought in engineers, HVAC specialists. We took the freeze dryers apart, put them back together, and created better freeze dryers. The reason that's important is the reason we win at retail, the reason our product is so much better than anything else on the market, is because of our proprietary technology. When we started Sow Good, Ira and I had sold our pet food company. We had a seven-year non-compete in the pet space, and we weren't ready to retire. We were like: What do we wanna do next? We said: Well, we love this technology. We wanna build freeze dryers. And that's how we were gonna start. We were just going to build the freeze dryers.
Fast-forward, we had a proof of concept building, 21,000 sq ft, three freeze dryers, and, you know, here comes TikTok. I'm a little older than some of the people in this room. I didn't know what TikTok was, but one of the buyers was like: "Hey, freeze-dried candy's going viral on social media. Have you looked at it?" And we said, "No," so we took a walk down the candy aisle, and what we saw really surprised us. All the same candy that I saw growing up, Reese's Peanut Butter Cups, Snickers, that's all we saw in the candy aisle.
And so, you know, it. I joke, but it really was like the lights were shining down, you know, and Hallelujah was playing in the background because we really felt like we found the category that needed disruption, that needed innovation, and that's what we did with freeze-dried candy. I got carried away. My spot. What makes us different? We built three different moats around our business: our proprietary technology, our extensive R&D process. It's not just about the freeze dryers. Through our R&D process, what we realized is sugar loves water. So we'd spend seventeen to twenty-four hours taking all of the moisture out of the product. We'd go into our packaging rooms, and within two hours, the product would start re-humidifying because it was sucking in all the moisture from around the ambient temperature. So we created these specialized rooms.
No matter what the humidity is anywhere else, in one of our packaging rooms, it can be down to 7% humidity, ensuring that the quality stays at the highest level throughout our manufacturing process. We're an SQF 2 certified facility, so that means from a food safety and quality perspective, you can't get any better than us. We scored a 97 on our last audit, so that was really exciting, and we also spent a lot of money on our branding and packaging. We wanted our packaging to be as distinctive and colorful as the products. Our assortment, the second moat, and probably the second most important moat. For those of you that I talk to later on in one-on-one, Mars is coming into the freeze-dried category. They are launching in the first quarter of next year.
Most people were like: "Oh, my gosh, how do you feel about that?" And I said, "I'm super excited," because they reaffirmed what Ira and I have been saying for the last fourteen months. Freeze-dried candy is an everyday category. The other thing, their marketing bucket is much bigger than mine, so they're bringing eyeballs to the category that I never could. Their packaging doesn't have any windows. They're gonna be more expensive than we are. Right now, our initial pricing is gonna be at about 30% more. So let's say, you know, they are walking down the candy aisle, they try the freeze-dried Skittles product. Remember, we make a better product because we have a better freeze dryer. So they take a bag.
Now, the next time they come, because, you know, the economy is doing so great right now, they're worried about the extra $3 they're spending on the bag. They see our product. They see our packaging with that big, huge window, and the reason we have that window is because we want everyone to see how great our product is. So they try our bag. They're gonna bring people into the category that I think is just gonna make the category grow exponentially. Now, the other thing is, when Ira and I first launched Sow Good candy, we always knew that there was going to be a big player that came in. There was no way no one else was going to try and take a piece of that pie. We focused on three things.
We focused on the best product, at the best price, with the best service. If we continue to focus on those three things, then we're going to continue to win at retail. Starting in the first quarter of next year, we will have vertically integrated our candy-making capabilities. So all of the chew candy is going to come in-house, and we'll be making it in our Irving, Dallas facility. We just leased 320,000 sq ft, so the candy making is going to be there. We've ordered an additional six freeze dryers that should all be online by the first quarter of that year. And so, yeah. Yay! I love this chart.
I'm not gonna love it at the end of the third quarter because the third quarter, if you guys have heard our earnings call, is not gonna be our best quarter. We are really focused in the long-term strategies of our company. We're not looking at, you know, what, what's gonna make people happy today, tomorrow, or this quarter. It's about we've got a very clear vision for the next three to five years to become the freeze-dried candy. We created the category, we're leading the category, and we want to retain that leadership, so if you looked at Q1 and Q2 of 2023, the blue lines were even smaller, so we're very proud of this.
But what I think is important about this, especially in Q3 through Q1, the only reason that those revenue numbers were not larger was because we did not have enough production capacity. That's a problem that we have now solved. Going into this next quarter, production capacity is where we need it to be in order to meet demand. We've always been incredibly disciplined with our operating expenses, so as of the third quarter of last year, we were profitable. We will continue to be profitable as we go forward. Q3, we are going to see some dips in margins because the 320,000 sq ft facility's coming online. We had some melting issues, which is why we stopped shipping in Q3. And you're gonna see us end up closer to an average between Q1 and Q2 on a go-forward basis.
What's our production capacity? So we have the two facilities. We do use two co-manufacturers, one in China and one in Colombia. They're the only two that we felt comfortable after seeing over 30 different manufacturers. We're going to continue to use them even as we increase our own production capacity, because it really gives us the ability to kind of just leverage their capabilities and make whatever production capacity decisions we need to on a go-forward basis. This is what our manufacturing looks like. So I'm gonna yell at you guys. I'm not really yelling at you, but what's really important, see this right here? This is one quarter of the brain of our freeze dryer. If I go over here, this right here is the brain for all three of our private manufacturing or co-manufactured freeze dryers.
This is what gives us our competitive advantage as far as product performance. The fact that our freeze dryers can do what no one else can. You guys are gonna learn more about freeze drying than you want. There are three important things that happen in freeze drying. You need super cold, you need extreme vacuum, and you need a touch of heat. Our freeze dryers get to 300 microns, so that means nothing to you guys, but trust me, it's a lot of vacuum. If you went in there, you wouldn't come back out. Our freezers go to negative 40, and because of how sophisticated the brain of our freeze dryer is, every second that product is in our freeze dryer, we know exactly what's happening.
If we go back to that product assortment mix, remember one of our moats, because Mars has two products they can do. They can do their Skittles, and they can do their Sour Skittles. We now have 16 SKUs that we have on the market. Five Below, one of our largest retailers, is going from 7 SKUs. They're adding two to four additional SKUs. We're gonna be doing seasonal in and outs, so it's not about one product, it's about the entire product assortment, and because of our technology, because of our manufacturing processes, because of our humidity-controlled room, we can do what none of our competitors can do. I get excited about our technology. So key retailers. You know, in the third and fourth quarter of last year, because we didn't have enough production capacity, we really focused on 5 key retailers.
We focused on Five Below, CB Distributors, Redstone Distributors, Cracker Barrel, and Citi Trends. This year has really been about now that we've solved our production capacity issue, is increasing our distribution strategy. There's not anywhere that we've gone that we haven't performed well. C stores, we perform well. Retailers, we perform well. Discount, we perform well. You guys will notice Big Lots. I'm sure you guys will ask. We have them on a credit hold. We have not been affected by them yet. They're at a $135,000 limit, so when they pay, we ship. We don't ship until they pay. Up until now, they've paid every single time, so that's been good. Case study, because the other big question we get asked is, "Okay, you're launching all these SKUs.
As you get more shelf space, are you just cannibalizing your own sales?" And the answer is no. What we're finding, and again, that assortment is so important, is people are looking for the innovation of freeze-dried candy across flavor profiles. So as we introduce, like, right now, we're launching into Five Below, a Lemon Puff, and they're deciding on the other SKUs they wanna take. We've got Chamoy coming online, that our sales per unit increase. They don't decrease. If you go to Q2 of last year, when we only had two SKUs, we did $200,000 . By Q4, where we had seven SKUs, we were at $2.1 million. No one knows how big the freeze-dried candy category is gonna be.
We're investing really heavily because we believe it is going to be a significant portion of candy going forward. The financials, they speak to themselves. We're very disciplined in the way we approach our company. We really focus on the long-term growth and strategy. We just did an uplisting, so we're now listed on NASDAQ. We did an $11 million raise while we did that uplisting, so from a cash position, we have everything we need in order to execute on our strategy, and there's our balance sheet, cash flow. You guys can ask me questions later if you want, and so I'm gonna turn it over to questions in a minute, but really what sets us apart is we are manufacturing experts, especially in the freeze-dried space. We know how to build categories into everyday categories, and that's what we're doing with the freeze-dried candy.
So have at it, guys.
So here, on the company highlights, the top line says, "Proprietary drying machinery, production, packaging." So you have co-manufacturing facilities in China and Colombia?
Only one in each. Everything that we have in-house. This is actually a really good question. When we saw that we didn't have enough production capacity to meet demand, we realized that we were, A, either gonna have to turn down a bunch of retailers, which would give an opportunity to competitors, or two, find co-manufacturers. I took Central and South America. Ira and I both did the U.S., and Ira went to Asia. We visited over 30 co-manufacturers. We found one in China, and we found one in Colombia that we felt comfortable using. They make the easier-to-make product. If we go back to our SKU assortment, these products range anywhere between seven hours and 24 hours to freeze-dried.
Some don't require as deep a vacuum as what our freeze dryers do, and so what we do in China and Colombia is those products that their freeze dryers can do well, we give them that to co-manufacture for us, leaving the more complicated and sophisticated products for us to do. Now, we talked about humidity control, right? And how important our packaging rooms are. They freeze-dry the product, they send it to us in sealed bulk package. It comes to us, and we package it in our humidity-controlled rooms because that's the other key aspect to what we do.
Okay. So after they manufacture the products, do they ocean freight or in refrigerated, like, containers?
Yeah.
In bulk or in packages like this?
In bulk. Everything they do is in bulk. We won't have them do any finished packaging because, A, we don't wanna teach them how to build our rooms, because that's very important to us, and, B, it's our last quality check, right? We wanna make sure that the product we're putting in the bag is at the same quality level that we expect.
Can you talk about how you sell the product, stores? Who's doing it, how many people, what you're doing and what-
Yeah. So you're looking at, you know, I should be salesperson of the year. No, I'm kidding. We have three people that do sales. It's myself, Ira, and Lexi. Lexi's our full-time salesperson. We are actively hiring because that really is where we're focused on next. So currently, we're hiring for four positions: a senior sales manager and four people under them to really pound the pavement, right? Because one of the things that we're learning now is every Tom, Dick, and Harry is trying to ride our coattails, right? They see the numbers. They see how we're doing. They want a piece of our pie. Well, I don't wanna give it to them. And so, you know, regional grocers, we're only in about 40% of Circle K's and 7-Eleven because of how they buy.
Having people knocking on those doors and really educating them because what we're seeing on the market is... and you know, we use a co-manufacturer in China, but you can cheat, especially on the gummy product, where it takes us about 17 hours. In seven hours, you can freeze-dry a product, and it's gonna look like it's freeze-dried. It's gonna look crunchy on the outside, and none of our competitors have windows, which tells you a lot, and I'll tell you a quick, funny story because of this. We were at a trade show.
A buyer sits down, and he's like: "Well, you know, this guy down the way, he's selling freeze-dried, too, and he's about $0.25 cheaper than you." And I said, "Okay, go try his product against mine and tell me if the quality is the same." I said, "Because what he's doing is he's freeze-drying it in 7 hours, so when you look at it, you're gonna think it's freeze-dried. When you bite into it, it's gonna be gummy and chewy on the inside." 3, 4 hours later, he comes back. We're in the middle of a meeting. He's like: "You're right! I was down there. I tried his product. It's gummy and chewy on the inside." And we're finding that in retailers that weren't waiting for us to have enough production capacity for them.
They took our competitors, and, you know, a month or two go by, and they go, "Why don't we have the same velocity you have at our competitors?" And we tell them, "It's because of the quality." And so, as we're reentering those markets, there's a little bit of an education curve because someone that tried it might think, "I don't like freeze-dried candy." And it takes a little bit for us to convince them, "It's not that you don't like freeze-dried candy. You don't like bad freeze-dried candy.
Yeah.
Yeah.
Yeah. So the fourth quarter should be back to normal. It should be back to what we've been doing, historically. The third quarter, we got caught flat-footed, and it was a lesson learned. You know, we've been at this for fourteen months. We don't have all the ebbs and flows and, speed bumps figured out quite yet. So we had product melt in trucks, and we had two options. We could continue to ship, knowing that it was going to melt, because even if we shipped in refrigerated trucks to them, a lot of DCs don't have temperature-controlled areas for our type of candy, or even if they do, from those DCs to their retail locations, they don't have refrigerated trucking. Or we could pause all shipments and make sure that no bad product was out there, and that's what we decided to do.
Wasn't fun, wasn't easy, but again, I think the long-term decision was right.
Thanks for that, but expanding on the heat issue, Claudia. So it sounds like the company, the manufacturer, you guys have figured that out. What about the retailers, do they have the capacity to receive during the heat?
Yeah, so great question. One of the things that we learned is there are distributors that specialize in temperature-controlled distribution, especially during hot months, so going forward, when summer strikes next year, that's who we're going to be using. It's gonna cost us anywhere between an additional $0.12-$0.20 a bag to use them during that time period, but it won't shut us down like we did this quarter. And just so you guys know, we continued producing, so we did not stop production. We just stopped outbound shipments for those customers that didn't have temperature-controlled environments that the product would stay good at. [audio distortion]
Right now, we've got production pretty much figured out. So it's really on a margin basis going forward, it's seeing how efficient we can get the new facility once it's up and running. So that's gonna be the biggest variable on a go-forward basis. The other thing is we did work on automating our packaging process. So our engineers worked with packaging manufacturers. Because of the fragility of the product, we need a special way of filling the bags if we're going to automate. That machinery comes in at the end of this quarter, and so, you know, that will definitely help on the margin perspective. And once we're vertically integrated, and we brought candy making in-house, in the long run, we're gonna see a positive margin impact. How big? I don't know. [audio distortion]
I mean, that's going to... Yeah, once we start getting into the actual ingredients, if there's any huge fluctuations, it'll affect the margin proportionally.[audio distortion]
Yeah. We're gonna be spending about $2.5 million each quarter for the next two quarters. Our strategy right now is to finish building out the 320,000 sq ft, start contracting on the co-manufacturing piece, bringing more of that in-house, but always keeping them, you know, kind of in our back pocket to turn on as needed. [audio distortion] No, the, we don't see a huge benefit in gross margins with the co-manufacturers because of shipping costs, refrigerated shipping costs, so it pretty much evens out. Yeah. I've got 27 seconds. It's flashing at me.
Yeah, I think we're twenty-seven over.
Oh!
But thank you. Appreciate it, Claudia. Thank you.
Thank you, everyone.