Introduce Claudia Goldfarb, CEO, and Brendon Fischer, the CFO. The format for today will be a management presentation for the first twenty or so minutes, and then we will open up for Q&A. For those in the audience who have questions, you can type your questions into the Q&A box at the bottom of your Zoom screen, and I'll read the questions out loud. So with no further delay, Claudia, the floor is yours.
Thank you very much, and thank you everyone for joining us. I am going to flip through our presentation and turn it over for Brendon Fischer to introduce himself.
Good morning, everybody. My background has been 25 years on the buy side. I have experience in the equity and debt markets, most recently, running my own firm, Fischer Capital Management. I joined Sow Good after a request by Ira and Claudia to come help them with a financial model. That happened last June, and then they slowly worked me up until they hired me full-time in November, and I stepped into the interim CFO role in April of this year.
Thank you, Brendon. So I'm Claudia Goldfarb. I'm CEO and co-founder of Sow Good. I founded Sow Good with my husband and sometimes better half, Ira Goldfarb. We started Sow Good about four years ago after exiting Prairie Dog Pet Products, which is a company that we founded and built over a 12-year time period. We sold it to a PE group, and during our experiences in the pet industry, we did three things very successfully that led us to Sow Good and have really informed the strategies and what we've done and accomplished during our tenure here. So the most important thing that we did at Prairie Dog was we identified three categories that were niche, specialty items that were ready to become everyday categories. We did it first with antlers for dog chews, deer, elk, and moose.
We took it from something that, you know, mom-and-pop ranchers were selling in, you know, little markets, to something that was available at Walmart, PetSmart, Petco, by the time we were done. When we exited in 2019, we still owned about 80% of all antler sales in the pet category in the U.S. But, you know, we didn't want to be one-trick ponies, and so from antlers, we developed the slow-smoked U.S.-made jerky in the U.S. When we did that, everyone thought we were crazy because at that time, about 98%-99% of all jerky products sold in the U.S. were made out of China. And we were told by both PetSmart and Petco that there is no way a U.S. company could compete with them.
But over time, we had seen a degradation of product quality in the jerky category, and so we decided that we were gonna give it a whirl, and sure enough, you know, we launched in about 2010, 2011. About eight months after we launched, there was a 100% recall of all jerky from China in the pet industry because there was melamine contamination of the product that was leading to dog's death, and the third category, and probably the most important to what we're talking about today, is freeze-dried pet food, so it was something that, you know, again, was something that was catching fire in pet specialty, and we really felt was ready for prime time, and so we invested about $8 million in the freeze-dried food line, you know, from high-pressure pasteurization all the way through the freeze dryers.
We decided on four freeze dryers from a manufacturer here in the U.S. And, you know, we install everything. We're ready to go. We, you know, turn the switches, and of course, you know, two to three of the freeze dryers at every given moment would not work. So not an acceptable ROI and not an acceptable, you know, outcome. So we did what we do best. We started problem-solving. We hired engineers, HVAC specialists, vacuum specialists. We took the machines apart and put them back together, and by doing that, we really became experts in freeze-dried technology and in freeze-dried manufacturing. So fast-forward to four years ago, you know, we're launching Sow Good.
Ira and I weren't ready to retire, and we were gonna start with just manufacturing the actual machinery, the actual freeze dryers, because we really felt that we were approaching the technology from a manufacturer's viewpoint. You know, very quickly, we realized we were gonna need a test kitchen. If we're gonna have a test kitchen, we might as well have a product, so we decided to launch in the better for you space with fruits and veggies.
Now, if anyone had told me back then, that we would be in the candy industry, I would have said, "There is no way." But, you know, at that time, Ira and I believed in our technology so strongly and felt that it was able to be so disruptive to the right category, that we started looking at the CPG landscape to see what category was ready for disruption, what was ready for innovation, because that's what freeze-dried technology can do in the CPG space. And, you know, TikTok was the one that shined the bright light on candy. Candy was what was ready for disruption. So, you know, during COVID, people had bought these little microwave-sized freeze dryers and were sticking everything but the kitchen sink in them.
For whatever reason, candy became a viral sensation, and so people asked us, "Hey, you know, have you ever tried freeze-drying candy?" and we said, "No, but we'll take a look," ... and, you know, Ira and I walked the candy aisles, and we were surprised, because as we walked those aisles, what we saw were the same candies that we grew up with, you know, Skittles, Hershey bars, Snickers. There had been nothing new, nothing innovative, in a very long time, and so we were like: "Okay, this is it. This is the category that, that's ready for us." We spent three months R&D-ing, and for those of you that don't know what freeze-dried candy is, what we do is we take, you know, either a gummy product or a chew product or a chocolatey, minty-type product, and we put it into our freeze dryers.
Our freeze dryers are about the size of tractor-trailers. Remember, we built our freeze dryers from scratch, so they can do things that no other freeze dryers on the market can do because of how advanced our technology is. You know, we put them in the freeze dryer, and over 17-24 hours, we take up to 99% of the moisture out of the product. What that does is it takes a gummy product, and it makes it crunchy. It makes it dried. It's almost like a candy potato chip. In addition to that, it makes it super flavorful. Because you take all of the water out, the only thing that's left is the flavor, so the sweetness is enhanced, or the sourness is enhanced, and that's what has really made freeze-dried candy, you know, the sensation that it is.
So, you know, that's great. We created these amazing products. We've got this amazing technology. But outside of that, who are we? And, you know, what makes us special? We helped launch the freeze-dried candy category because we were one of the only companies that had the scale and the ability to do it in any meaningful way. Because of the experiences we had had in pets, Ira and I launched, you know, Sow Good Candy in a very methodical and thoughtful way. We spent those three months of R&D really focusing on what our SKU assortment was going to be. We started with a 21,000 sq ft facility in Irving, Texas. It's an SQF 2-certified facility, and what that means is that we have the highest standards in food safety and quality, available in the U.S.
In April of this past year, we uplisted to Nasdaq with a $13.8 million public offering. Over the last twelve months, you know, we went from zero revenue at the beginning of last year with, you know, $41.6 million revenue over the last twelve months. You know, when we put this slide together, we were in over 5,800 retail stores, and we have over 18 SKUs. You know, the three kind of pillars that we really focus on at Sow Good is manufacturing excellence. What we learned during our R&D process was not only was the freeze-drying incredibly important, but the way you treat the product throughout the entire manufacturing and packaging process is equally as important. Because we're an SQF-certified facility, because we take our quality so seriously, we do hourly checks on all of our product.
And so, you know, during that R&D process, what we found was, at about hour two, we would start seeing a degradation in the quality of the product. It would stop being quite as crunchy. By hour three, it would start being gummy again. And so what we learned through that was sugar loves water, and so what was happening was the product was reabsorbing the humidity in the air. So, you know, we went back to the drawing board and built out these specialized humidity and temperature-controlled rooms so that we can reach humidity levels of 4% while we're packaging, ensuring that the product quality remains really high. Because freeze-dried candy is so fragile, what happens if you use an automated packaging line, which we own, is that you see a tremendous amount of breakage in the product.
You know, anywhere between 10% and 20% of the product breaks apart in the bag. So as of now, we hand-package every single bag to ensure that the product, integrity and quality stays really high. We also really focus on our branding and packaging. What's really exciting, or what's really unique about how quickly we've grown and the revenue growth that we've seen, is we did it with one salesperson and no money spent on branding, marketing, social media. That is changing as of now. We are growing our sales force to a team of five, with two additional hires coming in two weeks. We're expanding our marketing and branding efforts. We've just hired a fully integrated marketing company, so social media, influencer marketing, and traditional PR is going to be part of our future strategy.
Now, some of you are gonna ask about competition and how do you protect yourself against that? Well, when we set out to launch this, we knew that freeze-dried candy wasn't going to be a flash in the pan or some sort of fad. It was going to become an everyday category. And so we launched with that very much in mind, and we launched knowing that as soon as people understood what we did about what freeze-dried candy was going to become, that they would be following in our coattails. And sure enough, you know, every me-too product is coming out of the woodwork. But that's why we were so thoughtful about the product assortment that we put together. We focused on some... a little bit of product for everyone.
So we've got sweet, we've got fruity, we've got chocolatey, we've got sour, we've got ice cream, and because of the sophistication of our freeze dryers, we're able to do this entire SKU assortment, where many of our competitors cannot. You know, these four products that are right here in the middle, if you can see where I'm circling, those are the easiest products to freeze-dry. Almost every freeze-dryer on the market can make those. As you start getting into chocolate, more sophisticated gummy, and especially ice cream, that takes a much more sophisticated freeze-dryer. Now, as some of you may know, Mars has said that they're entering the freeze-dried category, sometime early next year, sometime probably in the first quarter.
Most of you might think, "Oh, no." I'm actually incredibly excited that they're coming into the category, and the reason that I'm excited is because by their entering this category, I think they really validate what we've been saying at Sow Good for the last 14 months, which is freeze-dried candy is here to stay. It is here, and it's going to be an everyday category going forward. The other reason I'm really excited is because they're going to bring, you know, new eyeballs to the category that otherwise wouldn't have looked at freeze-dried candy. You know, they've seen it as a trend on social media but weren't sure if they were gonna try it. They're launching with one SKU, which is their Skittles SKU. That is equivalent to what our Rainbow Bites or Sweet Bites are.
As of the third quarter of last year, we've only used private label candy, so we don't use branded products in our freeze-drying process any longer. Most of our competitors continue to use, be it Skittles or Trolli or some other sort of branded candy. You'll see that reflected in our margins and our financial performance. But in addition to that, as Mars enters the market, our product is incredibly different than theirs. We formulated our chew candy specifically for freeze-drying. One of the things that we're really excited about is, you know, toward the end of the fourth quarter, we're going to bring all of our chew candy manufacturing in-house, and the reason we wanted to do that is, A, really keep our supply chain secure.
It allows us to innovate and further enhance the formulations of the chew candy so that we can really optimize it for the freeze-drying, and in addition to that, it allows us to innovate in a much more agile and quick way, which is something that we've learned is incredibly important to the category. Mr. Brendon, you wanna go over this slide?
Sure. We'll go over it quickly 'cause I know we're gonna be short on time. As you can see, we've had a very solid revenue growth trajectory quarter over quarter. You know, this is something we expect to continue. Obviously, it won't always be this linear. We'll have our ups and downs on a quarterly basis, but when you look at us on a more yearly time horizon, we see a very strong market category that can grow for quite a while. We've lost the presentation, but I can tell you on the EBITDA slide, a very similar situation, where we have rising EBITDA over the last four quarters and strong EBITDA margin expansion. Q2, I'll talk a little bit more later, and we'll have questions on it.
With margin expansion there, we will see some pullback and some volatility within our margins due to a lot of different factors, but we'll talk a little bit more on that later, and I'll turn it back to Claudia.
Sorry, guys, I lost my place in the presentation for a little bit. So here's an example of our manufacturing and distribution facilities. If you look at the upper left-hand corner, you'll notice that's where we hand-package all of our product, and again, we do that in order to be able to really keep the quality at a high level. Who are our key retailers, and where is our growth going to go? You know, we have had tremendous growth up to now, but as of last month, Nielsen had us at a 7% penetration rate. So that means compared to other major candy companies, we're only in 7% of the stores. That means we have so much runway left in front of us, and that's why we're actively and aggressively growing our sales team and actively and aggressively going after new doors.
You know, we've had tremendous launches in Five Below, 7-Eleven, Circle K, Albertsons, Big Lots, and those launches are going to continue. Five Below was one of our first major customers and remains one of our best customers. We're up to seven SKUs every day with them. At the end of this month, they're bringing on board three additional SKUs because we haven't even started to scratch the surface as to what this category is going to be. If you look at, you know, confectionery sales, you know, in the U.S., it's growing at a 6% rate.
Obviously, we're growing at a much higher rate, and we're going to be taking market share away from existing candy companies, as well as expanding the category as a whole by bringing new people into candy that had gotten tired of the same old thing and were looking for something snackable, crunchy, and new, and now our financial overview.
All right, and I'll try to address some of these questions that are popping up in the Q&A as we go through this, but as you can see, Q2 revenue came in strong, $15.6 million, and we saw a very strong increase in gross margin, so gross margin at the end of the quarter in Q2 was 57.6%, and that compares to Q1 of around 41%. Now, the reason for that rapid expansion is, A, we had the strong sales part of it, but the big parts were a favorable price mix because we had a large customer come on that had favorable pricing and mix for us based on the SKUs they were ordering, so that contributed to part of that increase, and then we also had that transition fully to using private label product from branded product.
That is obviously a large raw material cost advantage for us, and that contributed to that increase as well. What I'll say, kind of speaking to forward gross margins, is that we're gonna see some variability. If we go back one slide, please. We're gonna continue to see a lot of variability in gross margin, and that's because Claudia and Ira like to keep me on my toes and keep doing a lot of different things. So what we're gonna be seeing is our new facility rent's gonna come in. That'll be a headwind on the gross margin as we go forward. We're also gonna be making a move to some automated packaging. We believe our engineers have been able to figure out how to do that while handling our product gently enough that previous machines were unable to do.
We also are doing internal candy manufacturing, which will impact gross margin. So there's a lot of things that are impacting what's gonna be going on on the gross margin side. In general, between that Q1, Q2, we think that over the long term provides a fairly decent range of where gross margin will start to play out. On the operating expense side, we'll continue to see a large increase into Q3 because of the new facility rent and related warehousing expenses. But we think Q3, once that's fully in, you'll have a fairly good idea what our operating expense base is. We don't expect any major increases there outside of some CapEx increases related to our capital build program for additional machines.
What we're gonna see growing in operating expenses going forward is gonna be driven by a lot of incremental hiring, so filling in our sales force. We have currently, as Claudia mentioned, one salesperson, we're taking that up to four with channel focus, so a lot of increases there. We'll be increasing advertising and marketing spend as well, but what's really interesting about that is you can see our EBITDA margin spiked to 39.7% in the quarter. That was a combination of that strong gross margin, but also leveraging those operating expenses.
And as we get out of Q3, what I think is a really important thing to notice is that as we have the investment in facilities, production capacity that we have to support a much higher level of sales once we get revenue on a more consistent basis, that will allow us to effectively leverage that operating expense base, which only needs incremental investment and drive strong EBITDA margins into the future. Next slide. Adjusted EBITDA reconciliation, not a lot to go on here. It's just the adjustments being stock comp expense, as well as the loss on early extinguishment of debt last quarter. Next slide. Our balance sheet. One of the questions I see is, do we need to raise capital next year or two to fund working cap?
Our biggest cash usage right now is gonna be on working cap, as well as funding our capital plan. We ran about $2.25 million in CapEx last quarter. We expect to see something similar in that range in the next two to three quarters as we bring on additional machines, and that includes the six new machines we're gonna be building for the freeze dryers, as well as new packaging line and as well as internal candy manufacturing machinery. With the capital raise we did in April, we feel confident that we have enough capital in place to fund all those initiatives, even with the issues we're dealing with in Q3. Working cap will be a continued build.
Excluding working cap, we've been able to be free cash flow positive, but obviously, working cap has been a headwind to that because of the build in inventory we've had to do to put ourselves in a position to meet higher sales in the future. Accounts receivable, we'll also see increasing over the long run due to the growth in sales, as well as elongating our accounts receivable payment cycle as we bring on new customers who have longer payment cycles. On the debt side, we only got $3.5 million in gross debt right now, so we're in a strong net cash position. Next slide. Again, this is just our free cash flow.
You can see it was negative, but you can see that strong working capital usage of $9.6 million, and again, driven primarily by the AR and inventory impact. And with that, I'll turn it back over to Claudia.
Okay, I'm gonna answer some of these questions. So probably my favorite question is the Boar's Head question. Quality assurance is incredibly important to us. We scored a 97% on our last SQF audit, and I think that the Boar's Head situation really is highlighting for buyers how important your manufacturers and suppliers are. So that is something that we take with utmost seriousness. Every single lot of product that we produce, we test in-house and through a third-party testing system for things like pathogens, which is what happened in the Boar's Head situation. So we feel incredibly comfortable about the safety and quality of our product. In regards to how we sell our products, so we do it in a number of different ways, and we are actively growing in every single channel that we can enter.
So we have direct relationships with Cracker Barrel, Five Below, Kroger, H-E-B. We also use distributors such as Nassau, Redstone, and CB Distributors for Circle K, specialty candy and other smaller type retail that requires very specific distribution. Places that we haven't even started to play in, that we just feel is just primed for growth for us, are things like the travel channel. You know, think of Hudson News and, you know, TravelCenters of America, cinemas, event space, college campuses. You know, going into your local Subway, and instead of grabbing a bag of chips, you grab a bag of Sow Good. So, you know, in regards to our growth potential, we really feel like we haven't even started to see where we can go.
And that's one of the reasons why we're bringing our candy in-house, because that really is going to give us the flexibility, the supply chain security, and the ability to really pivot as customer demands and opportunities come up. And let me see if there are any more questions. In regards to do we have a sense of same-store growth at Five Below, we don't, because if we go to last year at Five Below, and let me see if I can go there. Second quarter, we only had two SKUs. Third quarter, we had four SKUs. Q4, we had seven SKUs. So this is the first quarter that we will have the same number of SKUs, so it'll be the first time that we're really going to be able to see what year-over-year growth is.
In our conversations with Five Below, our velocity continues to be at pace or higher than it was last year, which is why they're introducing three more, brand-new SKUs to their assortment. In regards to our current capacity, we have five freeze dryers that are online at our original Union Bower facility, which is the 21,000 sq ft facility. We have a sixth one that's going online there by the end of this month. We have six more that are coming in and will be online by the end of the first quarter of this year. That'll be at our brand-new 320,000 sq ft facility in Dallas, Texas. So that'll take our total capacity to 12 machines, with a rule of thumb of about $10 million in revenue per machine. So our internal capacity will be $120 million by the end of the first quarter.
We're going to continue to utilize our Chinese co-manufacturer. We only use one, because that is the only one that we feel secure in from a food safety and quality perspective. That co-manufacturer will allow us the flexibility to be able to turn on and turn off additional capacity as needed. In regards to how we approach our pricing, when we launched Sow Good, we launched with how we were going to live in the space every day. What we learned from our pet era days was that if you price gouge in the beginning, because you're the new product, there's a limited amount of production capacity, what you end up doing is you end up making your retailers mad, and you end up opening the door for competition that can come in and undercut you.
As we were talking about Mars, they're going to be about 60% more expensive than we are on shelf, because we priced ourselves competitively from day one, and in regards to e-commerce and, you know, D2C distribution, up until this last quarter, it was. We were turning product every 72 hours. We didn't have enough production capacity to meet sales demand. So we really focused on key accounts and brick-and-mortar so that we could really, develop our brand, really start understanding the category. Now that we have a little bit of breathing room, it's something that we can start addressing. So we're looking at launching, you know, our own Amazon store, TikTok Shop, fleshing out our D2C website, and, you know, really engaging on social platforms in regards to outreach.
Just to add on to that, it's always been a focus for us to own the retail space first, because owning retail shelf space is much more difficult to get. If you're the first person or second person, you can get on shelf and maintain shelf space. Being the third, fourth, fifth into that space is very, very difficult. Whereas in the e-commerce side, you can get on Amazon very easily, very quickly. It doesn't matter if you're first or tenth or twentieth. Our focus has been to own that shelf space, because once we have it, it's gonna be very difficult for our competitors to pull that away from us.
Yeah, and one of the things that we have no interest in doing is private labeling our product. You know, we truly believe that we have superior technology, superior manufacturing expertise, and the best freeze-dried candy product on the market. And so to, you know, dilute our brand by opening up to private label at this time just doesn't make any sense for us. And in regards to what's the biggest factor limiting our growth, really nothing. You know, prior to this past quarter, it was production capacity. We've now solved for the production capacity issue, and so now it's just about how quickly can we grow. We put together a really good capital plan. We've got a strong strategy in place.
So now it's just, you know, off to the races, and let's get on shelf and off shelf as quickly as possible.
All right. Well, thank you very much, Claudia and Brendon. Unfortunately, we are out of time here. You know, certainly, you know, a terrific presentation, and congratulations on your success that you've had with Sow Good, and I've tested the product myself, and it is excellent. So certainly yeah, a lot of interest. You know, I apologize we couldn't get to all the questions, but I think you answered the you know the vast majority of them. So appreciate everyone tuning in and listening to the Sow Good presentation. Hope everyone has a productive day.
Thank you, everyone.