ITEM 1A. RISK FACTORS
Risks Related to Our Business
Our freeze-dried foods
business is essentially a start-up, and does not have any meaningful history of operations.
The assets we purchased under
the Asset Purchase Agreement were of a development stage business without any major customers or history of operations upon which to forecast
future business trends. We cannot guarantee that we will become profitable. As a developing company, we will need to adopt and implement
a plan to increase awareness of our products, secure distribution channels, and foster and strengthen our supply, manufacturing and distribution
relationships. It is likely our strategic priorities will need to evolve over time and our business would be materially and adversely
effected if we do not properly adapt our strategies to our changing needs and changes in the market.
As our operations develop
and grow, we expect to experience significant increases in our working capital requirements. These conditions raise doubt over our ability
to meet all of our obligations over the next twelve months if we are unable to obtain additional capital. Even if we obtain additional
capital and achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may be unable to
sustain or increase profitability and our failure to do so would adversely affect the Company’s business, including our ability
to raise additional funds.
We have very limited internal
distribution and marketing capabilities and are only in the early stages of building our distribution network.
We have launched our freeze-dried
food products commercially, but continue to make efforts at expanding our sales and distribution. In order to be successful, we will need
to establish a direct-to-consumer platform and/or relationships with numerous retail outlets through which our products can be sold. We
have extremely limited internal marketing and distribution capabilities and resources. There can be no assurance that we will be successful
in establishing a meaningful distribution network or direct to consumer platform or that if the same is established that such network
or platform will result in profitable sales of our products.
We may need additional
financing in the future, which may not be available when needed or may be costly and dilutive.
We may require additional
financing to support our working capital needs in the future. The amount of additional capital we may require, the timing of our capital
needs and the availability of financing to fund those needs will depend on a number of factors, including our strategic initiatives and
operating plans, the performance of our business and the market conditions for debt or equity financing. Additionally, the amount of capital
required will depend on our ability to meet our sales goals and otherwise successfully execute our operating plan. Although we believe
various debt and equity financing alternatives will be available to us to support our working capital needs, financing arrangements on
acceptable terms may not be available to us when needed. Additionally, these alternatives may require significant cash payments for interest
and other costs or could be highly dilutive to our existing shareholders. Any such financing alternatives may not provide us with sufficient
funds to meet our long-term capital requirements.
A worsening of economic
conditions or a decrease in consumer spending may adversely impact our ability to implement our business strategy.
Our success depends to a significant
extent on discretionary consumer spending, which is influenced by general economic conditions and the availability of discretionary income.
There is no certainty regarding economic conditions in the United States, and credit and financial markets and confidence in economic
conditions could deteriorate at any time. Accordingly, we may experience declines in revenue during economic turmoil or during periods
of uncertainty. In addition, sustained periods of inflation may result in a decline in the amount of discretionary spending and otherwise
hamper our gross margins. Any material decline in the amount of discretionary spending, leading cost-conscious consumers to be more selective
in food products purchased, could have a material adverse effect on our revenue, results of operations, business and financial condition.
Fluctuations in various
food and supply costs, particularly related to fruit, could adversely affect our operating results.
Supplies and prices of the
ingredients that we are going to use to be affected by a variety of factors, such as weather, seasonal fluctuations, demand, politics
and economics in the production areas.
These factors subject us to
shortages or interruptions in product supplies, which could adversely affect our revenue and profits. In addition, the price of fruit,
which is currently our main ingredient in our products, can be highly volatile. The fruit of the quality we seek tends to trade on a negotiated
basis, depending on supply and demand at the time of the purchase. An increase in pricing of any fruit that we are going to use in our
products could have a significant adverse effect on our profitability. We cannot assure you that we will be able to secure our fruit supply.
In addition, our costs are
affected by general inflationary pressures related to transportation and shipping costs, particularly to the extent we have additional
retail sales and smaller order quantities. We are also subject to a reduction in our profitability due to increased labor costs for our
employees. As we look to expand our distribution and market, we may not be able to increase our sales prices to absorb these costs. We
cannot provide assurances that we will be able to maintain profitability consistent with our goals.
As we consider adding a second
freeze drier, we also anticipate that the costs for this equipment will be more than as well as the lead time to receive the equipment
once ordered will be longer than we have planned. This could increase our capital needs and also delay our ability to ramp up production
in a timely manner to correspond to demand.
Our success depends on
our ability to correctly predict, identify, and interpret changes in consumer preferences and demand, to offer new products to meet those
changes, and to respond to competitive innovation.
Consumer preferences for food
and beverage products change continually and rapidly. Our success depends on our ability to predict, identify, and interpret the tastes
and dietary habits of consumers and to offer products that appeal to consumer preferences, including with respect to health and wellness.
If we do not offer products that appeal to consumers, our sales and market share will decrease, which could materially and adversely affect
our product sales, financial condition, and operating results.
We must distinguish between
short-term trends and long-term changes in consumer preferences. If we do not accurately predict which shifts in consumer preferences
will be long-term, or if we fail to introduce new and improved products to satisfy those preferences, our sales could decline.
Our business depends substantially
on the continuing efforts of our senior management and other key personnel, and our business may be severely disrupted if we lose their
services.
Our future success heavily
depends on the continued service of our senior management and other key employees. If one or more of our senior executives is unable or
unwilling to continue to work for us in his or her present position, we may have to spend a considerable amount of time and resources
searching, recruiting, and integrating a replacement into our operations, which would substantially divert management’s attention
from our business and severely disrupt our business. This may also adversely affect our ability to execute our business strategy.
We may be unable to attract
and retain qualified, experienced, highly skilled personnel, which could adversely affect the implementation of our business plan.
Our success depends to a significant
degree upon our ability to attract, retain and motivate skilled and qualified personnel. As we become a more mature company in the future,
we may find recruiting and retention efforts more challenging. If we do not succeed in attracting, hiring and integrating excellent personnel,
we may be unable to grow effectively. The loss of any key employee, including members of our senior management team, and our inability
to attract highly skilled personnel with sufficient experience in our industries could harm our business.
Our ability to maintain
and expand our distribution network and attract consumers, distributors, retailers and brokers will depend on a number of factors, some
of which are outside our control.
Some of these factors include:
· the level of demand for our brands and products types;
We may not be able to successfully
manage all or any of these factors in any of our current or prospective geographic areas of distribution. Our inability to achieve success
with regards to any of these factors in a geographic distribution area will have a material adverse effect on our relationships in that
particular geographic area, thus limiting our ability to maintain or expand our market, which will likely adversely affect our revenues
and financial results.
If we do not adequately
manage our inventory levels, our operating results could be adversely affected.
We will need to maintain adequate
inventory levels to be able to deliver products on a timely basis. Our inventory supply depends on our ability to correctly estimate demand
for our products. Our ability to estimate demand for our products is imprecise, particularly for new products. If we materially underestimate
demand for our products or are unable to maintain sufficient inventory of raw materials, we might not be able to satisfy demand on a short-term
basis. If we overestimate demand for our products, we may end up with too much inventory, resulting in higher storage costs and increased
trade spend. If we fail to manage our inventory to meet demand, we could damage our relationships with our customers and retailers and
could delay or lose sales opportunities, which would unfavorably impact our future sales and adversely affect our operating results.
We are highly dependent
on Ira and Claudia Goldfarb, our Executive Chairman and the Chief Executive Officer, and our other executive officers and employees. The
loss of one or more of them, upon whose knowledge, leadership and technical expertise we rely, would harm our ability to execute our business
plan.
Our success depends heavily upon the continued
contributions of Ira and Claudia Goldfarb, our Executive Chairman and Chief Executive Officer, respectively, whose knowledge, leadership
and technical expertise would be difficult to replace, with the support of Brad Burke, our Chief Financial Officer. If we were to lose
their services, our ability to execute our business plan would be harmed and we may be forced to cease operations until such time as we
are able to suitably replace them. Any of our executive officers may terminate their employment with our company at any time.
We may not be able to effectively
manage our growth, which may harm our profitability.
Our strategy envisions the
expansion of our business. If we fail to effectively manage our growth, our financial results could be adversely affected. Growth may
place a strain on our management systems and resources. We must continue to refine and expand our business capabilities, our systems and
processes and our access to financing sources. As we grow, we must continue to hire, train, supervise and manage new employees. We cannot
assure that we will be able to:
· meet our capital needs;
· expand our systems effectively or efficiently or in a timely manner;
· allocate our human resources optimally;
If we are unable to manage our growth, our financial
condition and results of operations may be materially adversely affected.
Risks Related to Our Industry
The challenges of competing
with other freeze-dried food businesses may result in reductions in our revenue and operating margins.
We will compete with many
companies on the basis of taste, quality and price of product offered, and customer service. Our success depends, in part, upon the popularity
of our products and our ability to develop new items that appeal to a broad range of consumers. Shifts in consumer preferences away from
products like ours, our inability to develop new items that appeal to a broad range of consumers, or changes in our offerings that eliminate
products popular with some consumers could harm our business. We compete with other manufacturers of freeze-dried foods, frozen foods,
convenience foods, health foods and packaged goods. Many of our competitors or potential competitors have substantially greater financial
and other resources than we do, which may allow them to react to changes in the market quicker than we can. In addition, aggressive pricing
by our competitors or the entrance of new competitors into our markets, could reduce our revenue and operating margins. We also compete
with other employers in our markets for workers and may become subject to higher labor costs as a result of such competition. Recently
there has been a significant increase in labor costs.
Concerns over food safety
and public health may affect our operations by increasing our costs and negatively impacting demand for our products.
We could be adversely affected
by diminishing confidence in the safety and quality of certain food products or ingredients. As a result, we may elect or be required
to incur additional costs aimed at increasing consumer confidence in the safety of our products. Our success depends on our ability to
maintain the quality of our existing and new products. Product quality issues, real or imagined, or allegations of product contamination,
even if false or unfounded, could tarnish the image of our brands and may cause consumers to choose other products.
Product liability exposure
may expose us to significant liability.
We may face an inherent business
risk of exposure to product liability and other claims and lawsuits in the event that the development or use of our technology or prospective
products is alleged to have resulted in adverse effects. We may not be able to avoid significant liability exposure. Although we believe
our insurance coverage to be adequate, we may not have sufficient insurance coverage, and we may not be able to obtain sufficient coverage
at a reasonable cost. An inability to obtain product liability insurance at acceptable cost or to otherwise protect against potential
product liability claims could prevent or inhibit the commercialization of our products. A product liability claim could hurt our financial
performance. Even if we ultimately avoid financial liability for this type of exposure, we may incur significant costs in defending ourselves
that could hurt our financial performance and condition.
Risks Related to our Common Stock
The market price of our
common stock is, and is likely to continue to be, highly volatile and subject to wide fluctuations.
The market price of our common
stock is likely to continue to be highly volatile and could be subject to wide fluctuations in response to a number of factors, some of
which are beyond our control, including but not limited to:
· challenges associated with timely SEC filings;
· illiquidity and lack of marketability by being an OTC traded stock;
· changes in the accounting methods used in or otherwise affecting our industry;
· additions and departures of key personnel;
These and other factors are
largely beyond our control, and the impact of these risks, singly or in the aggregate, may result in material adverse changes to the market
price of our common stock and our results of operations and financial condition.
Our operating results may
fluctuate significantly, and these fluctuations may cause the price of our common stock to decline.
Our operating results will
likely vary in the future primarily as the result of fluctuations in our revenues and operating expenses, including the expenses that
we incur and other factors. If our results of operations do not meet the expectations of current or potential investors, the price of
our common stock may decline.
Shareholders will experience
dilution upon the exercise of outstanding warrants and options and issuance of common stock under our incentive plans.
As of December 31, 2021,
we had options for 2,334 shares of common stock outstanding under our 2012 Amended and Restated Stock Incentive Plan and options
for an additional 3,333 shares of common stock outstanding under our 2016 Non-Qualified Stock Option Plan. In addition, our 2020 Stock
Incentive Plan (the “2020 Equity Plan”) was approved by written consent of a majority of shareholders of record as of November
12, 2019 and adopted by the Board on December 5, 2019, and on October 1, 2020, January 4, 2021 and again on March 19, 2021, the Board
approved an increase in the number of shares of common stock reserved under the 2020 Plan, from 320,000 shares to a total of 814,150 shares.
The increase was approved by a majority of shareholders of record on September 3, 2021. As of December 31, 2021, we had options for
535,520 shares of common stock outstanding under our 2020 Equity Plan. If the holders of outstanding options exercise those options or
our compensation committee or full board of directors determines to grant additional stock awards under our incentive plan, shareholders
may experience dilution in the net tangible book value of our common stock. Further, the sale or availability for sale of the underlying
shares in the marketplace as a result of the exercise of existing options and the grant of additional options could depress our stock
price.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Executive Offices
Our executive offices are
located at 1440 N Union Bower Rd, Irving, TX 75061. Our office space is included in our production facility, which consists of approximately
20,945 square feet leased pursuant to a lease agreement through September 15, 2025, with two five-year options to extend, under which
an entity owned entirely by Ira Goldfarb is the landlord.
Research and Development
We anticipate performing product
research and development as required for our products and distribution under our new plan of operation. The Company currently has one
full-time employee dedicated to product research and development. The Company’s research and development activities primarily consist
of product formulation, nutritional analysis, and taste analysis.
Delivery Commitments
We do not currently have any
delivery commitments under our plan of operation.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may
become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject
to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We
are not presently a party to any material litigation, nor to the knowledge of management is any litigation threatened against us, which
may materially affect us.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock
The Company changed its ticker
symbol from “ANFC” to “SOWG”, effective as of the opening of trading on January 22, 2021.
Quotations on the OTCQB reflect
inter-dealer prices, without retail markup, mark-down, or commission and may not necessarily represent actual transactions.
Effective February 21, 2020,
our common stock underwent a 1-for-300 reverse split, which is retrospectively reflected throughout this Form 10-K.
As of March 28, 2022,
there were approximately 365 record holders of our common stock, not including shares held in “street name” in brokerage accounts
which is unknown. As of March 28, 2022, there were 4,820,655 shares of common stock outstanding on record.
Equity Compensation Plan Information
Effective December 5, 2019,
the 2020 Stock Incentive Plan (the “2020 Plan”) was approved by our Board. Amongst other things, the 2020 Plan authorized
a total of 320,000 shares of our common stock. Subsequently, on October 1, 2020, January 4, 2021 and again on March 19, 2021, the Board
approved an increase in the number of shares of common stock reserved under the 2020 Plan, from 320,000 shares to a total of 814,150 shares.
The increase was approved by a majority of shareholders of record on September 3, 2021. The following table sets forth certain information
regarding our 2020 Plan as of December 31, 2021:
For the fiscal years ended
December 31, 2021 and 2020, we issued 257,975 and 439,151 stock options pursuant to the 2020 Plan. There were 161,606 options
cancelled or forfeited pursuant to the 2020 Plan during the year ended December 31, 2021. There were no options cancelled or
forfeited pursuant to the 2020 Plan during the year ended December 31, 2020.
Effective December 12, 2016,
the 2016 Non-Qualified Stock Option Plan (the “2016 Plan”) was approved by our Board. Amongst other things, the 2016
Plan authorized a total of 12,712 shares of our common stock. The following table sets forth certain information regarding our 2016 Plan
as of December 31, 2021:
For the fiscal years ended
December 31, 2021 and 2020, we issued no stock options pursuant to the 2016 Plan. There were 1,000 and 3,699 options cancelled
or forfeited pursuant to the 2016 Plan during the years ended December 31, 2021 and 2020, respectively.
Effective March 2, 2012,
the 2012 Amended and Restated Stock Incentive Plan (the “2012 Plan”) was approved by our Board and the holders of a majority
of our outstanding shares, replacing the Ante5, Inc. 2010 Stock Incentive Plan. Amongst other things, the 2012 Plan increased
the number of shares reserved under the Plan to a total of 25,000 shares of our common stock. The following table sets forth certain information
regarding the 2012 Plan as of December 31, 2021:
For the fiscal years ended
December 31, 2021 and 2020, we issued no stock options pursuant to the 2012 Plan. There were 1,666 and 10,131 options cancelled
or forfeited pursuant to the 2012 Plan during the years ended December 31, 2021 and 2020, respectively.
Warrants
On
December 31, 2021, the Company closed a private placement and concurrently entered into a Note and Warrant Purchase Agreement with related
parties to sell an aggregate $2,075,000 of promissory notes and warrants to purchase an aggregate 311,250 shares of common stock, representing
15,000 warrant shares per $100,000 of promissory notes. The warrants are exercisable at a price of $2.21 per share over a ten-year term.
The officers, directors and related parties receiving grants and the amounts of such grants were as follows:
Stock Warrant
Name and Title at Time of Grant Shares Granted
Ira and Claudia Goldfarb, Chairman and Chief Executive Officer 225,000
Brad Burke, Chief Financial Officer 3,750
Lyle Berman, Director 75,000
Cesar J. Gutierrez, brother of the Company’s Chief Executive Officer 7,500
In consideration for four
of our officers and directors’ willingness to serve as guarantors of the Cadence Loan, the Company issued warrants to each of the
Guarantors (the “Guarantor Warrants”) for the purchase of the Company’s common stock on March 12, 2020. The Guarantor
Warrants entitle each Guarantor to purchase 26,250 shares of the Company's common stock (the “Warrant Shares”) at an exercise
price of $4.00 per share. The Guarantor Warrants expire on March 12, 2030. The officers and directors receiving grants and the amounts
of such grants were as follows:
Stock Warrant
Name and Title at Time of Grant Shares Granted
Bradley Berman, former Chairman of the Board and Director 26,250
Lyle Berman, Director 26,250
Benjamin Oehler, former Director 26,250
There were no warrants
exercised, forfeited or expired during the years ended December 31, 2021 and 2020. A total of 417,550 warrants were outstanding
as of December 31, 2021 with a weighted average exercise price of $2.66 and a weighted average life of 9.5 years.
Unregistered Issuance of Equity Securities
The following issuances of
our securities during the three-month period ended December 31, 2021 were exempt from the registration requirements of the Securities
Act of 1933 pursuant to Section 4(a)(2) thereof and/or Rule 506 of Regulation D promulgated thereunder.
On December 8, 2021,
we issued a total of 46,665 shares of common stock, restricted in accordance with Rule 144, among five board members for services rendered.
On November 30, 2021,
we issued 5,541 shares of common stock, restricted in accordance with Rule 144, to Claudia Goldfarb, our Chief Executive Officer, for
services rendered.
On November 30, 2021,
we issued 6,044 shares of common stock, restricted in accordance with Rule 144, to Ira Goldfarb, our Executive Chairman, for services
rendered.
On October 31, 2021,
we issued 5,541 shares of common stock, restricted in accordance with Rule 144, to Claudia Goldfarb, our Chief Executive Officer, for
services rendered.
On October 31, 2021,
we issued 6,044 shares of common stock, restricted in accordance with Rule 144, to Ira Goldfarb, our Executive Chairman, for services
rendered.
On October 7, 2021,
we issued 5,541 shares of common stock, restricted in accordance with Rule 144, to Claudia Goldfarb, our Chief Executive Officer, for
services rendered.
On October 7, 2021,
we issued 6,044 shares of common stock, restricted in accordance with Rule 144, to Ira Goldfarb, our Executive Chairman, for services
rendered.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable.
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should
be read in conjunction with our financial statements and notes to those statements. In addition to historical information, the following
discussion and other parts of this annual report contain forward-looking information that involves risks and uncertainties.
Overview and Outlook
Effective January 21, 2021,
we changed our name from Black Ridge Oil & Gas, Inc. to Sow Good Inc. Our common stock is quoted on the OTCQB under the trading symbol
“SOWG”.
During 2021, the
Company launched a line of freeze-dried snacks, smoothies, soups and granola. We are marketing our line of products via our direct-to-consumer
focused website, as well as via the business-to-business sales channel.
Our business operates
under two distinct brands, Sow Good and Sustain Us. Our unique food products are target the large, and growing, freeze-dried food products
market. The global freeze-dried food products market is estimated by Technavio to total nearly $60B in 2020, with the United
States representing almost 30% of the total. Technavio further projects market growth to continue at over 8% per year through 2024.
With the extensive
freeze-dried manufacturing and food product-focused business development experience of our senior management team, including recent additions,
we believe we are well positioned to lead the Company's growth and development in the freeze-dried food industry.
S-FDF Business Combination
On
October 1, 2020, the Company completed its acquisition of S-FDF, LLC (the "Seller"), a Texas limited liability company, pursuant
to an Asset Purchase Agreement, between the Company and the Seller, dated June 9, 2020, as subsequently amended effective October 1,
2020. In connection with the closing of the Asset Purchase Agreement, the Company acquired approximately $2.2 million in cash and
certain assets and agreements related to the Seller’s freeze-dried fruits and vegetables business for human consumption and entered
into certain employment and registration rights agreements. The Company did not assume any liabilities of Seller or any liabilities, liens,
or encumbrances pertaining to or encumbering the Purchased Assets, except for those related to agreements or arrangements specified in
the Asset Purchase Agreement. The Seller transferred the Purchased Assets to the Company in exchange for the issuance of 1,120,000 shares
of the Company’s common stock to the Seller. The number of shares to be issued to Seller was subject to adjustment, as specified
in the Asset Purchase Agreement, as amended, based on the extent to which the amount of cash proceeds held by the Company, as derived
from the sale of the Company’s holdings of AESE Shares, were less than $5 million or greater than $6 million on the date
specified in the Asset Purchase Agreement, which resulted in the issuance of an additional 500,973 Seller Shares that were issued on January
4, 2021. The combined issuances represented approximately 46% of the Company’s issued and outstanding common stock, on a fully diluted
basis. Black Ridge Oil & Gas, Inc. was determined to be the acquiror of the business combination.
Pursuant
to its obligations under the Asset Purchase Agreement, on the Closing Date the Company, (a) created three new seats on the Company’s
Board of Directors and appointed the Seller’s principals, Ira Goldfarb and Claudia Goldfarb, and a third person designated by the
Goldfarbs, Greg Creed, as directors, (b) entered into employment agreements with Ira Goldfarb and Claudia Goldfarb, (c) delivered a registration
rights agreement with respect to the shares to be issued to Seller and any shares of common stock delivered as part of the employment
compensation for Ira Goldfarb or Claudia Goldfarb, and (d) amended the Company’s 2020 Stock Incentive Plan to increase the number
of shares of common stock reserved thereunder. At closing, the Company also assumed the Seller’s obligations under a real property
lease for its facility in Irving, Texas under which an entity owned entirely by Ira Goldfarb is the landlord.
Going Concern Uncertainty
As of December 31, 2021, the
Company had a cash balance of $3,345,928 and total working capital of $4,488,207. 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.
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 funding 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 report of the Company’s
independent registered public accounting firm that accompanies its audited financial statements in this Annual Report on Form 10-K
contains an explanatory paragraph regarding the substantial doubt about the Company’s ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the outcome of the going concern uncertainty.
Overview of 2021 results
Our 2021 results were largely
dominated by the completion of our freeze drier and manufacturing facility, the commencement of product sales on our direct-to-consumer
websites, and building the management capacity of the Company to support anticipated sales growth.
We earned $88,440 of revenue
in 2021 following the launch of our direct-to-consumer website for our Sow Good brand in the second quarter of the year.
Our general and administrative
expenses totaled $6,906,606 in 2021, with Salaries and Benefits expenses of $3,473,661 representing the majority. Salaries and Benefits
expenses increased throughout the year as the Company added employees necessary to support growing the business beyond 2021, and a goodwill
impairment loss of $1,524,030 on our prior year acquisition of S-FDF, LLC.
Our stock-based compensation
of $1,377,379 consisted of $814,047 of stock issued to officers and directors, $20,000 of stock issued to employees and consultants, and
$543,332 of expense related to the amortization of stock options.
Application of Critical Accounting Policies
Our discussion and analysis
of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to impairment of property,
plant and equipment, intangible assets, deferred tax assets and fair value computation using the Black Scholes option pricing model. We
base our estimates on historical experience and on various other assumptions, such as the trading value of our common stock and estimated
future undiscounted cash flows, that we believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions. We believe that our estimates, including those for the above-described
items, are reasonable.
Critical Accounting Policies
The establishment and consistent
application of accounting policies is a vital component of accurately and fairly presenting our financial statements in accordance with
generally accepted accounting principles in the United States (GAAP), as well as ensuring compliance with applicable laws and regulations
governing financial reporting. While there are rarely alternative methods or rules from which to select in establishing accounting and
financial reporting policies, proper application often involves significant judgment regarding a given set of facts and circumstances
and a complex series of decisions.
Cash in Excess of FDIC Insured Limits
The Company maintains its
cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are guaranteed by the Federal Deposit Insurance
Corporation (FDIC) and the Securities Investor Protection Corporation (SIPC) up to $250,000 and $500,000, respectively, under current
regulations. The Company had approximately $2,813,000 and $1,311,000 in excess of FDIC and SIPC insured limits at December 31, 2021 and
2020, respectively. The Company has not experienced any losses in such accounts.
Property and Equipment
Property and equipment are
stated at the lower of cost or estimated net recoverable amount. The cost of property, plant and equipment is depreciated using the straight-line
method based on the lesser of the estimated useful lives of the assets or the lease term based on the following life expectancy:
Software 3 years, or over the life of the agreement
Website 3 years
Office equipment 5 years
Furniture and fixtures 5 years
Machinery and equipment 7-10 years
Leasehold improvements Fully extended lease-term
Repairs and maintenance expenditures
are charged to operations as incurred. Major improvements and replacements, which extend the useful life of an asset, are capitalized
and depreciated over the remaining estimated useful life of the asset. When assets are retired or sold, the cost and related accumulated
depreciation and amortization are eliminated and any resulting gain or loss is reflected in operations. Depreciation expense was $208,448
and $3,642 for the years ended December 31, 2021 and 2020, respectively.
Impairment
of Long-Lived Assets
Long-lived assets held and
used by the Company are reviewed for possible impairment whenever events or circumstances indicate the carrying amount of an asset may
not be recoverable or is impaired. Recoverability is assessed using undiscounted cash flows based upon historical results and current
projections of earnings before interest and taxes. Impairment is measured using discounted cash flows of future operating results based
upon a rate that corresponds to the cost of capital. Impairments are recognized in operating results to the extent that carrying value
exceeds discounted cash flows of future operations.
Our intellectual property
is comprised of indefinite-lived brand names acquired and have been assigned an indefinite life as we currently anticipate that these
brand names will contribute cash flows to the Company perpetually. We evaluate the recoverability of intangible assets periodically by
taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.
Inventory
Inventory, consisting of raw
materials, material overhead, labor, and manufacturing overhead, are stated at the average cost or net realizable value and consist of
the following:
December 31, December 31,
Packaging materials 95,436 –
No reserve for obsolete inventories
has been recognized. We have not yet commenced significant production.
Goodwill
The Company evaluates goodwill
on an annual basis in the fourth quarter or more frequently if management believes indicators of impairment exist. Such indicators could
include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition,
or (3) an adverse action or assessment by a regulator. The Company first assesses qualitative factors to determine whether it is more
likely than not that the fair value of a reporting unit is less than its carrying amount, management conducts a quantitative goodwill
impairment test. The impairment test involves comparing the fair value of the applicable reporting unit with its carrying value. The Company
estimates the fair values of its reporting units using a combination of the income, or discounted cash flows, approach and the market
approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds the reporting unit’s
fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that
reporting unit. The Company’s evaluation of goodwill completed during the year resulted in an impairment loss of $1,524,030 for
the year ended December 31, 2021.
Revenue Recognition
The Company recognizes revenue
in accordance with ASC 606 — Revenue from Contracts with Customers (“ASC” 606”). Under ASC 606, the Company
recognizes revenue from the sale of its freeze-dried food products, in accordance with a five-step
model in which the Company evaluates the transfer of promised goods or services and recognizes revenue when customers obtain control of
promised goods or services in an amount that reflects the consideration which the Company expects to be entitled to receive in exchange
for those goods or services. To determine revenue recognition for the arrangements that the Company determines are within the scope of
ASC 606, the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance
obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations
in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company has elected, as
a practical expedient, to account for the shipping and handling as fulfillment costs, rather than as a separate performance obligation.
Revenue is reported net of applicable provisions for discounts, returns and allowances. Methodologies for determining these provisions
are dependent on customer pricing and promotional practices. The Company records reductions to revenue for estimated product returns and
pricing adjustments in the same period that the related revenue is recorded. These estimates are based on industry-based historical data,
historical sales returns, if any, analysis of credit memo data, and other factors known at the time.
Stock-Based Compensation
The Company accounts for equity
instruments issued to employees in accordance with the provisions of ASC 718 Stock Compensation (ASC 718) and Equity-Based Payments to
Non-employees pursuant to ASC 2018-07 (ASC 2018-07). All transactions in which the consideration provided in exchange for the purchase
of goods or services consists of the issuance of equity instruments are accounted for based on the fair value of the consideration received
or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the
equity instrument issued is the earlier of the date on which the counterparty’s performance is complete or the date at which a commitment
for performance by the counterparty to earn the equity instruments is reached because of sufficiently large disincentives for nonperformance.
Stock-based compensation was $1,377,379 and $726,656 for the years ended December 31, 2021 and 2020, respectively. Stock-based
compensation consisted of $834,047 and $268,608 related to the issuance of shares of common stock for services for the years ended December 31, 2021
and 2020, respectively. Amortization of the fair values of stock options issued for services and compensation totaled $543,332 and
$458,048 for the years ended December 31, 2021 and 2020, respectively. The fair values of stock options were determined
using the Black-Scholes options pricing model and an effective term of 6 to 6.5 years based on the weighted average of the vesting periods
and the stated term of the option grants and the discount rate on 5 to 7 year U.S. Treasury securities at the grant date and are being
amortized over the related implied service term, or vesting period. In addition, $377,440 of expenses related to the amortization of warrants
issued in consideration of personal guarantees provided for debt financing, using the Black-Scholes options pricing model and an effective
term of 5 years based on the weighted average of the vesting periods and the stated term of the warrant grants and the discount rate on
5 year U.S. Treasury securities at the grant date were recognized as interest expense for the year ended December 31, 2020.
Results of Operations for the Years Ended December
31, 2021 and 2020.
The following table summarizes
selected items from the statement of operations for the years ended December 31, 2021 and 2020.
Years Ended December 31, Increase/
Operating expenses:
General and administrative:
Other income:
Loss on disposal of property and equipment (8,036 ) (5,369 ) 2,667
Revenues
Revenues commenced during
the year ended December 31, 2021, which were generated by online sales of our freeze-dried foods products. The revenues were $88,440 for
the year ended December 31, 2021. The Company did not earn any revenues during the comparative year ended December 31, 2020. We anticipate
increased revenues during 2022, although there can be no assurance regarding the amount of such increased revenues.
Cost of Goods Sold
Cost of goods sold for the
year ended December 31, 2021 were $81,311, primarily consisting of material costs and labor on the sales of freeze-dried food products,
resulting in a gross profit of approximately 8% during the period. The Company did not have any cost of goods sold during the comparative
year ended December 31, 2020.
General and Administrative Expenses
Salaries and Benefits
Salaries and benefits for
the year ended December 31, 2021 were $3,473,661, compared to $2,203,780 for the year ended December 31, 2020, an increase of $1,269,881,
or 58%. Salaries and benefits included stock-based compensation expense of $1,377,379 for the year ended December 31, 2021, compared
to $726,656 for the year ended December 31, 2020, an increase of $650,723, or 90%. Stock-based compensation consists of $543,332
and $458,048 of stock options expense incurred in the years ended December 31, 2021 and 2020, respectively, and $834,047 and $268,608
of expense related to shares of common stock issued to officers and consultants for services rendered in the years ended December 31,
2021 and 2020, respectively. The increase in salaries and benefits was primarily due to increased operations as we developed our freeze-dried
food operations and stock-based compensation, as management accepted stock-based compensation in lieu of cash.
Professional Services
General and administrative
expenses related to professional services were $357,945 for the 2021 period, compared to $451,125 for the 2020 period, a decrease of $93,180,
or 21%. The decrease was primarily due to decreased legal costs that were not necessary in the current year, compared to those incurred
on our asset purchase agreement with S-FDF, LLC in the prior year.
Other General and Administrative Expenses
Other general and administrative
expenses for the year ended December 31, 2021 were $1,550,970, compared to $350,875 for the year ended December 31, 2020, an increase
of $1,200,095, or 342%. The increase is primarily attributable to increased administrative infrastructure as we seek to scale the production
and sales of our freeze-dried products.
Goodwill Impairment
Goodwill impairment expense
for the year ended December 31, 2021 was $1,524,030, compared to $-0- for the year ended December 31, 2020. In 2021, the Company
recognized a $1,524,030 loss on impairment of goodwill related to our prior year acquisition of S-FDF, LLC.
Depreciation
Depreciation expense for the
year ended December 31, 2021 was $208,448, compared to $3,642 for year ended December 31, 2020. The increase is attributable to the
significant increase in capital expenditures incurred as we developed our freeze-dried foods production facility and placed it into service.
Other Income (Expense)
In the year ended December
31, 2021, other income was $233,769, consisting of a gain on early extinguishment of debt of $113,772 related to forgiveness of our PPP
loan and a net gain on investments in Allied Esports Entertainment, Inc. securities of $133,944, as offset by $5,911 of interest expense
derived from operating loans, and a loss on the disposal of equipment of $8,036.
In the year ended December
31, 2020, other expense was $2,311,517, consisting of $386,164 of interest expense derived from operating loans, including $377,440 of
warrants issued as consideration to officers and directors in exchange for their personal guarantees, a loss on the disposal of equipment
of $5,369, and a net loss on investments in Allied Esports Entertainment, Inc. securities of $1,925,029, as offset by a $5,000 grant from
the Small Business Administration under their EIDL program and $45 of interest income.
Provision for Income Taxes
The Company had no income
tax expense in the 2021 or 2020 periods, as the Company continues to reserve against any deferred tax assets due to the uncertainty of
realization of any benefit.
Net Loss
Net loss for the year ended
December 31, 2021 was $6,874,156, compared to $5,320,939 during the year ended December 31, 2020, an increase of $1,553,217, or 29%.
The increased net loss was primarily due to our loss on impairment of goodwill related to our prior year acquisition of S-FDF, LLC.
Liquidity and Capital Resources
The following table summarizes
our total current assets, liabilities and working capital at December 31, 2021 and 2020.
December 31,
As of December 31, 2021, we had working capital
of $4,488,207.
The following table summarizes
our cash flows during the years ended December 31, 2021 and 2020, respectively.
Years Ended December 31,
Net cash provided by (used in) investing activities (653,051 ) 3,284,457
Net cash used in operating
activities was $5,551,261 and $1,743,409 for the years ended December 31, 2021 and 2020, respectively, a year over year
increased use of $3,807,852. The increased use was primarily due to an increased net loss of $1,553,217. Changes in working capital from
continuing operating activities resulted in a decrease in cash of $1,547,282 during the year ended December 31, 2021, as compared
to an increase in cash of $340,735 for the same period in the previous year.
Net cash used in investing
activities was $653,051 for the year ended December 31, 2021, compared to $3,284,457 of net cash provided by investing activities
for the year ended December 31, 2020. During the year ended December 31, 2021, cash used in investing activities consisted of
$982,818 paid for the purchase of property and equipment and $84,594 paid for the purchase of intangible assets, as offset by $414,361
of proceeds received from the sale of AESE securities. During the year ended December 31, 2020, cash provided by investing activities
consisted of $1,154,459 of cash received pursuant to our business combination with S-FDF, LLC, and $3,181,735 of proceeds received from
the sale of AESE securities, as offset by $257,626 of equipment purchases and $794,111 paid on construction projects still in progress.
Net cash provided by financing
activities was $7,637,511 and $262,925 for the years ended December 31, 2021 and 2020, respectively. Net cash provided
by financing activities consisted of $2,075,000 of proceeds received from related party debt financing, and $5,562,511 we raised from
the sale of an aggregate 631,250 shares of the Company’s common stock at $4.00 per share, and the sale of an aggregate 714,701 shares
sold at $4.25 per share, during the year ended December 31, 2021. Net cash provided by financing activities consisted of $802,025
of proceeds received from debt financing, including $112,925 of proceeds received under the Paycheck Protection Program (“PPP”)
that were forgiven in January of 2021, as offset by $539,100 of debt repayments for the year ended December 31, 2020.
Satisfaction of our cash obligations for
the next 12 months
As of December 31, 2021,
our balance of cash and cash equivalents was $3,345,928 and we had total working capital of $4,488,207. 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.
We continue to pursue sources
of additional capital through various financing transactions or arrangements, equity or debt financing or other means. 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.
We may not be successful in
identifying suitable funding 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 or expand our business.
Effects of inflation and pricing
We expect supplies and prices
of the ingredients that we are going to use to be affected by a variety of factors, such as weather, seasonal fluctuations, demand, politics
and economics in the producing countries.
These factors subject us to