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”.
The Company produces
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. We have also recently launched a freeze-dried candy product offering that
we expect will be a major driver of our growth going forward.
In 2022, we commenced
the construction of our second and third freeze driers in anticipation of the increased production demands for our products and freeze-drying
expertise. We expect to place these additional freeze driers in service during the second quarter of 2023.
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. 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, 2022, the
Company had a cash balance of $276,464 and total working capital of $1,687,880. 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 2022 results
We earned $428,132 of revenue
in 2022, as we began to ramp up our direct-to-consumer website for our Sow Good brand and began to provide products to big box retailers.
Our general and administrative
expenses totaled $10,731,281 in 2022, including salaries and benefits expenses of $3,662,313 and goodwill and intangible asset impairment
losses of $5,197,470, including $4,887,297 of losses on our 2020 acquisition of S-FDF, LLC. Salaries and benefits and other general expenses
increased slightly throughout the year due to inflationary pressures.
Our stock-based compensation
of $862,079 consisted of $49,998 of stock issued to officers and directors, $30,000 of stock issued to employees and consultants, and
$782,081 of expense related to the amortization of stock options for the year ended December 31, 2022.
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 didn’t have any cash in excess of FDIC and SIPC insured limits at December 31, 2022. The Company had approximately
$2,813,000 in excess of FDIC and SIPC insured limits at December 31, 2021. 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 $299,553,
including $25,500 capitalized as inventory overhead and expensed to cost of goods sold, and $208,448 for the years ended December 31, 2022
and 2021, 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. Impairment analysis on intangible assets resulted in a loss of $310,173 for
the year ended December 31, 2022.
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,
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 at year-end resulted in an impairment loss of $4,887,297 and $1,524,030
for the years ended December 31, 2022 and 2021, respectively.
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 $862,079 and $1,377,379 for the years ended December 31, 2022 and 2021, respectively. Stock-based
compensation consisted of $79,998 and $834,047 related to the issuance of shares of common stock for services for the years ended December 31, 2022
and 2021, respectively. Amortization of the fair values of stock options issued for services and compensation totaled $782,081 and
$543,332 for the years ended December 31, 2022 and 2021, 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, $925,839 of expenses related to the amortization of warrants
issued in consideration 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, 2022.
Results of Operations for the Years Ended December
31, 2022 and 2021.
The following table summarizes
selected items from the statement of operations for the years ended December 31, 2022 and 2021.
Years Ended December 31, Increase/
Operating expenses:
General and administrative:
Other income (expense):
Gain (loss) on disposal of property and equipment 36,392 (8,036 ) 44,428
Revenues
Revenues for the year ended
December 31, 2022 were $428,132, compared to $88,440 for the year ended December 31, 2021, an increase of $339,692, or 384%. Revenues
increased as we ramped up sales on our product lines and expanded our business-to-business sales during 2022, compared to the same period
in the prior year. We had minimal revenues during the comparative period, as we had commenced sales midway through 2021.
Cost of Goods Sold
Cost of goods sold for the
year ended December 31, 2022 were $308,293, compared to $81,311 for the year ended December 31, 2021, an increase of $226,982,
or 279%. Cost of goods sold, primarily consisted of material costs and labor on the sales of freeze-dried food products, resulted in a
gross profit of approximately 28% and 8% during the year ended December 31, 2022, compared to the year ended December 31, 2021.
Cost of goods sold and our gross profit increased as we began to realize economies of scale pursuant to our increased sales.
General and Administrative Expenses
Salaries and Benefits
Salaries and benefits for
the year ended December 31, 2022 were $3,662,313, compared to $3,473,661 for the year ended December 31, 2021, an increase of $188,652,
or 5%. Salaries and benefits included stock-based compensation expense of $862,079 for the year ended December 31, 2022, compared
to $1,377,379 for the year ended December 31, 2021, a decrease of $515,300, or 37%. Stock-based compensation consists of $782,081
and $543,332 of stock options expense incurred in the years ended December 31, 2022 and 2021, respectively, and $79,998 and $834,047
of expense related to shares of common stock issued to officers and consultants for services rendered in the years ended December 31,
2022 and 2021, respectively. The increase in salaries and benefits was primarily due to inflationary pressures, as diminished by decreased
stock-based compensation awards.
Professional Services
General and administrative
expenses related to professional services were $245,546 for the 2022 period, compared to $357,945 for the 2021 period, a decrease of $112,399,
or 31%. The decrease was primarily due to decreased legal fees incurred in connection with creating our brand in the comparative period
that were not necessary in the current period.
Other General and Administrative Expenses
Other general and administrative
expenses for the year ended December 31, 2022 were $1,625,952, compared to $1,550,970 for the year ended December 31, 2021, an increase
of $74,982, or 5%. The increase is primarily attributable to increased administrative infrastructure as we seek to scale the production
and sales of our freeze-dried products.
Intangible Asset Impairment
Intangible asset impairment
losses of $310,173, for the year ended December 31, 2022, related to impairment of our licensing and trademark assets, as our sales
have not ramped up quickly enough to support the carrying value.
Goodwill Impairment
Goodwill impairment losses
related to our 2020 acquisition of S-FDF, LLC was $4,887,297 and $1,524,030 for the years ended December 31, 2022 and 2021.
Depreciation
Depreciation expense for the
year ended December 31, 2022 was $274,053, compared to $208,448 for year ended December 31, 2021, an increase of $65,605 or 31%.
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, 2022, other expense was $1,241,573, consisting of $1,277,965 of interest expense derived from operating loans, as offset by a gain
on the disposal of equipment of $36,392.
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.
Provision for Income Taxes
The Company had no income
tax expense in the 2022 or 2021 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, 2022 was $12,127,068, compared to $6,874,156 during the year ended December 31, 2021, an increase of $5,252,912, or
76%. The increased net loss was primarily due to our loss on impairment of intangible assets and goodwill related to our 2022 acquisition
of S-FDF, LLC.
Liquidity and Capital Resources
The following table summarizes
our total current assets, liabilities and working capital at December 31, 2022 and 2021.
December 31,
As of December 31, 2022, we had working capital
of $1,687,880.
The following table summarizes
our cash flows during the years ended December 31, 2022 and 2021, respectively.
Years Ended December 31,
Net cash provided by (used in) investing activities (2,622,829 ) (653,051 )
Net cash used in operating
activities was $5,146,635 and $5,551,261 for the years ended December 31, 2022 and 2021, respectively, a year over year
decreased use of $404,626. The decreased use was primarily due to increased revenues. Changes in working capital from continuing operating
activities resulted in a decrease in cash of $2,800,327 during the year ended December 31, 2022, as compared to $1,547,282 for the
same period in the previous year.
Net cash used in investing
activities was $2,622,829 for the year ended December 31, 2022, compared to $653,051 for the year ended December 31, 2021,
a year over year increased use of $1,969,778. During the year ended December 31, 2022, cash used in investing activities consisted of
$193,184 paid for the purchase of property and equipment, $2,487,673 of payments for the construction of the Company’s second and
third freeze dryers and expansion of its operations facility, as well as, $5,929 paid for the purchase of intangible assets, as offset
by $63,957 of proceeds received from the disposal of property and equipment. 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.
Net cash provided by financing
activities was $4,700,000 and $7,637,511 for the years ended December 31, 2022 and 2021, respectively. Net cash provided
by financing activities the year ended December 31, 2022 consisted of $4,700,000 of proceeds received from debt financing, including
$4,120,000 received from related parties. 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.
Satisfaction of our cash obligations for
the next 12 months
As of December 31, 2022,
our balance of cash and cash equivalents was $276,464 and we had total working capital of $1,687,880. 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
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, we may face limits on the ability to source some of the candy for our freeze-dried candy products.
Contractual obligations and commitments
Upon closing of the Asset
Purchase Agreement, the Company assumed the Seller’s obligations under a real property lease for its 20,945 square foot facility
at 1440 N. Union Bower Rd. Irving, TX 75061, under which an entity owned entirely by Ira Goldfarb is the landlord. The lease term is through
September 15, 2025, with two five-year options to extend, at a monthly lease term of $10,036, with approximately a 3% annual escalation
of lease payments commencing September 15, 2021.
Summary of product and research and development
that we will perform for the term of our plan
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.
Off-Balance Sheet Arrangements
We do not have any off-balance
sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues, expenses,
results of operations liquidity, capital expenditures or capital resources that are material to investors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Commodity Price Risk
We do not expect any significant
effects from commodity price risk outside of inherent inflationary risks.
Interest Rate Risk
We do not anticipate entering
into any transactions that would expose us to any direct interest rate risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA OF SOW GOOD INC.
SOW GOOD INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
CONTENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID 2738) F-1
Statements of Operations for the years ended December 31, 2022 and 2021 F-4
Statements of Cash Flows for the years ended December 31, 2022 and 2021 F-6
Notes to the Financial Statements F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and
Stockholders of SOW GOOD INC.
Opinion on the Financial Statements
We have audited the accompanying balance sheets
of SOW GOOD INC. (the Company) as of December 31, 2022 and 2021, and the related statements of operations, stockholders’ equity,
and cash flows for the two-year period then ended, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December
31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has
suffered net losses from operations, which raises substantial doubt about its ability to continue as a going concern. Management’s
plans regarding those matters are discussed in Note 3. The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and the significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is
a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the
audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinion on
the critical audit matter or on the accounts or disclosures to which they relate.
As discussed in Note 1 to the
financial statements, the Company issues stock-based compensation in accordance with ASC 718, Compensation.
Auditing management’s calculation
of the fair value of stock-based compensation can be a significant judgment given the fact that the Company uses management estimates
on various inputs to the calculation.
To evaluate the appropriateness
of the fair value determined by management, we examined and evaluated the inputs management used in calculating the fair value of the
stock-based compensation.
/s/ M&K CPAS, PLLC
M&K CPAS, PLLC
We have served as the Company’s auditor since 2010.
Houston, TX
SOW GOOD INC.
BALANCE SHEETS
December 31, December 31,
ASSETS
Current assets:
Property and equipment:
Construction in progress 2,487,673 –
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of operating lease liabilities 52,543 45,970
Commitments and contingencies – –
Stockholders' equity:
The accompanying notes are an integral part of these financial statements.
SOW GOOD INC.
STATEMENTS OF OPERATIONS
For the Years
Ended December 31,
Operating expenses:
General and administrative expenses:
Intangible asset impairment 310,173 –
Other income (expense):
Gain (loss) on disposal of property and equipment 36,392 (8,036 )
Gain on early extinguishment of debt – 113,772
Gain on investment in Allied Esports Entertainment, Inc. – 133,944
Net loss per common share - basic and diluted $ (2.51 ) $ (1.61 )
The accompanying notes are an integral part of these financial statements.
SOW GOOD INC.
STATEMENT OF STOCKHOLDERS' EQUITY
Additional Common Total
Common Stock Paid-in Stock Accumulated Stockholders'
Shares Amount Capital Payable Deficit Equity
Common stock options granted to employees for services – – 45,305 – – 45,305
The accompanying notes are an integral part of these financial statements.
SOW GOOD INC.
STATEMENTS OF CASH FLOWS
For the Years
Ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debts expense 4,404 –
(Gain) loss on disposal of property and equipment (36,392 ) 8,036
Loss on impairment of intangible assets 310,173 –
Gain on investment in Allied Esports Entertainment, Inc. – (133,944 )
Gain on early extinguishment of debt – (113,772 )
Common stock issued to officers and directors for services 49,998 814,047
Common stock awarded to advisors and consultants for services 30,000 20,000
Amortization of stock warrants issued as a debt discount 925,839 –
Decrease (increase) in current assets:
Security deposits (14,000 ) –
Increase (decrease) in current liabilities:
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received from disposal of property and equipment 63,957 –
Cash paid for construction in progress (2,487,673 ) –
Cash paid for intangible assets (5,929 ) (84,594 )
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds received from notes payable, related parties 4,120,000 2,075,000
Proceeds received from notes payable 580,000 –
Proceeds received from the sale of common stock – 5,562,511
SUPPLEMENTAL INFORMATION:
Income taxes paid $ – $ –
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Value of debt discounts attributable to warrants $ 3,255,468 $ 699,213
The accompanying notes are an integral part of these financial statements.
SOW GOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
Note 1 – Organization and Nature of
Business
Effective January 21, 2021, we changed our name
from Black Ridge Oil & Gas, Inc. to Sow Good Inc. (“SOWG,” “Sow Good,” or the “Company”) to pursue
the freeze-dried fruits and vegetables business as acquired with our October 1, 2020 acquisition of S-FDF, LLC. Our common stock is traded
on the OTCQB under the trading symbol “SOWG”. At that time, our
common stock started to be quoted on the OTCQB under the trading symbol “SOWG”, from the former trading symbol “ANFC”.
Prior to April 2, 2012, the Company name was Ante5, Inc., which became an independent company in April 2010. We became a publicly traded
company when our shares began trading on July 1, 2010. From October 2010 through August 2019, we had been engaged in the business
of acquiring oil and gas leases and participating in the drilling of wells in the Bakken and Three Forks trends in North Dakota and Montana
and /or managing similar assets for third parties.
On September 26, 2017, the Company finalized an
equity raise utilizing a rights offering and backstop agreement, raising net proceeds of $5,051,675 and issuing 1,439,400 shares. The
proceeds were used to sponsor a special purpose acquisition company, discussed below, with the remainder for general corporate purposes.
On October 10, 2017, the Company’s sponsored
special purpose acquisition company, Black Ridge Acquisition Corp. (“BRAC”), completed an IPO raising $138,000,000 of gross
proceeds (including proceeds from the exercise of an over-allotment option by the underwriters on October 18, 2017). In addition, the
Company purchased 445,000 BRAC units at $10.00 per unit in a private placement transaction for a total contribution of $4,450,000 in order
to fulfill its obligations in sponsoring BRAC, a blank check company formed for the purpose of entering into a merger, share exchange,
asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination with one or more businesses
or entities. BRAC’s efforts to identify a prospective target business were not limited to a particular industry or geographic region.
Following the IPO and over-allotment, BROG owned 22% of the outstanding common stock of BRAC and managed BRAC’s operations via a
management services agreement. On December 19, 2018, BRAC entered into a business combination agreement, which subsequently closed on
August 9, 2019.
On October 1, 2020, the
Company completed its acquisition of S-FDF, LLC pursuant to an Asset Purchase Agreement. 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.
On February 5, 2021,
the Company raised over $2.5 million of capital from the sale of 631,250 newly issued shares at a share price of $4.00 in a private placement.
The proceeds were used to find capital expenditures and working capital investment.
On May 5, 2021, the Company
announced the launch of our direct-to-consumer freeze-dried consumer packaged goods (CPG) food brand, Sow Good. Sow Good launched with
its first line of non-GMO products including 6 ready-to-make smoothies and 9 snacks.
On July 7, 2021, the
Company raised over $3 million of capital from the sale of 714,701 newly issued shares at a share price of $4.25 in a private placement.
Investors in the private placement included Sow Good’s Chief Executive Officer, Executive Chairman, and Chief Financial Officer,
in addition to other Sow Good board members and a small group of accredited investors. The proceeds are being used to invest in inventory
ahead of pursuing larger business-to-business relationships, as well as funding incremental capital expenditures and general operating
expenses.
On July 23, 2021, we
launched six new gluten-free granola products under the Sow Good brand. Sow Good’s granola products are made with health-conscious
ingredients such as freeze-dried fruit, almonds, hemp hearts, and coconut oil. Granola products are initially being sold direct-to-consumer
and will later be targeted to the business-to-business segment.
SOW GOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
On December 31, 2021,
we sold an aggregate $2,075,000 of promissory notes and warrants to purchase an aggregate 311,250 shares of common stock to related parties,
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 proceeds will be used for working capital investment and to ramp up our freeze-dried consumer packaged goods business.
On
April 8, 2022, we sold an aggregate $3,700,000 of promissory notes and warrants to purchase an aggregate 925,000 shares of common
stock, including $3,120,000 and warrants to purchase an aggregate 780,000 shares of common stock, to related parties.
The warrants are exercisable at a price of $2.35 per share over a ten-year term. These proceeds were used for working capital investment
and to ramp up our freeze dried consumer packaged goods business.
On August 23, 2022, we
closed on an offering to sell up to $2,500,000 of promissory notes and warrants to purchase an aggregate 625,000 shares of the Company’s
common stock, exercisable over a ten-year period at a price of $2.60 per share, representing 25,000 warrant shares per $100,000 of Notes
purchased. The notes mature on August 23, 2025. Interest on the notes accrue at a rate of 8% per annum, payable on January 1, 2025.
Loans may be advanced to the Company from time to time from August 23, 2023 to the Maturity Date. On December 21, 2022 and September 29,
2022, the Company received aggregate proceeds of $250,000 and $750,000 from two of the Company’s Directors on the sale of these
notes and warrants.
Note 2 – Summary
of Significant Accounting Policies
Basis of Accounting
The accompanying financial statements have been
prepared in conformity with accounting principles generally accepted in the United States of America and the rules of the Securities and
Exchange Commission (SEC). All references to Generally Accepted Accounting Principles (“GAAP”) are in accordance with The
FASB Accounting Standards Codification (“ASC”) and the Hierarchy of Generally Accepted Accounting Principles.
Segment Reporting
FASB ASC 280-10-50 requires annual and interim
reporting for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major
customers. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn
revenues and expenses, and about which separate financial information is regularly evaluated by the chief operating decision maker in
deciding how to allocate resources. The Company operates as a single segment and will evaluate additional segment disclosure requirements
as it expands its operations.
Use
of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Environmental Liabilities
The Company was formerly a direct owner of assets
in the oil and gas industry. The oil and gas industry is subject, by its nature, to environmental hazards and clean-up costs. At this
time, management knows of no substantial losses from environmental accidents or events which would have a material effect on the Company.
SOW GOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
Fair Value of Financial Instruments
Under FASB ASC 820-10-05, the Financial Accounting
Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about
fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard
did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of cash, accounts
receivable, prepaid expenses, inventory, accounts payable and accrued expenses reported on the balance sheets are estimated by management
to approximate fair value primarily due to the short-term nature of the instruments. The Company had no items
that required fair value measurement on a recurring basis.
Cash and Cash Equivalents
Cash equivalents include money market accounts
which have maturities of three months or less. For the purpose of the statements of cash flows, all highly liquid investments with an
original maturity of three months or less are considered to be cash equivalents. Cash equivalents are stated at cost plus accrued interest,
which approximates market value. There were no cash equivalents on hand at December 31, 2022 and 2021.
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
didn’t have any cash in excess of FDIC and SIPC insured limits at December 31, 2022. The Company had approximately $2,813,000 in
excess of FDIC and SIPC insured limits at December 31, 2021. The Company has not experienced any losses in such accounts.
Accounts Receivable
Accounts receivable are carried at their estimated
collectible amounts. Trade accounts receivable are periodically evaluated for collectability based on past credit history with customers
and their current financial condition. The Company had no allowance for doubtful accounts for either of the periods presented, as all
accounts receivable had been subsequently collected.
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:
Schedule of estimated useful lives of assets
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 $299,553, including
$25,500 capitalized as inventory overhead and expensed to cost of goods sold, and $208,448 for the years ended December 31, 2022
and 2021, respectively.
SOW GOOD INC.
NOTES TO THE FINANCIAL STATEMENTS
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.
Impairment analysis on intangible assets resulted in a loss of $310,173 for the year ended December 31, 2022.
Inventory