Sow Good Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OF SOW GOOD INC. SOW GOOD INC. FINANCIAL STATEMENTS FOR THE YEARS ENDED December 31, 2023 and 2022 CONTENTS Report of Independent Registered Public Accounting Firm (PCAOB ID 1013 ) F-1 Balance Sheets as of December 31, 2023 and 2022 F-3 Statements of Operations for the years ended December 31, 2023 and 2022 F-4 Statement of Stockholders ’ Equity for the years ended December 31, 2023 and 2022 F-5 Statements of Cash Flows for the years ended December 31, 2023 and 2022 F-6 Notes to the Financial Statements F-7 50 Table of Contents Report of Independent Registered Public Accounting Firm Stockholders and Board of Directors Sow Good, Inc. Irving, TX Opinion on the Financial Statements We have audited the accompanying balance sheet of SOW Good, Inc. (“the Company”) as of December 31, 2023, the related statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2023, 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 at December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. 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 audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit 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 audit, 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 audit 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 audit also includes evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was 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 the critical audit matter 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 it relates. Stock Based Compensation — Measurement of fair value of stock options with market and performance conditions — Refer to Notes 2 and 13 to the Financial Statements Critical Audit Matter Description As described in Notes 2 and 13 to the financial statements, the Company granted certain stock-based awards that will vest based on various service conditions and certain stock-based awards that will vest based on the achievement of a market-based and performance-based goal. The Company estimated the fair value of stock awards using a Black-Scholes option pricing formula for service conditions and a Monte-Carlo simulation for market-based and performance-based goal. We identified the fair value measurement of the Company’s stock-based awards based on the achievement of a market-based and performance-based condition as a critical audit matter. Specifically, there was a high degree of subjective auditor judgment due to the complex valuation methodology used and assumption of the expected price volatility of the Company’s common stock. How the Critical Audit Matter Was Addressed in the Audit The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and understood the controls related to the valuation of stock-based awards based on the achievement of a market-based and performance-based condition process, including management’s method, use of a specialist, assumptions and data. We involved valuation professionals with specialized skill and knowledge who assisted in: ● evaluating the appropriateness of the valuation methodology utilized by the Company ● recalculated the volatility assumptions used in the model /s/ Urish Popeck & Co., LLC We have served as the Company's auditor since 2023. Pittsburgh, Pennsylvania March 22, 2024 F-1 Table of Contents 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 sheet of SOW GOOD INC. (the Company) as of December 31, 2022, and the related statements of operations, stockholders’ equity, and cash flows for year 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 the results of its operations and its cash flows for the year 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 that 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 served as the Company’s auditor from 2010 to 2023. Houston, TX April 14, 2023 F-2 Table of Contents SOW GOOD INC. BALANCE SHEETS December 31, December 31, 2023 2022 ASSETS Current assets: Cash and cash equivalents $ 2,410,037 $ 276,464 Accounts receivable, net 2,578,259 191,022 Inventory 4,123,246 1,874,949 Prepaid inventory 563,131 97,930 Prepaid expenses 563,164 137,692 Total current assets 10,237,837 2,578,057 Property and equipment: Construction in progress 1,522,465 2,487,673 Property and equipment 6,287,422 3,055,579 Less accumulated depreciation ( 967,602 ) ( 508,257 ) Total property and equipment, net 6,842,285 5,034,995 Security deposit 346,616 24,000 Right-of-use asset 4,061,820 1,261,525 Total assets $ 21,488,558 $ 8,898,577 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 853,535 $ 392,691 Accrued interest 860,693 226,575 Accrued expenses 648,947 218,368 Current portion of operating lease liabilities 550,941 52,543 Current maturities of notes payable, related parties, net of $ 431,854 and $ 0 of debt discounts at December 31, 2023 and 2022, respectively 2,543,146 - Current maturities of notes payable, net of $ 86,062 and $ 0 of debt discounts at December 31, 2023 and 2022, respectively 313,938 - Total current liabilities 5,771,200 890,177 Operating lease liabilities 3,671,729 1,301,355 Notes payable, related parties, net of $ 1,448,858 and $ 2,692,757 of debt discounts at December 31, 2023 and 2022, respectively 4,171,142 3,502,243 Notes payable, net of $ 135,962 and 336,082 of debt discounts at December 31, 2023 and 2022, respectively 594,038 393,915 Total liabilities 14,208,109 6,087,690 Commitments and contingencies Stockholders' equity: Preferred stock, $ 0.001 par value, 20,000,000 shares authorized, no shares issued and outstanding - - Common stock, $ 0.001 par value, 500,000,000 shares authorized, 6,029,371 and 4,847,384 shares issued and outstanding at December 31, 2023 and 2022, respectively 6,029 4,847 Additional paid-in capital 66,014,415 58,485,602 Accumulated deficit ( 58,739,995 ) ( 55,679,562 ) Total stockholders' equity 7,280,449 2,810,887 Total liabilities and stockholders' equity $ 21,488,558 $ 8,898,577 The accompanying notes are an integral part of these financial statements. F-3 Table of Contents SOW GOOD INC. STATEMENTS OF OPERATIONS For the Years Ended December 31, 2023 2022 Revenues $ 16,070,924 $ 428,132 Cost of goods sold 11,189,360 308,293 Gross profit 4,881,564 119,839 Operating expenses: General and administrative expenses: Salaries and benefits 3,391,798 3,662,313 Professional services 688,023 245,546 Other general and administrative expenses 1,854,156 1,625,952 Intangible asset impairment - 310,173 Goodwill impairment - 4,887,297 Total general and administrative expenses 5,933,977 10,731,281 Depreciation and amortization 168,271 274,053 Total operating expenses 6,102,248 11,005,334 Net operating loss ( 1,220,684 ) ( 10,885,495 ) Other income (expense): Interest expense, including $ 1,173,986 and $ 925,839 of warrants issued as a debt discount for the years ended December 31, 2023 and 2022, respectively ( 1,839,749 ) ( 1,277,965 ) Gain on disposal of property and equipment - 36,392 Total other expense ( 1,839,749 ) ( 1,241,573 ) Loss before income tax ( 3,060,433 ) ( 12,127,068 ) Provision (benefit) for income taxes - - Net loss $ ( 3,060,433 ) $ ( 12,127,068 ) Weighted average common shares outstanding - basic and diluted 5,168,339 4,835,389 Net loss per common share - basic and diluted $ ( 0.59 ) $ ( 2.51 ) The accompanying notes are an integral part of these financial statements. F-4 Table of Contents SOW GOOD INC. STATEMENT OF STOCKHOLDERS' EQUITY Additional Common Total Common Stock Paid-in Stock Accumulated Stockholders' Shares Amount Capital Payable Deficit Equity Balance, December 31, 2021 4,809,070 $ 4,809 $ 54,342,027 $ 26,066 $ ( 43,552,494 ) $ 10,820,408 Common stock issued to officers and directors for services 26,059 26 76,038 ( 26,066 ) - 49,998 Common stock issued to advisory panel for services 12,255 12 29,988 - - 30,000 Common stock options granted to officers and directors for services - - 645,127 - - 645,127 Common stock options granted to employees and advisors for services - - 136,954 - - 136,954 Common stock warrants granted to related parties pursuant to debt financing - - 2,811,138 - - 2,811,138 Common stock warrants granted to note holders pursuant to debt financing - - 444,330 - - 444,330 Net loss - - - - ( 12,127,068 ) ( 12,127,068 ) Balance, December 31, 2022 4,847,384 $ 4,847 58,485,602 - ( 55,679,562 ) 2,810,887 Common stock issued in private placement offering 1,161,288 1,161 6,444,687 - - 6,445,848 Common stock issued to officers and directors for services 20,699 21 125,209 - - 125,230 Common stock issued to advisory panel for services - - - - - - Common stock options granted to officers and directors for services - - 599,886 - - 599,886 Common stock options granted to employees and advisors for services - - 111,151 - - 111,151 Common stock warrants granted to related parties pursuant to debt financing - - 197,198 - - 197,198 Common stock warrants granted to note holders pursuant to debt financing - - 50,682 - - 50,682 Net loss - - - - ( 3,060,433 ) ( 3,060,433 ) Balance, December 31, 2023 6,029,371 $ 6,029 $ 66,014,415 $ - $ ( 58,739,995 ) $ 7,280,449 The accompanying notes are an integral part of these financial statements. F-5 Table of Contents SOW GOOD INC. STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ ( 3,060,433 ) $ ( 12,127,068 ) Adjustments to reconcile net loss to net cash used in operating activities: Bad debts expense - 4,404 Depreciation and amortization 459,345 299,553 Non-cash amortization of right-of-use asset and liability 68,477 21,594 Gain on disposal of property and equipment - ( 36,392 ) Inventory write-downs 1,398,888 - Impairment of intangible assets - 310,173 Impairment of goodwill - 4,887,297 Common stock issued to officers and directors for services 125,230 49,998 Common stock awarded to advisors and consultants for services - 30,000 Amortization of stock options 711,037 782,081 Amortization of stock warrants issued as a debt discount 1,173,986 925,839 Decrease (increase) in current assets: Accounts receivable ( 2,387,237 ) ( 183,044 ) Prepaid expenses ( 425,472 ) ( 56,635 ) Inventory ( 3,647,185 ) ( 520,982 ) Prepaid inventory ( 465,201 ) - Security deposits ( 322,616 ) ( 14,000 ) Increase (decrease) in current liabilities: Accounts payable 400,929 173,269 Accrued interest 634,118 - Accrued expenses 490,494 307,278 Net cash used in operating activities ( 4,845,640 ) ( 5,146,635 ) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds received from disposal of property and equipment - 63,957 Purchase of property and equipment ( 2,266,635 ) ( 193,184 ) Cash paid for construction in progress - ( 2,487,673 ) Cash paid for intangible assets - ( 5,929 ) Net cash used in investing activities ( 2,266,635 ) ( 2,622,829 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds received from the sale of common stock 6,445,848 - Proceeds received from notes payable, related parties 2,400,000 4,120,000 Proceeds received from notes payable 400,000 580,000 Net cash provided by financing activities 9,245,848 4,700,000 NET CHANGE IN CASH AND CASH EQUIVALENTS 2,133,573 ( 3,069,464 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 276,464 3,345,928 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,410,037 $ 276,464 SUPPLEMENTAL INFORMATION: Interest paid $ 30,017 $ 134,444 Income taxes paid $ - $ - NON-CASH INVESTING AND FINANCING ACTIVITIES: Reclassification of construction in progress to property and equipment $ 965,208 $ - Value of debt discounts attributable to warrants $ 247,880 $ 3,255,468 The accompanying notes are an integral part of these financial statements. F-6 Table of Contents 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. (business acquired with our October 1, 2020 acquisition of S-FDF, LLC) to Sow Good Inc. (“SOWG,” “Sow Good,” or the “Company”) to pursue the production of freeze dried fruits and vegetables, a business we later expanded to include freeze dried candy. At that time, our common stock began to be quoted on the OTCQB under the trading symbol “SOWG,” from the former trading symbol “ANFC.” Prior to April 2, 2012, Black Ridge Oil & Gas was known as Ante5, Inc., a publicly traded company since July 1, 2010. From October 2010 through August 2019, Ante5, Inc. and Black Ridge Oil & Gas, Inc. participated in the acquisition and development of oil and gas leases. 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 its first line of non-GMO products including six ready-to-make smoothies and nine snacks. On July 23, 2021, we launched six new gluten-free granola products under the Sow Good brand. In the first quarter of 2023, the Company launched a freeze dried candy product line, with a fourteen SKU offering as of December 31, 2023, that is projected to continue being a major driver of growth. After launching our freeze dried candy product line we discontinued our smoothie, snack and granola products. During the second quarter of 2023, we completed the construction of our second and third freeze driers and to facilitate the increased production demands for our recently launched candy products. The significant and rising demand for our freeze dried candy products has led us to add a fourth freeze drier in the first quarter of 2024 and begin construction of our fifth, and sixth freeze driers, which we expect to be completed in the third quarter of 2024. Note 2 – Summary of Significant Accounting Policies These financial statements are presented in accordance with United States generally accepted accounting principles (“GAAP”) and stated in US dollars, have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These statements reflect all adjustments, which in the opinion of management, are necessary for fair presentation of the information contained therein. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. 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. Reclassifications Certain amounts in the prior period financial statements have been reclassified to conform with the current period. 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. F- 7 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS Cash and Cash Equivalents Cash equivalents include money market accounts which have maturities of three months or less. Cash equivalents are stated at cost plus accrued interest, which approximates market value. 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 cash in excess of FDIC and SIPC insured limits of $ 1,837,840 at December 31, 2023 . The Company did not have cash in excess of FDIC and SIPC insured limits at December 31, 2022 . 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. Inventory Inventory is valued at the lower of average cost or net realizable value. The cost of substantially all of the Company’s inventory has been determined by the first -in, first -out (FIFO) method. 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 (years) 3 Office equipment (years) 5 Furniture and fixtures (years) 5 Machinery and equipment (years) 7 - 10 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 $ 459,345 and $ 299,553 including $ 291,074 and $ 25,500 which was allocated to cost of goods sold, for the years ended December 31, 2023 and 2022 , respectively. Construction in progress is stated at cost, which predominately relates to the cost of freezers and equipment not yet placed into service. No depreciation expense is recorded on construction-in-progress until such time as the relevant assets are completed and put into use. 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. The Company's intellectual property is comprised of indefinite-lived brand names acquired and have been assigned an indefinite life as the Company currently anticipate that these brand names will contribute cash flows to the Company perpetually. The Company evaluates 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 which represented a complete impairment of our intangible assets. As of December 31, 2023 and 2022, the carrying value of long-lived intangibles was $0. 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 for the year ended December 31, 2022 which represented a complete impairment of our goodwill. As of December 31, 2023 and 2022, the carrying value of goodwill was $0. F- 8 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS 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. For the years ended December 31, 2023 and 2022, shipping and handling costs of $ 129,412 and $ 59,756 , respectively, are included in cost of goods sold. 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. Customer Concentration For the year ended December 31, 2023 , one retail customer accounted for 43.3 % of our revenues and one food distributor accounted for 25.2 % of our revenues during the year ended December 31, 2023 . For the year ended December 31, 2022 two large retail customers accounted for 43.1 % and 42.5 % of our revenues and one large food distributor accounted for 12.9 % of our revenues. Our top five customers accounted for 83 % and 99 % of our revenues during the years ended December 31, 2023 and 2022 , respectively. Supplier Concentration For the year ended December 31, 2023 , two large candy suppliers accounted for 17 % and 10 % each of our purchases from vendors. The Company considers these vendors to be critical suppliers of candy for our freeze dried candy production. For the year ended December 31, 2022 no suppliers represented greater than 10% or more of our purchases from vendors. Basic and Diluted Earnings (Loss) Per Share The basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding. Diluted net income (loss) per common share is computed by dividing the net income (loss) adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the periods where potential dilutive securities would have an anti-dilutive effect and they were not included in the calculation of diluted net loss per common share. 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 – Compensation – Stock Compensation (“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 $ 836,267 and $ 888,107 for the years ended December 31, 2023 and 2022 , respectively. Stock-based compensation consisted of $ 125,230 and $ 106,026 related to the issuance of shares of common stock for services for the years ended December 31, 2023 and 2022 , respectively. Amortization of the fair values of stock options issued for services and compensation totaled $ 711,037 and $ 782,081 for the years ended December 31, 2023 and 2022 , respectively. The Company uses a Monte Carlo simulation to value its performance-based and market-based stock options. The fair values of service based stock options are determined using the Black-Scholes options pricing model and an effective term of 2.3 to 7.3 years based on either the weighted average of the vesting periods and the stated term of the option grants or as calculated under the options valuation model, 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. F- 9 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS Income Taxes The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not. Uncertain Tax Positions In accordance with ASC 740 – Income Taxes (“ASC 740” ), the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be capable of withstanding examination by the taxing authorities based on the technical merits of the position. These standards prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Various taxing authorities can periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. The Company has not yet undergone an examination by any taxing authorities. The assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions. Recent Accounting Pronouncements Recently Adopted Accounting Standards Financial Instruments – Credit Losses. The Financial Accounting Standards Board (“FASB”) issued five Accounting Standards Updates (“ASUs”) related to financial instruments – credit losses. The ASUs issued were: ( 1 ) in June 2016, ASU 2016 - 13, “Financial Instruments – Credit Losses (“ASC 326” ): Measurement of Credit Losses on Financial Instruments,” ( 2 ) in November 2018, ASU 2018 - 19, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses,” ( 3 ) in April 2019, ASU 2019 - 04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” ( 4 ) in May 2019, ASU 2019 - 05, “Financial Instruments – Credit Losses (Topic 326 ): Targeted Transition Relief” and ( 5 ) in November 2019, ASU 2019 - 11, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses.” Additionally, in February and March 2020, the FASB issued ASU 2020 - 02, “Financial Instruments—Credit Losses (Topic 326 ) and Leases (“ASC 842” ): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016 - 02, Leases (“ASC 842” ) and ASU 2020 - 03, “Codification Improvements to Financial Instruments,” respectively, which include amendments to ASC 326. ASU 2016 - 13 is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2018 - 19 clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leasing standard. ASU 2019 - 04 clarifies and improves areas of guidance related to the recently issued standards on financial instruments – credit losses, derivatives and hedging, and financial instruments. ASU 2019 - 05 provides entities that have certain instruments within the scope of ASC Subtopic 326 - 20, Financial Instruments—Credit Losses—Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825 - 10, Financial Instruments—Overall. ASU 2019 - 11 clarifies guidance around how to report expected recoveries among other narrow-scope and technical improvements. ASU 2020 - 02 adds a SEC paragraph pursuant to the 7 Table of Contents issuance of SEC Staff Accounting Bulletin No. 119 on loan losses to FASB Codification ASC 326 and updates the SEC section of the Codification for the change in the effective date of ASC 842. ASU 2020 - 03 makes narrow-scope improvements to various aspects of the financial instrument guidance as part of the FASB’s ongoing Codification improvement project aimed at clarifying specific areas of accounting guidance to help avoid unintended application. The Company adopted the applicable guidance in ASU 2016 - 13, ASU 2018 - 19, ASU 2019 - 04, ASU 2019 - 05, ASU 2019 - 11, ASU 2020 - 02 and ASU 2020 - 03 on January 1, 2023, and the adoption did not have a material impact on its consolidated financial statements and related disclosures. Our financial assets are limited to trade receivables. We estimate our reserve based on historical loss information. We believe that historical loss information is a reasonable base on which to determine expected credit losses for trade receivables held at the reporting date because the composition of the trade receivables at the reporting date is consistent with that used in developing the historical credit-loss percentages. However, the Company will continue to monitor and adjust the historical loss rates to reflect the effects of current conditions and forecasted changes. In November 2023, the FASB issued ASU 2023 - 07, Segment Reporting (Topic 280 ): Improvements to Reportable Segment Disclosure, to require a public entity to disclose significant segment expenses and other segment items on an annual and interim basis and to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. Public entities with a single reportable segment are required to provide the new disclosures and all the disclosures required under ASC 280. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, on a retrospective basis. Early adoption is permitted. The Company is currently evaluating the impact of adopting this new ASU on its interim and annual financial statements and related disclosures. In December 2023, the FASB issued ASU 2023 - 09, Income Taxes (Topic 740 ): Improvements to Income Tax Disclosures, to enhance the transparency and decision-usefulness of income tax disclosures, particularly in the rate reconciliation table and disclosures about income taxes paid. The ASU’s amendments are effective for annual periods beginning after December 15, 2024 on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of adopting this ASU on its financial statements and related disclosures. No other new accounting pronouncements, issued or effective during the year ended December 31, 2023 , have had or are expected to have a significant impact on the Company’s financial statements. F- 10 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS Note 3 – Going Concern In the prior reporting period, there was significant doubt regarding Sow Good's ability to continue as a going concern. This concern stemmed from our status as an early-stage development company, characterized by significant capital requirements and uncertain financial projections, largely due to a lack of historical sales data. The turnaround can be attributed to two successful capital raises that totaled $ 6,445,848 . These infusions of capital have significantly bolstered our financial stability and capacity for sustained operations. The Company has experienced excellent sales growth in the last two quarters, exceeding initial projections and establishing a more predictable revenue stream. This positive trend in sales performance is indicative of a growing market acceptance of our products/services and a clearer path to long-term viability. Based on these developments, management no longer has significant doubt about Sow Good's ability to continue as a going concern. The Company realized a net loss of $ 3,060,433 for the year ended December 31, 2023 compared to a net loss of $ 12,127,068 for the year ended December 31, 2022. As of December 31, 2023 , the Company had an accumulated retained deficit of $ 58,739,995 . As of December 31, 2023, the Company had $ 2,410,037 cash on hand, and working capital of $ 4,466,637 , compared to $ 276,464 of cash on hand and $ 1,687,880 working capital as of December 31, 2022. As a result of the capital infusion during the year ended December 31, 2023 , improved results, and improved cash and working capital at year end, the Company will be able to meet obligations as they become due for the twelve -month period following the filing of this report, and the Company believes any doubts existing in prior periods have been substantially alleviated. The financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern. The financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern. F- 11 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS Note 4 – Related Party Common Stock Sold for Cash On November 20, 2023, the Company entered into a Stock Purchase Agreement with multiple accredited investors to sell and issue to the purchasers, thereunder, an aggregate of 426,288 shares of the Company’s common stock at a price of $ 6.50 per share, resulting in total proceeds received of $ 2,770,872 . The stock sales included purchases by the following related parties: Shares Amount Ira and Claudia Goldfarb, Executive Chairman and CEO, respectively 23,077 $ 150,000 Bradley Berman, Director 10,000 65,000 Joe Mueller, Director 5,000 32,500 Alexandria Gutierrez 4,615 29,998 Cesar J. Gutierrez Living Trust 3,977 25,851 46,669 $ 303,348 On August 25, 2023, the Company entered into a Stock Purchase Agreement with multiple accredited investors to sell and issue to the purchasers, thereunder, an aggregate of 735,000 shares of the Company’s common stock at a price of $ 5.00 per Share, resulting in total proceeds received of $ 3,675,000 . The stock sales included purchases by the following related parties: Shares Amount Ira and Claudia Goldfarb, Executive Chairman and CEO, respectively 100,000 $ 500,000 Ira Goldfarb Irrevocable Trust 40,000 200,000 Lyle A. Berman Revocable Trust, Director 40,000 200,000 Bradley Berman, Director 10,000 50,000 Alexandria Gutierrez 5,000 25,000 195,000 $ 975,000 Common Stock Issued to Officers and Directors for Services On June 1, 2023, the Company issued an aggregate 20,699 shares of common stock amongst its five non-employee Directors for annual services to be rendered. The aggregate fair value of the common stock was $ 125,230 , based on the closing price of the Company’s common stock on the date of grant. The shares were expensed upon issuance. On July 22, 2022, the Company accepted Mr. Joseph Lahti’s resignation from the Board of Directors and appointed Tim Creed as a member of the Board. Pursuant to the Company’s Non-Employee Director Compensation Plan, Mr. Creed received 6,410 shares of common stock as compensation. The shares were expensed upon issuance. On April 11, 2022, the Company appointed Joe Mueller as a member of the Board of Directors and Audit Committee. Pursuant to the Company’s Non-Employee Director Compensation Plan, Mr. Mueller received 8,064 shares of common stock as compensation. F- 12 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS Common Stock Options Awarded to Officers and Directors On December 15, 2023, pursuant to the respective A&R Employment Agreements of Ira Goldfarb and Claudia Goldfarb, and the terms of the 2020 Equity Incentive Plan, Mr. Goldfarb was granted stock options entitling him to purchase up to 500,000 shares of common stock, and Mrs. Goldfarb was granted stock options entitling her to purchase 450,000 shares of common stock, at an exercise price of $ 9.75 per share. The shares will vest equally over a five -year period from grant date. In the case of a Change of Control (as defined in their respective A&R Employment Agreements) all shares granted in the Initial Option Grant will vest immediately. Additionally, on December 15, 2023, pursuant to their respective A&R Employment Agreements, Mr. Goldfarb was granted additional stock options entitling him to purchase up to 500,000 shares of common stock, and Mrs. Goldfarb was granted an additional 450,000 options to purchase shares of common stock, at an exercise price of $40.00. The shares will vest upon the Company’s stock price trading on a national securities exchange operated by Nasdaq or the New York Stock Exchange with a closing transaction price above $40.00 per share for a period of twenty consecutive trading days. In the case of a Change of Control (as defined in the A&R Employment Agreements) all shares granted in the additional option grant will vest immediately. On November 13, 2023, the Company appointed Keith Terreri as Chief Financial Officer, and granted options to purchase 27,000 shares of common stock having an exercise price of $ 6.19 per share. The options vest 60 % on the third anniversary, and 20 % each anniversary thereafter until fully vested. On July 22, 2022, pursuant to the Company’s 2020 Stock Incentive Plan, Mr. Creed was also granted options to purchase 24,151 shares of the Company’s common stock at an exercise price of $ 3.90 per share. These options will vest 20 % as of July 22, 2023 and 20% each anniversary thereafter until fully vested. On April 11, 2022, pursuant to the Company’s 2020 Equity Plan, Mr. Mueller was granted options to purchase 24,151 shares of the Company’s common stock at an exercise price of $ 3.10 per share. These options will vest 20 % as of April 11, 2023 and 20% each anniversary thereafter until fully vested. On April 1, 2022, the Company granted options to purchase 27,500 shares of the Company’s common stock, having an exercise price of $ 2.75 per share, exercisable over a 10 -year term, to the Company’s then Chief Financial Officer. The options were to vest 60% on the third anniversary, and 20% each anniversary thereafter until fully vested. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 406 % and a call option value of $2.64, was $ 72,692 . The options were being expensed over the vesting period, however, pursuant to a Separation Agreement and Release, dated May 3, 2022, the vesting terms of the options were accelerated to be fully vested, resulting in $ 72,692 of stock-based compensation expense during the year ended December 31, 2023 . Pursuant to the Separation Agreement and Release, the vesting of an aggregate 47,500 , with a weighted average exercise price of $ 4.87 , of Mr. Burke’s previously awarded options were also accelerated to be fully vested. F- 13 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS Debt Financing and Related Warrants Granted On May 11, 2023, the Company received proceeds of $ 100,000 from Bradley Berman, one of the Company’s directors, on behalf of the Bradley Berman Irrevocable Trust, from the sale of notes and warrants. This term loan was pursuant to an offering to sell up to $ 1,500,000 of promissory notes and warrants to purchase an aggregate 375,000 shares of the Company’s common stock, exercisable over a ten -year period at a price of $ 2.50 per share, representing 25,000 warrant shares per $100,000 of notes purchased. The notes mature on May 11, 2024. Interest on the notes accrue at a rate of 8 % per annum, payable in cash semi-annually on June 30 and December 31. On April 25, 2023, we closed on an offering to sell up to $ 1,500,000 of promissory notes and warrants to purchase an aggregate 375,000 shares of the Company’s common stock, exercisable over a ten -year period at a price of $ 2.50 per share, representing 25,000 warrant shares per $100,000 of notes purchased. The notes mature on April 25, 2024. Interest on the notes accrue at a rate of 8 % per annum, payable in cash semi-annually on June 30 and December 31. On April 25, 2023, the Company received proceeds of $ 750,000 and $ 50,000 from the Company’s Executive Chairman, Mr. Goldfarb, and the Cesar J. Gutierrez Living Trust, as beneficially controlled by the brother of the Company’s CEO, respectively, on the sale of these notes and warrants. On April 11, 2023, warrants to purchase an aggregate 62,500 shares of common stock were issued to a director pursuant to a private placement debt offering in which aggregate proceeds of $ 250,000 were received in exchange for promissory notes and warrants to purchase an aggregate 62,500 shares of common stock, representing 25,000 warrant shares per $100,000 of promissory notes. The warrants are fully vested and exercisable over a period of 10 years at a price of $ 2.60 per share. The Company may redeem outstanding warrants prior to their expiration, at a price of $ 0.01 per share, provided that the volume weighted average sale price per share of Common Stock equals or exceeds $ 9.00 per share for thirty ( 30 ) consecutive trading days ending on the third business day prior to the mailing of notice of such redemption. On December 21, 2022, 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 million 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. 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. On April 8, 2022, the Company closed a private placement and concurrently entered into a note and warrant purchase agreement to sell an aggregate $3,700,000 of promissory notes and warrants to purchase an aggregate 925,000 shares of common stock, representing 25,000 warrant shares per $100,000 of promissory notes. Accrued interest on the notes was payable semi-annually beginning September 30, 2022 at the rate of 6 % per annum, but on August 23, 2022, the notes were amended to update the terms of the interest payment to be payable at the earlier of the maturity date or January 1, 2025, rather than being paid semi-annually. The principal amount of the notes mature and become due and payable on April 8, 2025. The warrants are exercisable immediately and for a period of 10 years at a price of $ 2.35 per share. Proceeds to the Company from the sale of the securities were $ 3,700,000 . The Company may redeem outstanding warrants prior to their expiration, at a price of $0.01 per share, provided that the volume weighted average sale price per share of common stock equals or exceeds $9.00 per share for thirty ( 30 ) consecutive trading days ending on the third business day prior to the mailing of notice of such redemption. Assuming full exercise thereof, further proceeds to the Company from the exercise of the warrant shares is calculated as $ 2,173,750 . The offering closed simultaneously with execution of the purchase agreement. Of the aggregate $3,700,000 of notes, a total of $ 3,120,000 of notes were sold to officers or directors, along with 780,000 of the warrants. The value of the related party warrants are classified as debt discounts and are amortized to interest expense over the life of the notes. Leases The Company leases a 20,945 square foot facility in Irving, Texas, 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 rate of $ 10,036 , with approximately 3 % annual escalation of lease payments. F- 14 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS Note 5 – Fair Value of Financial Instruments The Company's financial statements are prepared in accordance with ASC 820, “Fair Value Measurement,” which requires the measurement of certain financial instruments at fair value. The Company's financial instruments primarily consist of cash and cash equivalents, and accounts receivable, which approximate fair value due to their short-term nature, and Term Loans issued in connection with detachable warrants, which are carried on the balance sheet net of the unamortized portion of the related discounts. For financial instruments or investments that are required to be reported at fair value on a recurring or nonrecurring basis under GAAP, the applicable guidance for fair value measurement requires the Company to include the determination of the appropriate fair value hierarchy level for each instrument. The fair value hierarchy levels consist of the following: Level 1: Quoted Prices in Active Markets for Identical Assets or Liabilities - This level represents the highest degree of observability, where fair values are based on quoted market prices for identical assets or liabilities in active markets. Level 2: Inputs Other Than Quoted Prices Included within Level 1 - Fair values in this level are based on inputs other than quoted market prices but are still observable, such as quoted market prices for similar assets or liabilities, or inputs derived from market data. Level 3: Unobservable Inputs - This level includes fair values for which there are no observable inputs and relies on the reporting entity's own assumptions and estimates. These fair values are considered the least reliable and most subjective. Detachable common stock warrants issued in connection with debt may be recorded as either liabilities or equity depending on the applicable accounting guidance. The Company determined that warrants issued in connection with our notes payable met the definition of a freestanding financial instrument and qualified for treatment as permanent equity. Warrants recorded as equity are recorded at the fair market value determined at issuance date, and are not remeasured after that. We utilized the Black-Scholes valuation model to estimate the fair value of warrants granted at issuance date. The initial measurement of the fair value of the notes considers the present value of future cash flows, discounted at the current market rate of interest at the issuance date, and time to liquidity. The Company allocated the value of warrants between the relative fair value of the notes payable without the warrants, and the warrants themselves at the time of issuance. The allocated portion of the warrants was treated as a debt discount, and amortized over the term of the note. The amortization of the debt discount is recognized as interest expense. When a notes payable are issued at a discount, wherein a significant portion of the issuance is between related parties, the valuation of the notes and the discount involve significant judgement and the use of unobservable inputs, classifying it into Level 3 of the fair value hierarchy, requiring a nonrecurring fair value measurement. Changes other than additions, settlements, or discount amortization, in the fair value of the notes payable, net of discounts do not impact net income or cash flows. The following schedule summarizes the valuation of financial instruments at fair value on a nonrecurring basis in the balances sheet as of December 31, 2023 and 2022 : Fair Value Measurements at December 31, 2023 Carrying Value Estimated Fair Value Liabilities Notes payable, related parties, net of $ 1,880,711 of debt discounts $ 6,714,288 $ 7,008,684 Notes payable, net of $ 220,024 of debt discounts 907,976 953,847 Total liabilities $ 7,622,264 $ 7,962,531 Fair Value Measurements at December 31, 2022 Carrying Value Estimated Fair Value Liabilities Notes payable, related parties, net of $ 2,692,757 of debt discounts $ 3,502,243 $ 4,502,093 Notes payable, net of $ 336,085 of debt discounts 393,915 413,018 Total liabilities $ 3,896,158 $ 4,915,111 F- 15 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS Note 6 – Inventory Inventory As of December 31, 2023 the Company's inventory is valued at $ 4,123,246 , consisting of raw materials, material overhead, labor, and manufacturing overhead, consist of the following: December 31, December 31, 2023 2022 Finished goods $ 222,051 $ 384,241 Packaging materials 815,883 416,663 Inventory in transit 571,970 - Work in progress 691,290 766,530 Raw materials 1,822,052 307,515 Total inventory $ 4,123,246 $ 1,874,949 During the year ended December 31, 2023 , the Company wrote down $ 1,398,888 related to our non-candy products following the Company's decision to focus production on freeze dried candy products in the second quarter of 2023. This write down is included in cost of goods sold in the accompanying condensed statement of operations. Prepaid Inventory As of December 31, 2023 , the company has reported a total of $ 563,131 in prepaid inventory, current assets line item on our consolidated balance sheet. This represents payments made in advance for inventory purchases that have not yet been shipped as of the balance sheet date. The prepaid inventory primarily consists of deposits and advance payments to suppliers for the purchase of raw materials and finished goods expected to be received and utilized in production within the next fiscal year. The Company accounts for prepaid inventory at cost, which includes all charges necessary to bring the inventory items to their present location and condition. Upon shipment of the inventory, these amounts are reclassified from prepaid inventory to the appropriate inventory accounts on the balance sheet. Note 7 – Prepaid Expenses Prepaid expenses consist of the following: December 31, 2023 2022 Prepaid professional costs 382,524 - Prepaid software licenses 35,252 36,424 Prepaid insurance costs 48,305 16,746 Trade show advances 29,964 18,707 Prepaid rent 67,119 27,043 Prepaid office and other costs - 38,772 Total prepaid expenses $ 563,164 $ 137,692 F- 16 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS Note 8 – Property and Equipment Property and equipment at December 31, 2023 and 2022 , consisted of the following: December 31, December 31, 2023 2022 Office equipment $ 21,440 $ 13,872 Machinery 4,714,626 1,643,010 Software 70,000 70,000 Website 71,589 71,589 Leasehold improvements 1,409,767 1,257,108 Construction in progress 1,522,465 2,487,673 7,809,887 5,543,252 Less: Accumulated depreciation and amortization ( 967,602 ) ( 508,257 ) Total property and equipment, net $ 6,842,285 $ 5,034,995 Construction in progress consists of costs incurred to build out our manufacturing facility in Irving Texas, along with the construction of our freeze driers. These costs will be capitalized as Leasehold Improvements and Machinery, respectively, upon completion. On July 1, 2022, the Company disposed of certain leasehold improvements that were damaged. The Company received proceeds on the disposal of $ 62,308 pursuant to a settlement with the manufacturer, resulting in a gain on the disposal of property and equipment of $ 36,392 , which represented the proceeds received, less the net book value at the time of disposal. Depreciation of property and equipment was $ 459,345 , including $ 168,271 capitalized as inventory, and $ 299,553 , including $ 25,500 capitalized as inventory overhead and expensed to cost of goods sold, December 31, 2023 and 2022 , respectively. Note 9 – Leases The Company determines if an arrangement is a finance lease or operating lease at inception and recognizes right-of-use (“ROU”) assets and lease liabilities at commencement date based on the present value of the lease payments over the lease term. For operating leases, our right-of-use assets are amortized on a straight-line basis over the lease term with rent expense recorded to operating expenses. The depreciable life of related leasehold improvements is based on the shorter of the useful life or the lease term. The Company leases its 20,945 square foot facility under a non-cancelable real property lease agreement that expires on August 31, 2025, with two five -year options to extend, at a monthly lease rate of $ 10,036 , with approximately a 3 % annual escalation of lease payments commencing September 15, 2021, under which an entity owned entirely by Ira Goldfarb, the Company's Executive Chairman, is the landlord. The facility lease contains provisions requiring payment of property taxes, utilities, insurance, maintenance and other occupancy costs applicable to the leased premise. As the Company’s leases do not provide implicit discount rates, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate for the lease at the time of commencement was 5.75 %. On July 1, 2023, the Company leased additional warehouse space in Irving, Texas, of approximately 9,000 feet under a 37 -month lease at a rate of $ 8,456 per month, with approximately a 4 % annual escalation of lease payments. The facility lease contains provisions requiring payment of property taxes, utilities, insurance, maintenance and other occupancy costs applicable to the leased premise. As the Company’s leases do not provide implicit discount rates, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate for the lease at the time of commencement was 8 %. On October 26, 2023, the Company entered into a lease agreement with Prologis, Inc., a Maryland corporation, which the Company intends to use as production space. The Company leased approximately 51,264 square feet in Dallas, Texas for an initial term of approximately five years and two months. The lease commenced on November 1, 2023. The base rent payments started at approximately $ 42,500 per month in the first year, and increase each year, up to approximately $ 51,700 per month during the last year of the initial term. The Company is also responsible for operating expenses of the premises, which start at $ 7,835 per month, with an annual escalation of 4.3 %. As a deposit on the lease, the Company is required to provide a letter of credit to the Landlord in the amount of $ 300,000 . The lease may be extended for a period of five years, at the option of the Company, at a rate to be based on a fair market rent rate determined at the time of the extension. The incremental borrowing rate for the lease at the time of commencement was 9.38 %. F- 17 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS The components of lease expense were as follows: For the Year Ended December 31, 2023 2022 Operating lease cost: Amortization of right-of-use asset $ 189,605 $ 67,564 Supplemental balance sheet information related to leases was as follows: December 31, December 31, 2023 2022 Operating lease: Operating lease assets $ 4,061,820 $ 1,261,525 Current portion of operating lease liability $ 550,941 $ 52,543 Noncurrent operating lease liability 3,671,729 1,301,355 Total operating lease liability $ 4,222,670 $ 1,353,898 Weighted average remaining lease term: Operating leases (in years) 5.9 13.3 Weighted average discount rate: Operating lease 8.20 % 5.75 % Supplemental cash flow and other information related to operating leases was as follows: For the Year Ended December 31, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows used for operating leases $ 194,435 $ 45,970 Leased assets obtained in exchange for lease liabilities: Total operating lease liabilities $ 4,222,670 $ 1,353,898 F- 18 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS The future minimum lease payments due under operating leases as of December 31, 2023 is as follows: Fiscal Year Ending Minimum Lease December 31, Commitments 2024 $ 874,000 2025 907,617 2026 881,562 2027 830,278 2028 and thereafter 1,980,505 5,473,962 Less effects of discounting ( 1,251,292 ) Lease liability recognized $ 4,222,670 F- 19 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS Note 10 – Notes Payable, Related Parties Notes payable, related parties consists of the following at December 31, 2023 and 2022 , respectively: December 31, December 31, 2023 2022 On May 11, 2023, the Company received $ 100,000 pursuant to a note and warrant purchase agreement from Bradley Berman, one of the Company’s directors, on behalf of the Bradley Berman Irrevocable Trust, as lender. The unsecured note matures on May 11, 2024 . The note bears interest at 8 % per annum, payable in cash semi-annually on June 30 and December 31, with appropriate pro rata adjustments made for any partial interest accrual period. The noteholder also received warrants to purchase 25,000 shares of common stock, exercisable at $ 2.50 per share over a ten -year term. The Company may redeem outstanding warrants prior to their expiration, at a price of $ 0.01 per share, provided that the volume weighted average sale price per share of Common Stock equals or exceeds $ 9.00 per share for thirty (30) consecutive trading days ending on the third business day prior to the mailing of notice of such redemption. $ 100,000 $ - On April 25, 2023, the Company received $ 50,000 pursuant to a note and warrant purchase agreement from the Cesar J. Gutierrez Living Trust, as beneficially controlled by the brother of the Company’s CEO, as lender. The unsecured note matures on April 25, 2024 . The note bears interest at 8 % per annum, payable in cash semi-annually on June 30 and December 31, with appropriate pro rata adjustments made for any partial interest accrual period. The noteholder also received warrants to purchase 12,500 shares of common stock, exercisable at $ 2.50 per share over a ten -year term. The Company may redeem outstanding warrants prior to their expiration, at a price of $ 0.01 per share, provided that the volume weighted average sale price per share of Common Stock equals or exceeds $ 9.00 per share for thirty (30) consecutive trading days ending on the third business day prior to the mailing of notice of such redemption. 50,000 - On April 25, 2023, the Company received $ 750,000 pursuant to a note and warrant purchase agreement from a trust held by the Company’s Executive Chairman, Mr. Goldfarb, as lender. The unsecured note matures on April 25, 2024 . The note bears interest at 8 % per annum, payable in cash semi-annually on June 30 and December 31, with appropriate pro rata adjustments made for any partial interest accrual period. The noteholder also received warrants to purchase 187,500 shares of common stock, exercisable at $ 2.50 per share over a ten -year term. The Company may redeem outstanding warrants prior to their expiration, at a price of $ 0.01 per share, provided that the volume weighted average sale price per share of Common Stock equals or exceeds $ 9.00 per share for thirty (30) consecutive trading days ending on the third business day prior to the mailing of notice of such redemption. 750,000 - On April 11, 2023, the Company received $ 250,000 pursuant to a note and warrant purchase agreement from the Lyle A. Berman Revocable Trust, as beneficially controlled by one of the Company’s directors, as lender. The unsecured note matures on August 23, 2025 . The note bears interest at 8 % per annum, payable on January 1, 2025. The noteholder also received warrants to purchase 62,500 shares of common stock, exercisable at $ 2.60 per share over a ten -year term. 250,000 - On March 7, 2023, the Company received $ 250,000 pursuant to a note and warrant purchase agreement from the Lyle A. Berman Revocable Trust, as beneficially controlled by one of the Company’s directors, as lender. The unsecured note matures on August 23, 2025 . The note bears interest at 8 % per annum, payable on January 1, 2025. The noteholder also received warrants to purchase 62,500 shares of common stock, exercisable at $ 2.60 per share over a ten -year term. 250,000 - On March 2, 2023, the Company received $ 250,000 pursuant to a note and warrant purchase agreement from a trust held by the Company’s Executive Chairman, Mr. Goldfarb, as lender. The unsecured note matures on August 23, 2025 . The note bears interest at 8 % per annum, payable on January 1, 2025. The noteholder also received warrants to purchase 62,500 shares of common stock, exercisable at $ 2.60 per share over a ten -year term. 250,000 - On February 1, 2023, the Company received $ 500,000 pursuant to a note and warrant purchase agreement from a trust held by the Company’s Executive Chairman, Mr. Goldfarb, as lender. The unsecured note matures on August 23, 2025 . The note bears interest at 8 % per annum, payable on January 1, 2025. The noteholder also received warrants to purchase 125,000 shares of common stock, exercisable at $ 2.60 per share over a ten -year term. 500,000 - On January 5, 2023, the Company received $ 250,000 pursuant to a note and warrant purchase agreement from the Lyle A. Berman Revocable Trust, as beneficially controlled by one of the Company’s directors, as lender. The unsecured note matures on August 23, 2025 . The note bears interest at 8 % per annum, payable on January 1, 2025. The noteholder also received warrants to purchase 62,500 shares of common stock, exercisable at $ 2.60 per share over a ten -year term. 250,000 - On December 21, 2022, the Company received $ 250,000 pursuant to a note and warrant purchase agreement from the Lyle A. Berman Revocable Trust, as beneficially controlled by one of the Company’s directors, as lender. The unsecured note matures on August 23, 2025 . The note bears interest at 8 % per annum, payable on January 1, 2025. The noteholder also received warrants to purchase 62,500 shares of common stock, exercisable at $ 2.60 per share over a ten -year term. 250,000 250,000 On September 29, 2022, the Company received $ 500,000 pursuant to a note and warrant purchase agreement from a trust held by the Company’s Executive Chairman, Mr. Goldfarb, as lender. The unsecured note matures on August 23, 2025 . The note bears interest at 8 % per annum, payable on January 1, 2025. The noteholder also received warrants to purchase 125,000 shares of common stock, exercisable at $ 2.60 per share over a ten -year term. 500,000 500,000 On September 29, 2022, the Company received $ 250,000 pursuant to a note and warrant purchase agreement from the Lyle A. Berman Revocable Trust, as beneficially controlled by one of the Company’s directors, as lender. The unsecured note matures on August 23, 2025 . The note bears interest at 8 % per annum, payable on January 1, 2025. The noteholder also received warrants to purchase 62,500 shares of common stock, exercisable at $ 2.60 per share over a ten -year term. 250,000 250,000 On April 8, 2022, the Company received $ 2,000,000 pursuant to a note and warrant purchase agreement from a trust held by the Company’s Executive Chairman, Mr. Goldfarb, as lender. The unsecured note bears interest at 6 % per annum, compounded semi-annually, and was payable in cash semi-annually on June 30th and December 31st. On August 23, 2022, the note was amended to update the terms of the interest payment to be payable at the earlier of the maturity date or January 1, 2025, rather than being paid semi-annually. The note matures on April 8, 2025 . The noteholder also received warrants to purchase 500,000 shares of common stock, exercisable at $ 2.35 per share over a ten -year term. 2,000,000 2,000,000 On April 8, 2022, the Company received $ 100,000 pursuant to a note and warrant purchase agreement with the Company’s Executive Chairman, Mr. Goldfarb, and Chief Executive Officer, Mrs. Goldfarb as lenders. The unsecured note bears interest at 6 % per annum, compounded semi-annually, and was payable in cash semi-annually on June 30th and December 31st. On August 23, 2022, the note was amended to update the terms of the interest payment to be payable at the earlier of the maturity date or January 1, 2025, rather than being paid semi-annually. The note matures on April 8, 2025 . The noteholder also received warrants to purchase 25,000 shares of common stock, exercisable at $ 2.35 per share over a ten -year term. 100,000 100,000 On April 8, 2022, the Company received $ 100,000 pursuant to a note and warrant purchase agreement with IG Union Bower LLC, an entity owned by Ira Goldfarb, the Company’s Executive Chairman, as lender. The unsecured note bears interest at 6 % per annum, compounded semi-annually, and was payable in cash semi-annually on June 30th and December 31st. On August 23, 2022, the note was amended to update the terms of the interest payment to be payable at the earlier of the maturity date or January 1, 2025, rather than being paid semi-annually. The note matures on April 8, 2025 . The noteholder also received warrants to purchase 25,000 shares of common stock, exercisable at $ 2.35 per share over a ten -year term. 100,000 100,000 F- 20 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS On April 8, 2022, the Company received $ 920,000 pursuant to a note and warrant purchase agreement from the Lyle A. Berman Revocable Trust, as beneficially controlled by one of the Company’s directors, as lender. The unsecured note bears interest at 6 % per annum, compounded semi-annually, and was payable in cash semi-annually on June 30th and December 31st. On August 23, 2022, the note was amended to update the terms of the interest payment to be payable at the earlier of the maturity date or January 1, 2025, rather than being paid semi-annually. The note matures on April 8, 2025 . The noteholder also received warrants to purchase 230,000 shares of common stock, exercisable at $ 2.35 per share over a ten -year term. 920,000 920,000 On December 31, 2021, the Company received $ 1,500,000 pursuant to a note and warrant purchase agreement with the Company’s Executive Chairman, Mr. Goldfarb, and Chief Executive Officer, Mrs. Goldman, as lenders. The unsecured note bears interest at 8 % per annum, compounded semi-annually, and shall be payable in cash semi-annually on June 30th and December 31st. The note matures on December 31, 2024 . The noteholders also received warrants to purchase 225,000 shares of common stock, exercisable at $ 2.21 per share over a ten -year term. 1,500,000 1,500,000 On December 31, 2021, the Company received $ 500,000 pursuant to a note and warrant purchase agreement from the Lyle A. Berman Revocable Trust, as beneficially controlled by one of the Company’s directors, as lender. The unsecured note bears interest at 8 % per annum, compounded semi-annually, and shall be payable in cash semi-annually on June 30th and December 31st. The note matures on December 31, 2024 . The noteholder also received warrants to purchase 75,000 shares of common stock, exercisable at $ 2.21 per share over a ten -year term. 500,000 500,000 On December 31, 2021, the Company received $ 25,000 pursuant to a note and warrant purchase agreement from the Company’s former CFO, Bradley K. Burke, as lender. The unsecured note bears interest at 8 % per annum, compounded semi-annually, and shall be payable in cash semi-annually on June 30th and December 31st. The note matures on December 31, 2024 . The noteholder also received warrants to purchase 3,750 shares of common stock, exercisable at $ 2.21 per share over a ten -year term. 25,000 25,000 On December 31, 2021, the Company received $ 50,000 pursuant to a note and warrant purchase agreement from the Cesar J. Gutierrez Living Trust, as beneficially controlled by the brother of the Company’s CEO, as lender. The unsecured note bears interest at 8 % per annum, compounded semi-annually, and shall be payable in cash semi-annually on June 30th and December 31st. The note matures on December 31, 2024 . The noteholder also received warrants to purchase 7,500 shares of common stock, exercisable at $ 2.21 per share over a ten -year term. 50,000 50,000 Total notes payable, related parties 8,595,000 6,195,000 Less unamortized debt discounts: 1,880,712 2,692,757 Notes payable 6,714,288 3,502,243 Less: current maturities 2,543,146 - Notes payable, related parties, less current maturities $ 4,171,142 $ 3,502,243 The Company recorded total discounts of $ 1,154,050 and $ 2,811,138 , consisting of debt discounts on warrants granted to the related parties during the years ended December 31, 2023 and 2022 , respectively. The warrants were valued using Black-Scholes option pricing model with significant inputs as follows: For the Year Ended December 31, 2023 2022 Weighted average expected volatility 155 % 162 % Weighted average expected life (in years) 10 10 Weighted average risk-free interest rate 2.9 % 2.5 % Expected dividend yield - - The discounts are being amortized to interest expense over the term of the notes, until repayment, using the straight-line method, which closely approximates the effective interest method. The Company recorded $ 1,009,397 of related party stock-based interest expense pursuant to the amortization of discounts during the year ended December 31, 2023 . The Company recognized $ 598,340 and $ 320,580 of related-party note interest expense for the years ended December 31, 2023 and December 31, 2022 . F- 21 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS Note 11 – Notes Payable Notes payable consists of the following at December 31, 2023 and 2022 , respectively: December 31, December 31, 2023 2022 On April 25, 2023, the Company received $ 400,000 pursuant to a note and warrant purchase agreement from an accredited investor, as lender. The unsecured note matures on April 25, 2024 . The note bears interest at 8 % per annum, payable in cash semi-annually on June 30 and December 31, with appropriate pro rata adjustments made for any partial interest accrual period. The noteholder also received warrants to purchase 100,000 shares of common stock, exercisable at $ 2.50 per share over a ten -year term. The Company may redeem outstanding warrants prior to their expiration, at a price of $ 0.01 per share, provided that the volume weighted average sale price per share of Common Stock equals or exceeds $ 9.00 per share for thirty (30) consecutive trading days ending on the third business day prior to the mailing of notice of such redemption. $ 400,000 $ – On April 8, 2022, the Company received $ 80,000 pursuant to a note and warrant purchase agreement from an accredited investor, as lender. The unsecured note bears interest at 6 % per annum, compounded semi-annually, and was payable in cash semi-annually on June 30 th and December 31 st . On August 23, 2022, the note was amended to update the terms of the interest payment to be payable at the earlier of the maturity date or January 1, 2025, rather than being paid semi-annually. The note matures on April 8, 2025 . The noteholders also received warrants to purchase 20,000 shares of common stock, exercisable at $ 2.35 per share over a ten -year term. 80,000 80,000 On April 8, 2022, the Company received $ 500,000 pursuant to a note and warrant purchase agreement from an accredited investor, as lender. The unsecured note bears interest at 6 % per annum, compounded semi-annually, and was payable in cash semi-annually on June 30 th and December 31 st . On August 23, 2022, the note was amended to update the terms of the interest payment to be payable at the earlier of the maturity date or January 1, 2025, rather than being paid semi-annually. The note matures on April 8, 2025 . The noteholders also received warrants to purchase 125,000 shares of common stock, exercisable at $ 2.35 per share over a ten -year term. 500,000 500,000 On June 16, 2020, the Company entered into a loan authorization and loan agreement with the United States Small Business Administration (the “SBA”), as lender, pursuant to the SBA’s Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business (the “EIDL Loan Agreement”) encompassing a $ 150,000 Promissory Note issued to the SBA (the “EIDL Note”)(together with the EIDL Loan Agreement, the “EIDL Loan”), bearing interest at 3.75 % per annum. In connection with entering into the EIDL Loan, the Company also executed a security agreement, dated June 16, 2020, between the SBA and the Company (the “EIDL Security Agreement”) pursuant to which the EIDL Loan is secured by a security interest on all of the Company’s assets. Under the EIDL Note, the Company is required to pay principal and interest payments of $ 731 every month beginning June 16, 2021. All remaining principal and accrued interest is due and payable on June 16, 2050. The EIDL Note may be repaid at any time without penalty. 150,000 150,000 Total notes payable 1,130,000 730,000 Less: unamortized debt discounts 222,024 336,085 Notes payable 907,976 393,915 Less: current maturities 313,938 – Notes payable, less current maturities $ 594,038 $ 393,915 The Company recorded total discounts of $ 202,285 and $ 444,330 , consisting of debt discounts on warrants granted to accredited investors during the years ended December 31, 2023 and 2022 , respectively. The warrants were valued using Black-Scholes option pricing model with significant inputs as follows: For the Year Ended December 31, 2023 2022 Weighted average expected volatility 147 % 154 % Weighted average expected life (in years) 10 10 Weighted average risk-free interest rate 3.1 % 2.7 % Expected dividend yield - - The discounts are being amortized to interest expense over the term of the notes, until repayment, using the straight-line method, which closely approximates the effective interest method. The Company recorded $ 164,589 and $ 108,245 of stock-based interest expense pursuant to the amortization of discounts during the years ended December 31, 2023 and 2022 , respectively. The Company recognized $ 56,346 and $ 31,546 of interest expense for the years ended December 31, 2023 and 2022 , respectively. The Company recognized interest expense for the years ended December 31, 2023 and 2022 , as follows: December 31, December 31, 2023 2022 Interest on notes payable, related parties $ 598,340 $ 320,580 Amortization of debt discounts on notes payable, related parties 1,009,396 817,594 Interest on notes payable 65,848 31,546 Amortization of debt discounts on notes payable 164,590 108,245 Interest - other 1,575 - Total interest expense $ 1,839,749 $ 1,277,965 F- 22 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS Note 12 – Stockholders ’ Equity Preferred Stock The Company has 20,000,000 authorized shares of $ 0.001 par value preferred stock. No shares have been issued to date. Common Stock Sold for Cash On November 20, 2023, the Company entered into a Stock Purchase Agreement with multiple accredited investors to sell and issue to the purchasers, thereunder, an aggregate of 426,288 shares of the Company’s common stock at a price of $6.50 per share. Proceeds to the Company from the sale of the shares were $ 2,770,848 . A total of 46,669 of these shares, or proceeds of $ 303,348 were purchased by officers and directors. On August 25, 2023, the Company entered into a Stock Purchase Agreement with multiple accredited investors to sell and issue to the purchasers, thereunder, an aggregate of 735,000 shares of the Company’s common stock at a price of $5.00 per share. Proceeds to the Company from the sale of the shares were $ 3,675,000 . A total of 195,000 of these shares, or proceeds of $ 975,000 were purchased by officers and directors. Common Stock Issued to Directors for Services On June 1, 2023, the Company issued an aggregate 21,095 shares of common stock amongst its five directors for annual services to be rendered. The aggregate fair value of the common stock was $ 125,230 , based on the closing price of the Company’s common stock on the date of grant. The shares were expensed upon issuance. On July 22, 2022, the Company accepted Mr. Joseph Lahti’s resignation from the Board of Directors and appointed Tim Creed as a member of the Board. Pursuant to the Company’s Non-Employee Director Compensation Plan, Mr. Creed received 6,410 shares of common stock as compensation. The fair value of the shares was $ 25,000 , based on the closing price of the Company’s common stock on the date of grant. On April 11, 2022, the Company appointed Joe Mueller as a member of the Board of Directors and Audit Committee. Pursuant to the Company’s Non-Employee Director Compensation Plan, Mr. Mueller received 8,064 shares of common stock as compensation. The fair value of the shares was $ 24,998 , based on the closing price of the Company’s common stock on the date of grant. Common Stock Awarded to Advisory Panel Members On April 20, 2022, the Company awarded an aggregate total of 8,000 shares of common stock to two advisory panel members for services. The aggregate fair value of the shares was $ 20,000 , based on the closing price of the Company’s common stock on the date of grant. On March 25, 2022, the Company awarded 4,255 shares of common stock to a newly appointed advisory panel member for services. The fair value of the shares was $ 10,000 , based on the closing price of the Company’s common stock on the date of grant. F- 23 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS Note 13 – Options 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, as provided in the definitive information statement filed with Securities and Exchange Commission on January 10, 2020 ( the “DEF 14C” ). The description of the 2020 Equity Plan is qualified in its entirety by the text of the 2020 Equity Plan, a copy of which was attached as Annex C to the DEF 14C. On January 8, 2024, our stockholders took action by written consent to ratify the amendment to the 2020 Stock Incentive Plan (the “2020 Plan”) approved by the Board on December 15, 2023. On December 15, 2023, our Board approved an amendment to the 2020 Plan to effect an increase in the number of shares that remain available for issuance under the 2020 Plan by an additional 2,150,000 shares up to an aggregate of 2,272,954 shares available for issuance under the 2020 Plan (the “2020 Plan Amendment”). Before the 2020 Plan Amendment, the number of shares available for issuance under the 2020 Plan would be too limited to effectively operate as an incentive and retention tool for employees, officers, directors, non-employee directors and consultants of the Company and its affiliates (as defined in the 2020 Plan). The 2020 Plan and the approved increase will enable us to continue our policy of equity ownership by employees, officers, directors, non-employee directors and consultants of the Company and its affiliates as an incentive to contribute to the creation of long-term value for our stockholders. Outstanding Options Options to purchase an aggregate total of 2,260,813 and 590,991 shares of common stock were outstanding as of December 31, 2023 and 2022, respectively, at a weighted average strike price of $ 19.38 and $ 4.53 , respectively. The weighted average life of exercisable outstanding options was 6.6 and 8.1 years as of December 31, 2023 and 2022, respectively. Options Granted On December 15, 2023, pursuant to the respective A&R Employment Agreements of Ira Goldfarb and Claudia Goldfarb, and the terms of the 2020 Equity Incentive Plan, Mr. Goldfarb was granted stock options entitling him to purchase up to 500,000 shares of common stock, and Mrs. Goldfarb was granted stock options entitling her to purchase 450,000 shares of common stock, at an exercise price of $ 9.75 per share. The shares will vest equally over a five -year period from grant date. In the case of a Change of Control (as defined in their respective A&R Employment Agreements) all shares granted in the Initial Option Grant will vest immediately. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 97 % and a call option value of $ 8.15 , was $ 7,752,000 . The options are being expensed over the vesting period. Additionally, on December 15, 2023, pursuant to their respective A&R Employment Agreements, Mr. Goldfarb was granted additional stock options entitling him to purchase up to 500,000 shares of common stock, and Mrs. Goldfarb was granted an additional 450,000 options to purchase shares of common stock, at an exercise price of $40.00. The shares will vest upon the Company’s stock price trading on a national securities exchange operated by Nasdaq or the New York Stock Exchange with a closing transaction price above $40.00 per share for a period of twenty consecutive trading days. In the case of a Change of Control (as defined in the A&R Employment Agreements) all shares granted in the additional option grant will vest immediately. The Company engaged a third -party valuation expert to perform a Monte-Carlo simulation options pricing model to determine the call value and expected term of the options. Based a volatility of $97% and a risk-free interest rate of 3.9 %, the option value was $ 5.84 , resulting in an aggregate value of $ 5,544,200 , which will be amortized over the expected term of the options of 2.3 years. On November 13, 2023, the Company appointed Keith Terreri as Chief Financial Officer, and granted options to purchase 27,000 shares of common stock having an exercise price of $ 6.19 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 97 % and a call option value of $ 5.12 , was $ 138,240 . These shares were subsequently forfeited when Mr. Terreri resigned as Chief Financial Officer on March 8, 2024. During November 2023, five employees were granted options to purchase an aggregate of 61,500 shares of the Company's common stock, having a weighted average exercise price of $ 8.21 , exercisable over a 10 -year term. The options will vest 60 % on the third anniversary, and 20 % each anniversary thereafter until fully vested. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 97 % and a call option value of $ 6.77 , was $ 416,245 . The options are being expensed over the vesting period. During July 2023, three employees were granted options to purchase an aggregate of 16,000 shares of the Company's common stock, having a weighted average exercise price of $ 4.61 , exercisable over a 10 -year term. The options will vest 60 % on the third anniversary, and 20 % each anniversary thereafter until fully vested. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 90 % and a call option value of $ 2.95 , was $ 47,182 . The options are being expensed over the vesting period. On June 5, 2023, a total of nineteen employees and consultants were granted options to purchase an aggregate 46,405 shares of the Company’s common stock, having an exercise price of $ 3.66 per share, exercisable over a 10 -year term. The options will vest 60 % on the third anniversary, and 20 % each anniversary thereafter until fully vested. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 84.2 % and a call option value of $3.66, was $ 170,028 . The options are being expensed over the vesting period. On July 22, 2022, the Company appointed Tim Creed as a member of the Board. Pursuant to the Company’s 2020 Equity Plan, Mr. Creed was granted options to purchase 24,151 shares of the Company’s common stock at an exercise price of $ 3.90 per share. These options will vest 20 % as of July 22, 2023 and 20% each anniversary thereafter until fully vested. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 137 % and a call option value of $ 3.62 , was $ 87,346 . The options are being expensed over the vesting period. On April 11, 2022, the Company appointed Joe Mueller as a member of the Board of Directors and Audit Committee. Pursuant to the Company’s 2020 Equity Plan, Mr. Mueller was granted options to purchase 24,151 shares of the Company’s common stock at an exercise price of $ 3.10 per share. These options will vest 20 % as of April 11, 2023 and 20% each anniversary thereafter until fully vested. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 406 % and a call option value of $2.64, was $ 71,423 . The options are being expensed over the vesting period. On April 1, 2022, a total of nineteen employees and consultants were granted options to purchase an aggregate 35,977 shares of the Company’s common stock, having an exercise price of $ 2.75 per share, exercisable over a 10 -year term. The options will vest 60 % on the third anniversary, and 20 % each anniversary thereafter until fully vested. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 406 % and a call option value of $2.64, was $ 95,099 . The options are being expensed over the vesting period. On April 1, 2022, the Company granted options to purchase 27,500 shares of the Company’s common stock, having an exercise price of $ 2.75 per share, exercisable over a 10 -year term, to the Company’s then Chief Financial Officer. The options were to vest 60 % on the third anniversary, and 20 % each anniversary thereafter until fully vested. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 406 % and a call option value of $2.64, was $ 72,692 . The options were being expensed over the vesting period, however, pursuant to a Separation Agreement and Release, dated May 3, 2022, the vesting terms of the options were accelerated to be fully vested, resulting in $ 72,692 of stock-based compensation expense during the year ended December 31, 2022. Pursuant to the Separation Agreement and Release, the vesting of an aggregate 47,500 , with a weighted average exercise price of $ 4.87 , of Mr. Burke’s previously awarded options were also accelerated to be fully vested. F- 24 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS On March 30, 2022, a total of sixteen employees and consultants were granted options to purchase an aggregate 19,436 shares of the Company’s common stock, having an exercise price of $ 2.75 per share, exercisable over a 10 -year term. The options will vest 60 % on the third anniversary, and 20 % each anniversary thereafter until fully vested. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 407 % and a call option value of $2.64, was $ 51,380 . The options are being expensed over the vesting period, resulting in $ 7,096 of stock-based compensation expense during the year ended December 31, 2023 . As of December 31, 2023 , a total of $ 26,756 of unamortized expenses are expected to be expensed over the vesting period. On March 25, 2022, a newly appointed advisory panel member was granted options to purchase an aggregate 6,382 shares of the Company’s common stock, having an exercise price of $ 2.35 per share, exercisable over a 10 -year term. The options will vest 20% on each anniversary over a five -year period, until fully vested. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 406 % and a call option value of $2.26, was $ 14,413 . The options are being expensed over the vesting period, resulting in $ 2,220 of stock-based compensation expense during the year ended December 31, 2023 . As of December 31, 2023 , a total of $ 12,193 of unamortized expenses are expected to be expensed over the vesting period. The Company recognized a total of $ 711,068 , and $ 782,081 of compensation expense during the years ended December 31, 2023 and 2022 , respectively, related to common stock options that are being amortized over the implied service term, or vesting period, of the options. The remaining unamortized balance of these options is $ 14,625,420 as of December 31, 2023 and the weighted-average period over which these awards are expected to be recognized is approximately 2.4 years. Options Cancelled or Forfeited An aggregate 21,083 and 87,793 options with a weighted average strike price of $ 2.84 and $ 7.11 per share were forfeited by former employees during the years ended December 31, 2023 and 2022 , respectively. Options Expired During the years ended December 31, 2023 and 2022 there were no options expirations. Options Exercised No options were exercised during the years ended December 31, 2023 and 2022 . F- 25 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS The following is a summary of information about the Stock Options outstanding at December 31, 2023 . Shares Underlying Shares Underlying Options Outstanding Options Exercisable Weighted Shares Average Weighted Shares Weighted Underlying Remaining Average Underlying Average Options Range of Contractual Exercise Options Exercise Outstanding Exercise Prices Life (in years) Price Exercisable Price December 31, 2022 590,991 2.35 5 - 195.00 00 8.1 $ 4.53 160,199 $ 5.02 December 31, 2023 2,620,813 2.35 5 - 195.00 00 6.6 $ 19.38 271,259 $ 4.69 The following is a summary of activity of outstanding stock options: Weighted Average Average Number Exercise Intrinsic of Shares Prices Value Balance, December 31, 2021 541,187 $ 6.77 Options granted 137,597 2.99 Options cancelled ( 87,793 ) ( 7.11 ) Balance, December 31, 2022 590,991 $ 4.53 $ 2,677,189 Options granted 2,050,905 23.55 Options cancelled ( 21,083 ) ( 2.84 ) Balance, December 31, 2023 2,620,813 $ 19.38 $ 50,802,052 Exercisable, December 31, 2023 271,259 $ 4.69 $ 1,272,205 F- 26 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS Note 14 – Warrants Outstanding Warrants Warrants to purchase an aggregate total of 2,291,250 shares of common stock at a $ 2.50 strike price, exercisable over a weighted average life of 8.51 years were outstanding as of December 31, 2023 . Warrants are fair-valued using the Black-Scholes options pricing model, using the applicable volatility and risk-free rate based on the term of the warrant, at the issue date. The fair value of the warrants is allocated to the notes payable, and amortized to interest over the term of the notes. Interest expense related to debt discount amortization was $ 1,173,986 and $ 925,839 for the years ended December 31, 2023 and 2022 respectively. Warrants Granted On May 11, 2023, we closed on an offering to sell $100,000 of promissory notes and warrants to purchase an aggregate 25,000 shares of the Company’s common stock, exercisable over a ten -year period at a price of $ 2.50 per share, representing 25,000 warrant shares per $100,000 of Notes purchased. The notes mature on May 11, 2024. The Company may redeem outstanding warrants prior to their expiration, at a price of $ 0.01 per share, provided that the volume weighted average sale price per share of Common Stock equals or exceeds $ 9.00 per share for thirty ( 30 ) consecutive trading days ending on the third business day prior to the mailing of notice of such redemption. On May 11, 2023, the Company received aggregate proceeds of $100,000 from one of the Company’s Directors on the sale of these notes and warrants. On April 25, 2023, we closed on an offering to sell up to $ 1,200,000 of promissory notes and warrants to purchase an aggregate 300,000 shares of the Company’s common stock, exercisable over a ten -year period at a price of $ 2.50 per share, representing 25,000 warrant shares per $100,000 of Notes purchased. The notes mature on April 25, 2024. The Company may redeem outstanding warrants prior to their expiration, at a price of $ 0.01 per share, provided that the volume weighted average sale price per share of Common Stock equals or exceeds $ 9.00 per share for thirty ( 30 ) consecutive trading days ending on the third business day prior to the mailing of notice of such redemption. On April 25, 2023, the Company received aggregate proceeds of $ 800,000 from two of the Company’s Directors and $ 400,000 from one accredited investor on the sale of these notes and warrants. On April 11, 2023, warrants to purchase an aggregate 62,500 shares of common stock were issued to a director pursuant to a private placement debt offering in which aggregate proceeds of $ 250,000 were received in exchange for promissory notes and warrants to purchase an aggregate 62,500 shares of common stock, representing 25,000 warrant shares per $100,000 of promissory notes. The warrants are fully vested and exercisable over a period of 10 years at a price of $ 2.60 per share. The Company may redeem outstanding warrants prior to their expiration, at a price of $ 0.01 per share, provided that the volume weighted average sale price per share of Common Stock equals or exceeds $ 9.00 per share for thirty ( 30 ) consecutive trading days ending on the third business day prior to the mailing of notice of such redemption. On December 21, 2022, 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 million 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. 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. Loans may be advanced to the Company from time to time from August 23, 2022 to the Maturity Date. The Company may redeem outstanding warrants prior to their expiration, at a price of $ 0.01 per share, provided that the volume weighted average sale price per share of Common Stock equals or exceeds $ 9.00 per share for thirty ( 30 ) consecutive trading days ending on the third business day prior to the mailing of notice of such redemption. On various dates from September 29, 2022 through March 7, 2023, the Company received aggregate proceeds of $ 2,250,000 from two of the Company’s Directors on the sale of these notes and warrants. On April 8, 2022, warrants to purchase an aggregate 925,000 shares of common stock were issued pursuant to a private placement debt offering in which aggregate proceeds of $ 3,700,000 were received in exchange for promissory notes and warrants to purchase an aggregate 925,000 shares of common stock, representing 25,000 warrant shares per $100,000 of promissory notes. The warrants are fully vested and exercisable over a period of 10 years at a price of $ 2.35 per share. The Company may redeem outstanding warrants prior to their expiration, at a price of $ 0.01 per share, provided that the volume weighted average sale price per share of Common Stock equals or exceeds $ 9.00 per share for thirty ( 30 ) consecutive trading days ending on the third business day prior to the mailing of notice of such redemption. A total of 780,000 of the warrants were issued to officers or directors. F- 27 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS No warrants were exercised, cancelled or expired during the year ended December 31, 2023 . A total of 1,300 warrants with a weighted average exercise price of $ 3.00 per share expired during the year ended December 31, 2022 The following is a summary of activity of outstanding warrants: Weighted Average Number Exercise of Shares Prices Balance, December 31, 2021 417,550 2.66 Warrants granted 1,175,000 2.40 Warrants expired ( 1,300 ) ( 3.00 ) Balance, December 31, 2022 1,591,250 $ 2.47 Warrants granted 700,000 2.55 Warrants expired - - Balance, December 31, 2023 2,291,250 $ 2.50 Exercisable, December 31, 2023 2,291,250 $ 2.50 Note 15 - Earnings Per Share Basic and diluted earnings per share years ended December 31, 2023 and 2022 For the Year Ended December 31, 2023 2022 Net income (loss) attributable to common shareholders $ ( 3,060,433 ) $ ( 12,127,068 ) Basic weighted average shares 5,168,339 4,835,389 Basic income and diluted loss per share $ ( 0.59 ) $ ( 2.51 ) The table below includes information related to stock options and warrants that were outstanding at the end of each respective year ended December 31, 2023 and 2022 . For periods in which we incurred a net loss, these amounts are not included in weighted average dilutive shares because their impact would be anti-dilutive. For the Year Ended 2023 2022 Weighted average stock options 1,060,717 600,796 Weighted average price of stock options $ 19.38 $ 4.81 Weighted average warrants 2,084,994 1,010,337 Weighted average price of warrants $ 2.50 $ 2.47 Average price of common stock $ 5.37 $ 4.06 F- 28 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS Note 16 – Income Taxes We account for income taxes under the provisions of ASC Topic 740, Income taxes, which provides for an asset and liability approach for income taxes. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences, using currently enacted tax laws, attributable to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts calculated for income tax purposes. We had no provision for income taxes for the years ended December 31, 2023 and 2022. The effective income tax rate for the years ended December 31, 2023 and 2022 consisted of the following: December 31, 2023 2022 Federal statutory income tax rate 21.00 % 21.00 % State income taxes 0.00 % 0.00 % Permanent differences ( 0.21 )% 0.10 % Change in effective state income tax rate 0.00 % 0.00 % True up prior year tax return 0.06 % ( 0.50 )% Change in valuation allowance ( 20.85 )% ( 20.60 )% Net effective income tax rate 0.00 % 0.00 % The components of the deferred tax assets and liabilities as of December 31, 2023 and 2022 are as follows: December 31, 2023 2022 Deferred tax assets: Federal and state net operating loss carryovers $ 9,391,254 $ 8,681,830 Stock compensation 2,578,060 862,079 Stock-based debt discounts 440,963 925,839 Goodwill and intangibles 1,106,693 5,197,470 Reorganization costs 28,135 - Allowance for bad debts 132 Total deferred tax assets $ 13,545,237 $ 15,667,218 Deferred tax liabilities: Property and equipment ( 561,128 ) ( 149,777 ) Total deferred liabilities ( 561,128 ) ( 149,777 ) Net deferred tax assets (liabilities) 12,984,109 15,517,441 Less: valuation allowance ( 12,984,109 ) ( 15,517,441 ) Deferred tax assets (liabilities) $ - $ - F- 29 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS As of December 31, 2023 , the Company has a net operating loss carryover of approximately $ 44,720,255 . Under existing Federal law, a portion of the net operating loss may be utilized to offset taxable income through the year ended December 31, 2037. A portion of the net operating loss (“NOL”) carryover begins to expire in 2030. For tax years beginning after December 31, 2017, pursuant to the enactment of the Tax Cuts and Jobs Act (“TCJA”) net operating losses now carry forward indefinitely but are limited to offsetting 80% of taxable income in a tax year. Of the total net operating loss as of December 31, 2023 , approximately $ 18,966,124 of the Company’s NOL is subject to the TCJA net operating loss provisions. ASC Topic 740 provides that a valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. In 2023, the Company decreased its valuation allowance from $ 15,517,441 to $ 12,984,109 to adjust for the decrease in net deferred tax assets. The Company believes it is more likely than not that the benefit of these remaining assets will not be realized. The Company filed annual US Federal income tax returns and annual income tax returns for the state of Minnesota through 2020. Following the 2020 tax year, the Company has filed annual state franchise tax returns for the state of Texas. We are not subject to income tax examinations by tax authorities for years before 2020 for all returns. Income taxing authorities have conducted no formal examinations of our past federal or state income tax returns and supporting records. The Company adopted the provisions of ASC Topic 740 regarding uncertainty in income taxes. The Company has found no significant uncertain tax positions as of any date on or before December 31, 2023 . Note 17 – Subsequent Events Management has evaluated events and transactions subsequent to the balance sheet date through the date of this report (the day the financial statements were available to be issued) for potential recognition or disclosure in the financial statements. Management has not identified any items requiring recognition or disclosure, except as follows: Change in Board of Directors On January 5, 2024, Tim Creed tendered his resignation, effective January 5, 2024 from the Board of Directors and the Company appointed Edward Shensky as a member of the Board of Directors of the Company effective immediately. Mr. Creed’s resignation was not a result of any disagreement with the Company on any matter related to its operations, policies or practices. Mr. Shensky will stand for re-election at the Company’s next annual meeting. His appointment to the Board of Directors was not pursuant to any arrangement or understanding between Mr. Shensky and any other person. Pursuant to the Company’s Non-Employee Director Compensation Plan, Mr. Shensky will receive annualized compensation of $ 25,000 , to be paid in cash or common stock, at the Company’s election, beginning with his appointment and continuing on each subsequent anniversary of his appointment thereafter or the date of his election at an annual meeting of shareholders, whichever comes first. On January 11, 2024, the Company issued an aggregate of 1,233 shares to Mr. Shensky under the Non-Employee Director Compensation Plan, which represents the number of shares to be issued based on the closing price of the Company’s shares on the OTCQB marketplace on January 10, 2024. Employment Agreement with and Resignation of Chief Financial Officer On January 11, 2024, the Board ratified the Employment Agreement (the “Terreri Employment Agreement”) entered into on December 1, 2023 with Keith Terreri, the Company’s Chief Financial Officer. The Terreri Employment Agreement supersedes Mr. Terreri’s previously filed offer letter and includes the previously approved compensation terms as well as restrictive covenants, a release and the severance terms described in more detail below. The Terreri Employment Agreement provides for Mr. Terreri’s entitlement to receive an annual base salary of $ 270,000 and an annual target bonus opportunity equal to 25% of base salary. Additionally, the Terreri Employment Agreement provides Mr. Terreri’s entitlement to a grant of 27,000 stock options, representing the right to purchase shares of the Company’s common stock, subject to Mr. Terreri’s continuous service to the Company through each vesting date. On March 2, 2024, Mr. Terreri tendered his resignation effective as of March 4, 2024. None of Mr. Terreri’s options were vested at the time his resignation was effective, so in accordance with the Terreri Employment Agreement, all 27,000 of his options are forfeited. F- 30 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS Amendment to the 2020 Stock Incentive Plan On January 8, 2024, our stockholders took action by written consent to ratify the amendment to the 2020 Stock Incentive Plan (the “2020 Plan”) approved by the Board on December 15, 2023. On December 15, 2023, our Board approved an amendment to the 2020 Plan to effect an increase in the number of shares that remain available for issuance under the 2020 Plan by an additional 2,150,000 shares up to an aggregate of 2,272,954 shares available for issuance under the 2020 Plan (the “2020 Plan Amendment”). Before the 2020 Plan Amendment, the number of shares available for issuance under the 2020 Plan would be too limited to effectively operate as an incentive and retention tool for employees, officers, directors, non-employee directors and consultants of the Company and its affiliates (as defined in the 2020 Plan). The 2020 Plan and the approved increase will enable us to continue our policy of equity ownership by employees, officers, directors, non-employee directors and consultants of the Company and its affiliates as an incentive to contribute to the creation of long-term value for our stockholders. Approval of Option Grants under the 2020 Plan On December 15, 2023 our Board of Directors approved option grants under the 2020 Plan to Ira Goldfarb and Claudia Goldfarb, subject to approval by a majority of the voting stockholders. In addition to ratifying the 2020 Plan Amendment, on January 9, 2024, the majority of voting stockholders of the Company approved Board on December 15, 2023. On December 15, 2023, pursuant to the respective A&R Employment Agreements of Ira Goldfarb and Claudia Goldfarb, and the terms of the 2020 Equity Incentive Plan, Mr. Goldfarb was granted stock options entitling him to purchase up to 500,000 shares of common stock, and Mrs. Goldfarb was granted stock options entitling her to purchase 450,000 shares of common stock, at an exercise price of $ 9.75 per share. The shares will vest equally over a five -year period from grant date. In the case of a Change of Control (as defined in their respective A&R Employment Agreements) all shares granted in the Initial Option Grant will vest immediately. Additionally, on December 15, 2023, pursuant to their respective A&R Employment Agreements, Mr. Goldfarb was granted additional stock options entitling him to purchase up to 500,000 shares of common stock, and Mrs. Goldfarb was granted an additional 450,000 options to purchase shares of common stock, at an exercise price of $40.00. The shares will vest upon the Company’s stock price trading on a national securities exchange operated by Nasdaq or the New York Stock Exchange with a closing transaction price above $40.00 per share for a period of twenty consecutive trading days. In the case of a Change of Control (as defined in the A&R Employment Agreements) all shares granted in the additional option grant will vest immediately. Reincorporation Effective February 15, 2024, Sow Good Inc. reincorporated to the State of Delaware from the State of Nevada under the name Sow Good Inc. pursuant to a plan of conversion (the “Plan of Conversion”), dated February 15, 2024 ( the “Reincorporation”). The Reincorporation was effected by the Company filing (i) articles of conversion (the “Articles of Conversion”) with the Secretary of State of the State of Nevada, (ii) a certificate of conversion (the “Certificate of Conversion”) with the Secretary of State of the State of Delaware and (iii) a certificate of incorporation (the “Certificate of Incorporation”) with the Secretary of State of the State of Delaware. In connection with the Reincorporation the Company also adopted Amended and Restated Bylaws (the “Bylaws”). Upon effectiveness of the Reincorporation: ● ‎the affairs of the Company ceased to be governed by the Nevada Revised Statutes, as amended, the Company’s existing articles of incorporation and the Company’s existing bylaws, and the affairs of the Company became subject to the Delaware General Corporation Law, as amended, the Certificate of Incorporation and the Bylaws; ● the shares of Sow Good’s issued and outstanding common stock, with a par value $ 0.0001 per share, converted into shares of the equivalent class of the Company’s Common Stock, each with a par value $ 0.0001 per share, on a 1 share of common stock to 1 share of common stock basis; ● each director and officer of Sow Good will continue to hold his or her respective position with the Company; ● each employee benefit, stock option or other similar plan of Sow Good will continue to be an employee benefit, stock option or other similar plan of the Company; and ● the Company will continue to file periodic reports and other documents with the SEC. 2024 Stock Incentive Plan Effective February 15, 2024, the board of directors adopted the 2024 Plan (the “2024 Plan”) under which a total of 3,000,000 share of our common stock have been reserved for issuance of Incentive Stock Options, or ISOs, Non-Qualified Stock Options, or NSOs, restricted share awards, stock unit awards, SARs, other stock-based awards, performance-based stock awards, (collectively, “stock awards”) and cash-based awards (stock awards and cash-based awards are collectively referred to as “awards”). ISOs may be granted only to our employees, including officers, and the employees of our parent or subsidiaries. All other awards may be granted to our employees, officers, our non-employee directors, and consultants and the employees and consultants of our subsidiaries, and affiliates. F- 31 Table of Contents SOW GOOD INC. NOTES TO THE FINANCIAL STATEMENTS Sublease Agreement by and between Papsa Merx S. de R.S. de C.V. and the Company, dated January 19, 2024. On January 19, 2024, Sow Good Inc., the Company entered into a sublease agreement with Papsa Merx S. de R.S. de C.V., a corporation registered in Mexico City, Mexico. Pursuant to the terms of the Sublease Agreement, the Company will sublease approximately 141 rentable square meters at Av. Roble 660, Valle del Campestre, 66265 San Pedro Garza García Municipality, Nuevo León, 66269 for a term of approximately seventeen months, which the Company intends to use as office space. The Term of the Lease Agreement will commence on February 1, 2024. The Sublease Agreement provides for rent payments at fixed price of $ 5,250 USD per month plus the corresponding Value Added Tax for the duration of the Term. The Company is also responsible for operating expenses of the Premises, which includes a maintenance fee, electricity and internet services. The Company is required to provide a deposit of guarantee in the amount of $ 5,250 USD in connection with the Sublease Agreement. The Sublease Agreement does not have a renewal period. Board of Director Grants On January 11, 2024, the Company issued an aggregate 7,060 shares of common stock amongst its five non-employee Directors for annual services to be rendered. The aggregate fair value of the common stock was $ 56,480 , based on the closing price of the Company’s common stock on the date of grant. The shares were expensed upon issuance. On February 9, 2024, the Company issued an aggregate 23,534 shares of common stock amongst its five non-employee Directors and three advisory Directors for annual services to be rendered. The aggregate fair value of the common stock was $ 519,280 , based on the closing price of the Company’s common stock on the date of grant. The shares were expensed upon issuance. Filing of an S- 1 On February 13, 2024, the Company filed a Form S- 1 Registration Statement in connection with a potential public offering of its common stock and uplist on a nationally recognized stock exchange. F-32 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. The Company conducted an evaluation to determine the Company's independent registered public accounting firm for the fiscal year ending December 31, 2023. Following the evaluation, on August 23, 2023, the Audit Committee approved the appointment of Urish Popeck & Co., LLC (“UPCO”) as the Company's independent public accounting firm to audit the Company's consolidated financial statements for the fiscal year ending December 31, 2023 and to review the Company's quarterly consolidated financial statements beginning with the third quarter of the 2023 fiscal year. On the same date, the Audit Committee approved the dismissal of M&K CPAS, PLLC (“M&K”) as the Company's independent registered public accounting firm. The reports of M&K on the consolidated financial statements of the Company for the fiscal years ended December 31, 2022 and 2021 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. During the fiscal years ended December 31, 2022 and 2021, and the subsequent interim period through June 30, 2023, there were no disagreements with M&K on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of M&K, would have caused M&K to make reference to the subject matter of such disagreements in connection with its reports on the consolidated financial statements for such fiscal years. During the fiscal years ended December 31, 2022 and 2021, and the subsequent interim period through June 30, 2023, there have been no reportable events (as that term is described in Item 304(a)(1)(v) of Regulation S-K, except for the material weaknesses previously disclosed under Item 9A of the Company's 2022 Annual Report on the Form 10-K filed on April 14, 2023 pertaining to its internal controls over its financial statements. The Company authorized M&K to respond fully to inquiries of the successor accountant concerning the material weaknesses. During the fiscal years ended December 31, 2022 and 2021, and the subsequent interim period through June 30, 2023, neither the Company nor anyone on its behalf consulted with UPCO regarding: (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements, and neither a written report nor oral advice was provided to the Company that UPCO concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).