Sow Good Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS . SOW GOOD INC. CONDENSED BALANCE SHEETS September 30, December 31, 2022 2021 ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 1,374,816 $ 3,345,928 Accounts receivable 225,891 12,382 Prepaid expenses 118,390 81,057 Inventory 1,900,523 1,451,897 Total current assets 3,619,620 4,891,264 Property and equipment: Construction in progress 2,175,241 – Property and equipment 3,017,248 2,891,352 Less accumulated depreciation ( 432,591 ) ( 210,096 ) Total property and equipment, net 4,759,898 2,681,256 Security deposit 24,000 10,000 Right-of-use asset 1,278,664 1,329,089 Intangible assets 310,173 304,244 Goodwill 4,887,297 4,887,297 Total assets $ 14,879,652 $ 14,103,150 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 487,823 $ 279,337 Accrued expenses 202,679 77,750 Current portion of operating lease liabilities 50,846 45,970 Total current liabilities 741,348 403,057 Operating lease liabilities 1,315,413 1,353,898 Notes payable, related parties, net of $ 2,777,036 and $ 699,213 of debt discounts at September 30, 2022 and December 31, 2021, respectively 3,167,964 1,375,787 Notes payable, net of $ 373,383 of debt discounts at September 30, 2022 356,617 150,000 Total liabilities 5,581,342 3,282,742 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, 4,847,384 and 4,809,070 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively 4,847 4,809 Additional paid-in capital 58,158,080 54,342,027 Common stock payable, consisting of 11,585 shares at December 31, 2021 – 26,066 Accumulated deficit ( 48,864,617 ) ( 43,552,494 ) Total stockholders' equity 9,298,310 10,820,408 Total liabilities and stockholders' equity $ 14,879,652 $ 14,103,150 See accompanying notes to unaudited condensed financial statements. 3 SOW GOOD INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) For the Three Months For the Nine Months Ended September 30, Ended September 30, 2022 2021 2022 2021 Revenues $ 87,741 $ 21,137 $ 381,056 $ 28,213 Cost of goods sold 65,195 19,396 263,289 24,295 Gross profit 22,546 1,741 117,767 3,918 Operating expenses: General and administrative expenses: Salaries and benefits 788,450 936,783 2,947,505 2,610,884 Professional services 61,209 108,186 177,197 270,779 Other general and administrative expenses 403,429 472,369 1,296,294 1,183,453 Total general and administrative expenses 1,253,088 1,517,338 4,420,996 4,065,116 Depreciation and amortization 69,127 64,863 202,046 129,915 Total operating expenses 1,322,215 1,582,201 4,623,042 4,195,031 Net operating loss ( 1,299,669 ) ( 1,580,460 ) ( 4,505,275 ) ( 4,191,113 ) Other income (expense): Interest expense, including $ 285,522 and $ 607,320 of warrants issued as a debt discount for the three and nine months ending September 30, 2022, respectively ( 383,995 ) ( 1,697 ) ( 843,240 ) ( 4,431 ) Gain on disposal of property and equipment 36,392 – 36,392 – Gain on early extinguishment of debt – – – 113,772 Gain on investment in Allied Esports Entertainment, Inc. – – – 133,944 Total other income (expense) ( 347,603 ) ( 1,697 ) ( 806,848 ) 243,285 Net loss $ ( 1,647,272 ) $ ( 1,582,157 ) $ ( 5,312,123 ) $ ( 3,947,828 ) Weighted average common shares outstanding - basic and diluted 4,845,851 4,645,393 4,831,346 4,093,882 Net loss per common share - basic and diluted $ ( 0.34 ) $ ( 0.34 ) $ ( 1.10 ) $ ( 0.96 ) See accompanying notes to unaudited condensed financial statements. 4 SOW GOOD INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) For the Three Months Ended September 30, 2021 Additional Total Common Stock Paid-in Common Stock Accumulated Stockholders' Shares Amount Capital Payable Deficit Equity Balance, June 30, 2021 3,978,194 $ 3,978 $ 49,911,440 $ 2,524,732 $ ( 39,044,009 ) $ 13,396,141 Common stock sales for cash to officers and directors 430,733 431 1,830,190 ( 1,474,996 ) – 355,625 Common stock sales for cash 283,968 284 1,206,606 ( 997,140 ) – 209,750 Common stock issued to officers and directors for services 34,755 35 179,996 ( 19,579 ) – 160,452 Common stock options granted to officers and directors for services – – 135,804 – – 135,804 Common stock options granted to employees for services – – 9,762 – – 9,762 Net loss for the three months ended September 30, 2021 – – – – ( 1,582,157 ) ( 1,582,157 ) Balance, September 30, 2021 4,727,650 $ 4,728 $ 53,273,798 $ 33,017 $ ( 40,626,166 ) $ 12,685,377 For the Three Months Ended September 30, 2022 Additional Total Common Stock Paid-in Common Stock Accumulated Stockholders' Shares Amount Capital Payable Deficit Equity Balance, June 30, 2022 4,840,974 $ 4,841 $ 57,637,706 $ – $ ( 47,217,345 ) $ 10,425,202 Common stock warrants granted to related parties pursuant to debt financing – – 364,512 – – 364,512 Common stock issued to officers and directors for services 6,410 6 24,994 – – 25,000 Common stock options granted to officers and directors for services – – 113,166 – – 113,166 Common stock options granted to employees and advisors for services – – 17,702 – – 17,702 Net loss for the three months ended September 30, 2022 – – – – ( 1,647,272 ) ( 1,647,272 ) Balance, September 30, 2022 4,847,384 $ 4,847 $ 58,158,080 $ – $ ( 48,864,617 ) $ 9,298,310 5 For the Nine Months Ended September 30, 2021 Additional Total Common Stock Paid-in Common Stock Accumulated Stockholders' Shares Amount Capital Payable Deficit Equity Balance, December 31, 2020 2,742,890 $ 2,743 $ 44,748,859 $ 1,982,197 $ ( 36,678,338 ) $ 10,055,461 Common stock issued on subscriptions payable for the purchase of S-FDF, LLC assets 500,973 501 1,853,099 ( 1,853,600 ) – – Common stock sales for cash to officers and directors 655,733 656 2,729,965 – – 2,730,621 Common stock sales for cash 690,218 690 2,831,200 – – 2,831,890 Common stock issued to officers and directors for services 133,836 134 683,648 ( 95,580 ) – 588,202 Common stock issued to employees and consultants for services 4,000 4 19,996 – – 20,000 Common stock options granted to officers and directors for services – – 373,580 – – 373,580 Common stock options granted to employees for services – – 33,451 – – 33,451 Net loss for the nine months ended September 30, 2021 – – – – ( 3,947,828 ) ( 3,947,828 ) Balance, September 30, 2021 4,727,650 $ 4,728 $ 53,273,798 $ 33,017 $ ( 40,626,166 ) $ 12,685,377 For the Nine Months Ended September 30, 2022 Additional Total Common Stock Paid-in Common 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 warrants granted to related parties pursuant to debt financing – – 2,614,196 – – 2,614,196 Common stock warrants granted to note holders pursuant to debt financing – – 444,330 – – 444,330 Common stock issued to officers and directors for services 26,059 26 76,038 ( 26,066 ) – 49,998 Common stock issued to advisory board for services 12,255 12 29,988 – – 30,000 Common stock options granted to officers and directors for services – – 530,908 – – 530,908 Common stock options granted to employees and advisors for services – – 120,593 – – 120,593 Net loss for the nine months ended September 30, 2022 – – – – ( 5,312,123 ) ( 5,312,123 ) Balance, September 30, 2022 4,847,384 $ 4,847 $ 58,158,080 $ – $ ( 48,864,617 ) $ 9,298,310 See accompanying notes to unaudited condensed financial statements. 6 SOW GOOD INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months Ended September 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ ( 5,312,123 ) $ ( 3,947,828 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 223,887 129,915 Gain on disposal of property and equipment ( 36,392 ) – Gain on investment in Allied Esports Entertainment, Inc. – ( 133,944 ) Gain on early extinguishment of debt – ( 113,772 ) Common stock issued to officers and directors for services 49,998 588,202 Common stock awarded to advisors and consultants for services 30,000 20,000 Amortization of stock options 651,501 407,031 Amortization of stock warrants issued as a debt discount 607,320 – Decrease (increase) in current assets: Accounts receivable ( 213,509 ) ( 8,020 ) Prepaid expenses ( 37,333 ) ( 24,993 ) Inventory ( 448,626 ) ( 1,021,099 ) Security deposits ( 14,000 ) – Right-of-use asset 50,425 48,620 Increase (decrease) in current liabilities: Accounts payable 208,486 ( 137,171 ) Accrued expenses 124,929 ( 82,357 ) Lease liabilities ( 33,609 ) ( 29,085 ) Net cash used in operating activities ( 4,149,046 ) ( 4,304,501 ) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds received from disposal of property and equipment 63,957 – Proceeds received from sale of investment in Allied Esports Entertainment, Inc. securities – 414,361 Purchase of property and equipment ( 154,853 ) ( 1,004,611 ) Cash paid for construction in progress ( 2,175,241 ) – Cash paid for intangible assets ( 5,929 ) – Net cash used in investing activities ( 2,272,066 ) ( 590,250 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds received from notes payable, related parties 3,870,000 – Proceeds received from notes payable 580,000 – Proceeds received from the sale of common stock – 5,562,511 Net cash provided by financing activities 4,450,000 5,562,511 NET CHANGE IN CASH AND CASH EQUIVALENTS ( 1,971,112 ) 667,760 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,345,928 1,912,729 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,374,816 $ 2,580,489 SUPPLEMENTAL INFORMATION: Interest paid $ 134,444 $ – Income taxes paid $ – $ – NON-CASH INVESTING AND FINANCING ACTIVITIES: Value of debt discounts attributable to warrants $ 3,058,526 $ – See accompanying notes to unaudited condensed financial statements. 7 SOW GOOD INC. Notes to Condensed Financial Statements (Unaudited) Note 1 – Organization and Nature of Business Effective January 21, 2021, we changed our name from Black Ridge Oil & Gas, Inc. to Sow Good Inc. (“SOWG,” “Sow Good,” or the “Company”) to pursue the freeze dried fruits and vegetables business as acquired with our October 1, 2020 acquisition of S-FDF, LLC. Our common stock is traded on the OTCQB under the trading symbol “SOWG”. At that time, o ur common stock started to be quoted on the OTCQB under the trading symbol “SOWG”, from the former trading symbol “ANFC”. Prior to April 2, 2012, the Company name was Ante5, Inc., which became an independent company in April 2010. We became a publicly traded company when our shares began trading on July 1, 2010. From October 2010 through August 2019, we had been engaged in the business of acquiring oil and gas leases and participating in the drilling of wells in the Bakken and Three Forks trends in North Dakota and Montana and /or managing similar assets for third parties. On September 26, 2017, the Company finalized an equity raise utilizing a rights offering and backstop agreement, raising net proceeds of $ 5,051,675 and issuing 1,439,400 shares. The proceeds were used to sponsor a special purpose acquisition company, discussed below, with the remainder for general corporate purposes. On October 10, 2017, the Company’s sponsored special purpose acquisition company, Black Ridge Acquisition Corp. (“BRAC”), completed an IPO raising $ 138,000,000 of gross proceeds (including proceeds from the exercise of an over-allotment option by the underwriters on October 18, 2017). In addition, the Company purchased 445,000 BRAC units at $ 10.00 per unit in a private placement transaction for a total contribution of $ 4,450,000 in order to fulfill its obligations in sponsoring BRAC, a blank check company formed for the purpose of entering into a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination with one or more businesses or entities. BRAC’s efforts to identify a prospective target business were not limited to a particular industry or geographic region. Following the IPO and over-allotment, BROG owned 22% of the outstanding common stock of BRAC and managed BRAC’s operations via a management services agreement. On December 19, 2018, BRAC entered into a business combination agreement, which subsequently closed on August 9, 2019. On October 1, 2020, the Company completed its acquisition of S-FDF, LLC pursuant to an Asset Purchase Agreement. In connection with the closing of the Asset Purchase Agreement, the Company acquired approximately $2.2 million in cash and certain assets and agreements related to the Seller’s freeze dried fruits and vegetables business for human consumption and entered into certain employment and registration rights agreements. On February 5, 2021, the Company raised over $ 2.5 million of capital from the sale of 631,250 newly issued shares at a share price of $ 4.00 in a private placement. The proceeds were used to find capital expenditures and working capital investment. On May 5, 2021, the Company announced the launch of our direct-to-consumer freeze dried consumer packaged goods (CPG) food brand, Sow Good. Sow Good launched with its first line of non-GMO products including 6 ready-to-make smoothies and 9 snacks. On July 7, 2021, the Company raised over $ 3 million of capital from the sale of 714,701 newly issued shares at a share price of $ 4.25 in a private placement. Investors in the private placement included Sow Good’s Chief Executive Officer, Executive Chairman, and Chief Financial Officer, in addition to other Sow Good board members and a small group of accredited investors. The proceeds were used to invest in inventory ahead of pursuing larger business-to-business relationships, as well as funding incremental capital expenditures and general operating expenses. On July 23, 2021, we launched six new gluten-free granola products under the Sow Good brand. Sow Good’s granola products are made with health-conscious ingredients such as freeze dried fruit, almonds, hemp hearts, and coconut oil. 8 SOW GOOD INC. Notes to Condensed Financial Statements (Unaudited) On December 31, 2021, we sold an aggregate $ 2,075,000 of promissory notes and warrants to purchase an aggregate 311,250 shares of common stock to related parties, representing 15,000 warrant shares per $ 100,000 of promissory notes. The warrants are exercisable at a price of $ 2.21 per share over a ten-year term. The proceeds will be used for working capital investment and to ramp up our freeze dried consumer packaged goods business. On April 8, 2022, we sold an aggregate $ 3,700,000 of promissory notes and warrants to purchase an aggregate 925,000 shares of common stock, including $ 3,120,000 and warrants to purchase an aggregate 780,000 shares of common stock, to related parties . The warrants are exercisable at a price of $ 2.35 per share over a ten-year term. These proceeds will also be used for working capital investment and to ramp up our freeze dried consumer packaged goods business. On August 23, 2022, we closed on an offering to sell up to $ 2,500,000 of promissory notes and warrants to purchase an aggregate 625,000 shares of the Company’s common stock, exercisable over a ten-year period at a price of $ 2.60 per share, representing 25,000 warrant shares per $ 100,000 of Notes purchased. The notes mature on August 23, 2025 . Interest on the notes accrue at a rate of 8 % per annum, payable on January 1, 2025. Loans may be advanced to the Company from time to time from August 23, 2023 to the Maturity Date. On September 29, 2022, the Company received aggregate proceeds of $ 750,000 from two of the Company’s Directors on the sale of these notes and warrants. Note 2 – Basis of Presentation and Significant Accounting Policies The interim condensed financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to not make the information presented misleading. 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. It is suggested that these interim condensed financial statements be read in conjunction with the audited financial statements for the year ended December 31, 2021, which were included in our Annual Report on Form 10-K. The Company follows the same accounting policies in the preparation of interim reports. Fair Value of Financial Instruments The Company discloses the fair value of certain assets and liabilities in accordance with ASC 820 – Fair Value Measurement (“ASC 820”). Under FASB ASC 820-10-05, the Financial Accounting Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of cash, accounts payable and accrued expenses reported on the balance sheets are estimated by management to approximate fair value primarily due to the short-term nature of the instruments. The Company had no items that required fair value measurement on a recurring basis. 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. 9 SOW GOOD INC. Notes to Condensed Financial Statements (Unaudited) Cash in Excess of FDIC 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 $ 832,600 of cash in excess of FIDC and SIPC insured limits at September 30, 2022, and has not experienced any losses in such accounts. Property and Equipment Property and equipment are stated at the lower of cost or estimated net recoverable amount. The cost of property, plant and equipment is depreciated using the straight-line method based on the lesser of the estimated useful lives of the assets or the lease term based on the following life expectancy: Schedule of estimated useful lives of assets Software 3 years, or over the life of the agreement Website 3 years Office equipment 5 years Furniture and fixtures 5 years Machinery and equipment 7-10 years Leasehold improvements Fully extended lease-term Repairs and maintenance expenditures are charged to operations as incurred. Major improvements and replacements, which extend the useful life of an asset, are capitalized and depreciated over the remaining estimated useful life of the asset. When assets are retired or sold, the cost and related accumulated depreciation and amortization are eliminated and any resulting gain or loss is reflected in operations. Depreciation was $ 223,887 and $ 129,915 for the nine months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022, $ 21,841 of the depreciation expense was allocated to inventory overhead, resulting in $ 202,046 of depreciation expense. Impairment of Long-Lived Assets Long-lived assets held and used by the Company are reviewed for possible impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable or is impaired. Recoverability is assessed using undiscounted cash flows based upon historical results and current projections of earnings before interest and taxes. Impairment is measured using discounted cash flows of future operating results based upon a rate that corresponds to the cost of capital. Impairments are recognized in operating results to the extent that carrying value exceeds discounted cash flows of future operations. Our intellectual property is comprised of indefinite-lived brand names acquired and have been assigned an indefinite life as we currently anticipate that these brand names will contribute cash flows to the Company perpetually. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired. 10 SOW GOOD INC. Notes to Condensed Financial Statements (Unaudited) Inventory Inventory, consisting of raw materials, material overhead, labor, and manufacturing overhead, are stated at the average cost or net realizable value and consists of the following: Schedule of inventory September 30, December 31, 2022 2021 Finished goods $ 454,378 $ 273,135 Packaging materials 459,435 95,436 Work in progress 636,768 613,063 Raw materials 349,942 470,263 Total inventory $ 1,900,523 $ 1,451,897 No reserve for obsolete inventories has been recognized. Goodwill The Company evaluates goodwill on an annual basis in the fourth quarter or more frequently if management believes indicators of impairment exist. Such indicators could include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, management conducts a quantitative goodwill impairment test. The impairment test involves comparing the fair value of the applicable reporting unit with its carrying value. The Company estimates the fair values of its reporting units using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The Company’s evaluation of goodwill completed during the year resulted in an impairment loss of $ 1,524,030 for the year ended December 31, 2021. Revenue Recognition The Company recognizes revenue in accordance with ASC 606 — Revenue from Contracts with Customers (“ASC” 606”). Under ASC 606, the Company recognizes revenue from the sale of its freeze dried food products, in accordance with a five-step model in which the Company evaluates the transfer of promised goods or services and recognizes revenue when customers obtain control of promised goods or services in an amount that reflects the consideration which the Company expects to be entitled to receive in exchange for those goods or services. To determine revenue recognition for the arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company has elected, as a practical expedient, to account for the shipping and handling as fulfillment costs, rather than as a separate performance obligation. Revenue is reported net of applicable provisions for discounts, returns and allowances. Methodologies for determining these provisions are dependent on customer pricing and promotional practices. The Company records reductions to revenue for estimated product returns and pricing adjustments in the same period that the related revenue is recorded. These estimates are based on industry-based historical data, historical sales returns, if any, analysis of credit memo data, and other factors known at the time. Basic and Diluted Earnings (Loss) Per Share The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the periods presented, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share. 11 SOW GOOD INC. Notes to Condensed Financial Statements (Unaudited) Stock-Based Compensation The Company accounts for equity instruments issued to employees in accordance with the provisions of ASC 718 Stock Compensation (ASC 718) and Equity-Based Payments to Non-employees pursuant to ASC 2018-07 (ASC 2018-07). All transactions in which the consideration provided in exchange for the purchase of goods or services consists of the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty’s performance is complete or the date at which a commitment for performance by the counterparty to earn the equity instruments is reached because of sufficiently large disincentives for nonperformance. Stock-based compensation was $ 731,499 and $ 1,015,233 , consisting entirely of expenses related to common stock and options issued for services for the nine months ended September 30, 2022 and 2021, respectively, using the Black-Scholes options pricing model and an effective term of 6 to 6.5 years based on the weighted average of the vesting periods and the stated term of the option grants and the discount rate on 5 to 7 year U.S. Treasury securities at the grant date. In addition, $ 607,320 of expenses related to the amortization of warrants issued in consideration of debt financing for the nine months ended September 30, 2022. 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. Recent Accounting Pronouncements From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company's financial statements upon adoption. In October 2021, the FASB issued ASU 2021-08 , Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which creates an exception to the general recognition and measurement principle for contract assets and contract liabilities from contracts with customers acquired in a business combination. The new guidance will require companies to apply the definition of a performance obligation under accounting standard codification (“ASC”) Topic 606 to recognize and measure contract assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers that are acquired in a business combination. Under current GAAP, an acquirer in a business combination is generally required to recognize and measure the assets it acquires and the liabilities it assumes at fair value on the acquisition date. The new guidance will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. These amendments are effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The adoption of ASU 2021-08 is not expected to have a material impact on the Company’s financial statements or related disclosures. In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity Classified Written Call Options . ASU 2021-04 addresses issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. ASU 2021-04 is effective for fiscal years beginning after December 15, 2021 and interim periods within those fiscal years, with early adoption permitted. The adoption of ASU 2021-04 has not had a material impact on the Company’s financial statements or related disclosures. 12 SOW GOOD INC. Notes to Condensed Financial Statements (Unaudited) In March 2020, the FASB issued ASU 2020-04 establishing Topic 848, Reference Rate Reform . ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance is optional and is effective between March 12, 2020 and December 31, 2022. The guidance may be elected over time as reference rate reform activities occur. We are currently evaluating the impact that the expected market transition from the London Interbank Offered Rate, commonly referred to as LIBOR, to alternative references rates will have on our financial statements as well as the applicability of the aforementioned expedients and exceptions provided in ASU 2020-04. In August 2020, the FASB issued ASU No. 2020-06, Debt–Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging–Contracts in Entity’s Own Equity (Subtopic 815-40) : Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if converted method. The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2021, with early adoption permitted. The adoption of ASU 2020-06 has not had a material impact on the Company’s financial statements or related disclosures. No other new accounting pronouncements, issued or effective during the period ended September 30, 2022, have had or are expected to have a significant impact on the Company’s financial statements. Note 3 – Going Concern As shown in the accompanying financial statements, as of September 30, 2022, the Company has incurred recurring losses from operations resulting in an accumulated deficit of $ 48,864,617 , and had cash on hand of $ 1,374,816 . We are too early in our development stage to project revenue with a necessary level of certainty; therefore, we may not have sufficient funds to sustain our operations for the next twelve months and we may need to raise additional cash to fund our operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company has commenced sales and continues to develop its operations. In the event sales do not materialize at the expected rates, management would seek additional financing or would attempt to conserve cash by further reducing expenses. There can be no assurance that we will be successful in achieving these objectives. 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. Our ability to scale production and distribution capabilities and further increase the value of our brands, is largely dependent on our success in raising additional capital. Note 4 – Related Party Debt Financing 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 September 29, 2022, the Company received aggregate proceeds of $ 750,000 from two of the Company’s Directors on the sale of these notes and warrants. 13 SOW GOOD INC. Notes to Condensed Financial Statements (Unaudited) On April 8, 2022 , the Company closed a private placement and concurrently entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) to sell an aggregate $ 3,700,000 of Promissory Notes (the “Notes”) and warrants (the “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. Common Stock Payable Awarded to Officers On March 25, 2022, the Company issued 5,541 and 6,044 shares of common stock to Claudia and Ira Goldfarb , respectively, in satisfaction of an outstanding common stock payable for services earned during December 31, 2021. The aggregate fair value of the shares was $ 12,467 and $ 13,599 for Claudia and Ira, respectively, based on the closing price of the Company’s common stock on the date of grant. Common Stock and Options Awarded to Recently Appointed Director 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. Pursuant to the Company’s 2020 Stock Incentive Plan (the “2020 Equity 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, 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. Pursuant to the Company’s 2020 2020 Equity Plan, Mr. Mueller was also 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. Lease Agreement Upon closing of the Asset Purchase Agreement, the Company assumed the Seller’s obligations under a real property lease for its 20,945 square foot facility in Irving, Texas, from IG Union Bower, LLC (“Union Bower”), an entity owned entirely by Ira Goldfarb, under which Union Bower is the landlord. The lease term is through September 15, 2025 , with two five-year options to extend, at a monthly lease term of $ 10,036 , with approximately a 3% annual escalation of lease payments commencing September 15, 2021. Common Stock Options Awarded to Former Chief Financial Officer 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, however, pursuant to a Separation Agreement and Release, dated May 3, 2022 , the vesting terms of the options were accelerated to be fully vested. Departure of CFO On April 30, 2022, Mr. Brad Burke resigned as the Company’s Chief Financial Officer, and the Company’s Chief Executive Officer, Claudia Goldfarb, was appointed as the interim Chief Financial Officer. On May 3, 3022, the Company entered into a Separation Agreement and Release, which entitles Mr. Burke to receive an amount equal to the base salary that he would have received for a three-month period (“Severance Pay”), and the accelerated vesting of options to purchase an aggregate 75,000 shares of common stock with a weighted average exercise price of $ 4.09 per share, along with an extension of the time period to exercise such stock option agreements to the fifth anniversary of the separation. 14 SOW GOOD INC. Notes to Condensed Financial Statements (Unaudited) Note 5 – Fair Value of Financial Instruments The Company discloses the fair value of certain assets and liabilities in accordance with ASC 820 – Fair Value Measurement (“ASC 820”). Under FASB ASC 820-10-5, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows: Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs). Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability. The following schedule summarizes the valuation of financial instruments at fair value on a recurring basis in the balance sheets as of September 30, 2022 and December 31, 2021: Valuation of financial instruments at fair value Fair Value Measurements at September 30, 2022 Level 1 Level 2 Level 3 Assets Cash and cash equivalents $ 1,374,816 $ – $ – Intangible assets – 310,173 – Goodwill – 4,887,297 – Total assets 1,374,816 5,197,470 – Liabilities Notes payable, related parties, net of $2,777,036 of debt discounts – 3,167,964 – Notes payable, net of $373,383 of debt discounts – 356,617 – Total liabilities – 3,524,581 – $ 1,374,816 $ 1,672,889 $ – Fair Value Measurements at December 31, 2021 Level 1 Level 2 Level 3 Assets Cash and cash equivalents $ 3,345,928 $ – $ – Intangible assets – 304,244 – Goodwill – 4,887,297 – Total assets 3,345,928 5,191,541 – Liabilities Notes payable, related parties, net of $699,213 of debt discounts – 1,375,787 – Notes payable – 150,000 – Total liabilities – 1,525,787 – $ 3,345,928 $ ( 3,665,754 ) $ – There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs for the nine months ended September 30, 2022. 15 SOW GOOD INC. Notes to Condensed Financial Statements (Unaudited) Note 6 – Prepaid Expenses Prepaid expenses consist of the following: Schedule of prepaid expenses September 30, December 31, 2022 2021 Prepaid software licenses $ 50,407 $ 28,314 Prepaid insurance costs 16,417 11,179 Trade show advances 18,557 22,728 Prepaid office and other costs 33,009 18,836 Total prepaid expenses $ 118,390 $ 81,057 Note 7 – Property and Equipment Property and equipment at September 30, 2022 and December 31, 2021, consists of the following: Property and equipment September 30, December 31, 2022 2021 Office equipment $ 13,872 $ 13,872 Machinery 1,629,732 1,478,022 Software 70,000 70,000 Website 71,589 71,589 Leasehold improvements 1,232,055 1,257,869 Construction in progress 2,175,241 – 5,192,489 2,891,352 Less: Accumulated depreciation and amortization ( 432,591 ) ( 210,096 ) Total property and equipment, net $ 4,759,898 $ 2,681,256 Construction in progress consists of costs incurred to build our second and third freeze driers, and to build out our offices within our facility in Irving Texas. These costs will be capitalized as Machinery and Leasehold Improvements, 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. The Company recognized depreciation of $ 223,887 and $ 129,915 for the nine months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022, $ 21,841 of the depreciation expense was allocated to inventory overhead, resulting in $ 202,416 of depreciation expense. 16 SOW GOOD INC. Notes to Condensed Financial Statements (Unaudited) Note 8 – Intangible Assets Intangible assets consist of the following: Schedule of Intangible assets September 30, December 31, 2022 2021 Licenses $ 2,500 $ 2,500 Branding, Sow Good 159,083 159,083 Branding, Sustain Us 48,399 48,399 Trademarks and patents 100,191 94,262 Total intangible assets $ 310,173 $ 304,244 Note 9 – Leases The Company leases its 20,945 square foot operating and office 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 term of $ 10,036 , with approximately a 3% annual escalation of lease payments commencing September 15, 2021, subject to the ASU 2016-02. In the locations in which it is economically feasible to continue to operate, management expects to enter into a new lease upon expiration. The operating and office 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 components of lease expense were as follows: Schedule of components of lease expense For the Nine Months Ended September 30, 2022 Operating lease cost: Fixed rent expense $ 110,161 17 SOW GOOD INC. Notes to Condensed Financial Statements (Unaudited) Supplemental balance sheet information related to leases was as follows: Schedule of supplemental balance sheet information September 30, 2022 Operating leases: Operating lease assets $ 1,278,664 Current portion of operating lease liabilities $ 50,846 Noncurrent operating lease liabilities 1,315,413 Total operating lease liabilities $ 1,366,259 Weighted average remaining lease term: Operating leases 13.5 years Weighted average discount rate: Operating leases 5.75 % Supplemental cash flow and other information related to leases was as follows: Schedule of supplemental cash flow and other information For the Nine Months Ended September 30, 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows used for operating leases $ 33,609 The future minimum lease payments due under operating leases as of September 30, 2022 was as follows: Schedule of future minimum lease payments Fiscal Year Ending Minimum Lease December 31, Commitments 2022 (for the three months remaining) $ 31,942 2023 129,046 2024 132,917 2025 136,905 2026 and thereafter 1,554,000 Total $ 1,984,810 Less effects of discounting 618,551 Lease liability recognized $ 1,366,259 18 SOW GOOD INC. Notes to Condensed Financial Statements (Unaudited) Note 10 – Notes Payable, Related Parties Notes payable, related parties consists of the following at September 30, 2022 and December 31, 2021, respectively: Schedule of Notes payable, related parties September 30, December 31, 2022 2021 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 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 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 – 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 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 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 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 – On April 8, 2022, the Company received $ 100,000 pursuant to a note and warrant purchase agreement with the Company’s Chairman and CEO, Mr. & 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 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 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 – 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 Chairman, 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 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 – 19 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 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 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 – On December 31, 2021, the Company received $ 1,500,000 pursuant to a note and warrant purchase agreement with the Company’s Chairman and CEO, Mr. & Mrs. Goldfarb, as lenders. The unsecured note bears interest at 8% per annum, compounded semi-annually, and shall be payable in cash semi-annually on June 30 th and December 31 st . The note matures on December 31, 2024 . The noteholder 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 30 th and December 31 st . 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 then 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 30 th and December 31 st . 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 30 th and December 31 st . 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 5,945,000 2,075,000 Less unamortized debt discounts: 2,777,036 699,213 Notes payable, related parties 3,167,964 1,375,787 Less: current maturities – – Notes payable, related parties, less current maturities $ 3,167,964 $ 1,375,787 The Company recorded total discounts of $ 3,313,409 , consisting of $ 364,512 , $ 2,249,684 and $ 699,213 of debt discounts on warrants granted to the related parties on September 29, 2022, April 8, 2022 and on various dates in December, 2021, respectively. 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 recognized $ 752,257 of interest expense for the nine months ended September 30, 2022. Interest expense consisted of $ 215,884 of stated interest expense and $ 536,373 of amortized debt discounts related to stock-based warrants. There was no interest expense during the nine months ended September 30, 2021. 20 Note 11 – Notes Payable Notes payable consists of the following at September 30, 2022 and December 31, 2021, respectively: Schedule of notes payable September 30, December 31, 2022 2021 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 $ – 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 – 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, 2022, as extended. 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 730,000 150,000 Less unamortized debt discounts: 373,383 – Notes payable 356,617 150,000 Less: current maturities – – Notes payable, less current maturities $ 356,617 $ 150,000 The Company recorded total discounts of $ 444,330 , consisting of debt discounts on warrants granted to accredited investors on April 8, 2022. 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 recognized $ 90,983 and $ 4,431 of interest expense for the nine months ended September 30, 2022 and 2021, respectively. Interest expense consisted of $ 20,036 of stated interest, and $ 70,947 of amortized debt discounts related to stock-based warrants for the nine months ended September 30, 2022. Interest expense of $ 4,431 consisted entirely of the stated interest on the EIDL Loan during the nine months ended September 30, 2021. 21 Note 12 – Changes in 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 The Company has 500,000,000 authorized shares of $ 0.001 par value common stock. As of September 30, 2022, a total of 4,847,384 shares of common stock have been issued. Common Stock Awarded to Board Member 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 Board Members On April 20, 2022, the Company awarded an aggregate total of 8,000 shares of common stock to two advisory board 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 board 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. The shares were subsequently issued on April 11, 2022. Settlement of Common Stock Payable Awarded to Officers On March 25, 2022, the Company issued 5,541 and 6,044 shares of common stock to Claudia and Ira Goldfarb , respectively , for their services earned in December of 2021. The fair value of the shares was $ 12,467 and $ 13,599 for Claudia and Ira, respectively, based on the closing price of the Company’s common stock on the dates of grant. 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 September 29, 2020, January 4, 2021, and March 19, 2021, the Board of Directors adopted and approved amendments that in aggregate increase the number of shares reserved for issuance under the 2020 Equity Plan to an aggregate total of 814,150 shares and such amendments were approved by a majority of shareholders of record on September 3, 2021. Outstanding Options Options to purchase an aggregate total of 631,798 shares of common stock at a weighted average strike price of $ 4.81 , exercisable over a weighted average life of 8.37 years were outstanding as of September 30, 2022. 22 Options Granted 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 $3.6166, was $ 87,346 . The options are being expensed over the vesting period, resulting in $ 3,350 of stock-based compensation expense during the nine months ended September 30, 2022. As of September 30, 2022, a total of $ 83,996 of unamortized expenses are expected to be 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 $2.6433, was $ 71,423 . The options are being expensed over the vesting period, resulting in $ 7,162 of stock-based compensation expense during the nine months ended September 30, 2022. As of September 30, 2022, a total of $ 64,261 of unamortized expenses are expected to be 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 $2.6433, was $ 95,099 . The options are being expensed over the vesting period, resulting in $ 9,468 of stock-based compensation expense during the nine months ended September 30, 2022. As of September 30, 2022, a total of $ 85,241 of unamortized expenses are expected to be 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 $2.6433, 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 nine months ended September 30, 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 . 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 $2.6435, was $ 51,380 . The options are being expensed over the vesting period, resulting in $ 5,038 of stock-based compensation expense during the nine months ended September 30, 2022. As of September 30, 2022, a total of $ 42,709 of unamortized expenses are expected to be expensed over the vesting period. On March 25, 2022, a newly appointed advisory board 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 $2.2584, was $ 14,413 . The options are being expensed over the vesting period, resulting in $ 1,493 of stock-based compensation expense during the nine months ended September 30, 2022. As of September 30, 2022, a total of $ 12,920 of unamortized expenses are expected to be expensed over the vesting period. The Company recognized a total of $ 651,501 and $ 407,031 of compensation expense during the nine months ended September 30, 2022 and 2021, respectively, related to common stock options issued to Officers, Directors, Employees and Advisors that are being amortized over the implied service term, or vesting period, of the options. The remaining unamortized balance of these options is $ 1,370,205 as of September 30, 2022. Options Exercised No options were exercised during the nine months ended September 30, 2022 and 2021. Options Forfeited A total of 46,986 options with a weighted average exercise price of $ 5.64 were forfeited during the nine months ended September 30, 2022. 23 Note 14 – Warrants Outstanding Warrants Warrants to purchase an aggregate total of 1,528,750 shares of common stock at a weighted average strike price of $ 2.47 , exercisable over a weighted average life of 9.42 years were outstanding as of September 30, 2022. Warrants Granted On September 29, 2022 , warrants to purchase an aggregate 187,500 shares of common stock were issued to directors pursuant to a private placement debt offering in which aggregate proceeds of $ 750,000 were received in exchange for promissory notes and warrants to purchase an aggregate 187,500 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. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 140 % and a weighted average call option value of $1.9441, was $ 364,512 . The warrants are being expensed over the life of the loans, resulting in $ 688 of stock-based compensation expense during the nine months ended September 30, 2022. As of September 30, 2022, a total of $ 363,824 of unamortized expenses are expected to be expensed over the lives of outstanding debts. 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. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 154 % and a weighted average call option value of $2.9443, was $ 2,694,014 . The warrants are being expensed over the life of the loans, resulting in $ 430,160 of stock-based compensation expense during the nine months ended September 30, 2022. As of September 30, 2022, a total of $ 2,786,595 of unamortized expenses are expected to be expensed over the lives of outstanding debts, including $ 522,741 of unamortized debt discounts on warrants issued during December of 2021. No warrants were granted during the nine months ended September 30, 2021. Warrants Expired A total of 1,300 warrants with a weighted average exercise price of $ 3.00 were forfeited during the nine months ended September 30, 2022. No warrants were exercised during the nine months ended September 30, 2021. Warrants Exercised No warrants were exercised during the nine months ended September 30, 2022 and 2021. 24 Note 15 – Income Taxes The Company accounts for income taxes under ASC Topic 740, Income Taxes, which provides for an asset and liability approach of accounting for income taxes. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences, using currently enacted tax laws, attributed to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts calculated for income tax purposes. Losses incurred during the period from April 9, 2011 (inception) to September 30, 2022 could be used to offset future tax liabilities. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is “more likely than not” that some component or all of the benefits of deferred tax assets will not be realized. As of September 30, 2022, net deferred tax assets were $ 8,432,000 , with no deferred tax liability, primarily related to net operating loss carryforwards. A valuation allowance of approximately $ 8,432,000 was applied to the net deferred tax assets. Therefore, the Company has no tax expense for 2022 to date. In accordance with FASB ASC 740, the Company has evaluated its tax positions and determined there are no significant uncertain tax positions as of any date on, or before September 30, 2022. Note 16 – Commitments Legal Proceedings The Company may be subject from time to time to various inquiries, administrative proceedings and litigation relating to matters arising in the normal course of business. The Company is not currently a defendant in any material litigation and is not aware of any threatened litigation that could have a material effect on the Company. Management is not able to estimate the minimum loss to be incurred, if any, as a result of the final outcome of the matters arising in the normal course of business but believes they are not likely to have a material adverse effect upon the Company’s financial position or results of operations and, accordingly, no provision for loss has been recorded. Cash in Excess of FDIC Limits The Company periodically maintains cash balances at banks in excess of federally insured amounts. The extent of loss, if any, to be sustained as a result of any future failure of a bank or other financial institution is not subject to estimation at this time. Lease Commitments Upon closing of the Asset Purchase Agreement, the Company assumed the Seller’s obligations under a real property lease for its 20,945 square foot facility 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 term of $ 10,036 , with approximately a 3% annual escalation of lease payments commencing September 15, 2021. The future minimum lease payments due under operating leases as of September 30, 2022 was as follows: Fiscal Year Ending Minimum Lease December 31, Commitments 2022 (for the three months remaining) $ 31,942 2023 129,046 2024 132,917 2025 136,905 2026 and thereafter 1,554,000 $ 1,984,810 Less effects of discounting 618,551 Lease liability recognized $ 1,366,259 Note 17 – Subsequent Events The Company evaluates events that have occurred after the balance sheet date through the date these financial statements were issued. No events occurred of a material nature that would have required adjustments to or disclosures in these financial statements. 25