ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated historical financial statements and the notes to those statements that appear elsewhere in this report. Certain statements in the discussion contain forward-looking statements based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors.
Overview and Outlook
Sow Good Inc. is a U.S.-based consumer packaged goods company that pioneered the freeze dried candy category. Since commencing commercial sales in the first quarter of 2023, Sow Good developed and scaled a proprietary freeze drying manufacturing operation dedicated to transforming traditional candy and snacks into novel, intensely flavorful treats it markets under the "hyper dried, hyper crunchy, hyper flavorful" brand positioning.
Recent Strategic Transactions
On December 30, 2025, the Company completed a series of strategic transactions that fundamentally changed the nature of its operations. The Company sold substantially all of its manufacturing assets — including six proprietary freeze drying machines and other property and equipment with an aggregate net book value of approximately $10 million — to Trea Grove, LLC, a related party, for total consideration of $1.5 million. Concurrently, the Company entered into an exclusive Distribution Agreement with Trea Grove, LLC, pursuant to which Trea Grove serves as the exclusive worldwide distributor of Sow Good's remaining finished goods inventory, with the Company receiving 10% of gross receipts from customer sales. The Distribution Agreement has a term through July 31, 2026. Additionally, the Company completed a $3.0 million convertible preferred stock offering, the proceeds of which were used to pay down debt and for operational purposes.
As a result of these transactions, the Company no longer operates manufacturing facilities and has transitioned to a capital-light model for the duration of the Distribution Agreement. The Company's board and management are evaluating strategic alternatives for the business going forward.
On December 31, 2025, the Company entered into a Securities Purchase Agreement with David Lazar for the private placement of two tranches of convertible preferred stock (. The Company completed the sale of the first tranche by issuing 1,500,000 shares of Series AA Preferred Stock with proceeds to the Company of $3,000,000, which were used to pay down debt, reduce headcount, and for operational purposes. Pursuant to the Securities Purchase Agreement, the Company expects to consummate the sale of the second tranche with the issuance of 1,500,000 shares of Series AAA Preferred Stock for additional proceeds of $3,000,000 in March 2026. The terms of the Series AAA Preferred Stock are substantially similar to the terms of the Series AA Preferred Stock, except that the Series AAA Preferred Stock are redeemable at a price of $200 per share, and each share of Series AA Preferred Stock is initially convertible into 14 shares of Common Stock where each share of Series AAA Preferred Stock is initially convertible into 250 shares of Common Stock (subject to adjustment as provided in the Series AAA certificate of designations).
In connection with the Private Placement the Company experienced a leadership transition with (i) Claudia Goldfarb stepping down as Chief Executive Officer while remaining with the Company as Chief Operating Officer and a member of the Company’s board of directors (the “Board”), (ii) members of the Board Chris Ludeman and Joe Mueller resigning from the Board in connection with the private placement and strategic asset sale, (iii) David Lazar being appointed Chief Executive Officer and elected to the Board, serving as the Board’s Chairman and (iv) David Natan being elected to the Board and serving as Audit Committee Chairman following Mr. Ludeman’s resignation.
Products
Sow Good offers freeze dried candy and snack products. The freeze drying process removes up to 99% of moisture from products in their frozen state through the application of low heat in a near-vacuum environment, concentrating flavor and producing a uniquely crunchy texture with a long shelf life and natural preservation characteristics.
A Distinctive and Trusted Brand Name
We believe we have a distinctive brand that consumers trust and helps distinguish our product on crowded retail shelves. Since Sow Good’s inception, we have invested heavily to elevate the Sow Good brand by creating a distinctive and cohesive brand design that sparks consumer curiosity and a desire to sample additional flavors carried by Sow Good. In addition, we use premium packaging materials to communicate the high-quality nature of our products and differentiate ourselves from competitive offerings.
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Key Factors Affecting our Performance
Our future success is dependent upon many factors. While the factors and trends described below present opportunities for us, they also pose significant challenges that we must successfully address to enable us to sustain and grow of our business and improve our results of operations. These factors and trends in our business have driven fluctuations in revenues over the periods presented and are expected to be key drivers of our results of operations and liquidity position for the foreseeable future.
The State of the Freeze Dried Candy Category
While we observed the freeze dried candy category experience a significant rise in popularity during 2024 and the first half of 2025, we have observed market data showing a significant decline in sales in the freeze dried candy category toward the end of 2025. This decline could be the result of a number of factors, including the disjointed nature of freeze dried candy providers and the variance in quality, the arrival of large multinational market entrants and their desire to reduce competition in the space, or the exhaustion of consumer appetite of freeze dried candy. As a result of the slowdown in the market for freeze dried candy, the Company has transitioned to a capital-light model for the duration of the Distribution Agreement.
Ability to Compete Against Competitors with Greater Resources and Market Clout
We operate in a highly competitive industry against competitors with significantly greater financial and other resources. We have become aware of certain of our competitors using their status in the market and marketing spend to limit our current and future customers from purchasing our products or reducing our shelf space. This caused the loss of significant customers with resulted in a significant reduction in revenue and an increase in our inventory. Our ability to keep our current customers, or grow our SKU portfolio on their shelves, and continue to expand our sales with new customers will depend on our competitors’ ability to leverage their market status and financial resources to limit our access to consumers and our ability to compete with these larger competitors.
Ability to Grow Our Customer Base in Retail and Traditional Wholesale Distribution Channels
We are currently seeking to grow our customer base in a variety of physical retail and traditional wholesale distribution channels. Our products have launched in retailers nationwide from convenience and grocery stores to big-box retailers and distributors, such as Five Below, Albertsons and C&S Wholesale. In addition, we have expanded our market to two Middle East distributors. Given the nascent state of the freeze dried candy segment and the number of potential retailer and wholesaler customers, we also believe there is a significant growth opportunity with customer acquisition in both the retail and wholesale channels, domestically and internationally. Customer acquisition in these channels depends on, among other things, our go-to-market function and our ability to meet the demand of customers who require large volumes of products.
Impact of inflation and other factors on our supply chain and operations.
We expect supplies and prices of the ingredients that we are going to use to be affected by a variety of factors, such as war, weather, seasonal fluctuations, demand, politics and economics in the producing countries. These factors subject us to shortages or interruptions in product supplies, which could adversely affect our revenue and profits.
Components of Results of Operations
Revenues
We recognize revenues from the sales of our freeze dried treats. The Company recognizes revenues when orders are shipped to customers.
Operating Expenses
Our operating expenses consist of general and administrative expenses, which includes salaries and benefits expenses, professional services expenses and other general and administrative expenses.
We expect our general and administrative expenses will increase as our business grows.
Interest Expense
Interest expense consists primarily of the cash interest expense on outstanding debt and the amortization of the debt discount created upon the issuance of warrants in connection with debt.
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Interest Income
Interest income consists primarily of the interest on short-term U.S Treasury Bonds.
Provision for Income Taxes
The Company recognized federal income tax of $0 for the twelve months ended December 31, 2025 and 2024, respectively. The Company’s effective tax rates for the twelve months ended December 31, 2025 and 2024 differed from the federal statutory tax rate of 21% primarily due to a valuation allowance for the Company’s deferred tax assets and permanent differences.
Segment Overview
Our chief operating decision makers, who are our Chief Executive Officer and our Executive Chairman, review financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance, as well as for strategic operational decisions and managing the organization. For each of the years ended December 31, 2025 and 2024, we have determined that we have one operating segment and one reportable segment.
Results of Operations for the Years Ended December 31, 2025 and December 31, 2024.
The following table summarizes selected items from the statement of operations for the years ended December 31, 2025 and December 31, 2024:
Year Ended
December 31,
Increase /
(Decrease)
% Change
Revenues
Cost of goods sold
Operating expenses:
General and administrative expenses:
Salaries and benefits
Professional services
Other general and administrative expenses
Total general and administrative expenses
Depreciation and amortization
Total operating expenses
Net operating loss
Other expense:
Loss on impairment of long lived assets
Interest expense
Total other expense
Net loss before tax provision
Revenues
As a result of the Asset Sale Agreement and Distribution Agreement entered into on December 30 and December 31, 2025, respectively, the Company exited its manufacturing and omnichannel sales business for freeze dried candy and related products. Under the new business model, the Company operates as a commission-based distribution agent and earns a percentage of distributor gross receipts from sales of Sow Good-branded products. Because the prior manufacturing and product sales activities were discontinued as part of these transactions, all revenues associated with the sale of freeze dried candy and related products have been reclassified to loss from discontinued operations for all periods presented. Accordingly, the Company recognized no revenue from continuing operations for the twelve months ended December 31, 2025 and 2024.
Results of operations for the years ended December 31, 2025 and 2024 have been reclassified on our Statement of Operations as either a gain or loss on discontinued operations, net of tax. For the years ended December 31, 2025 and 2024, we reclassified a loss of $33.8 million and a gain of $8.1 million, respectively to discontinued operations.
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Cost of Goods Sold
As a result of the transactions described above, the Company no longer manufactures or sells products directly and therefore does not incur cost of goods sold in its continuing operations. All costs associated with the manufacturing and sale of freeze dried candy, including inventory write-downs, production costs, and related overhead previously included in cost of goods sold, have been reclassified to discontinued operations for all periods presented. These costs include charges recorded to write down finished goods and raw materials inventory associated with SKUs the Company no longer intends to produce or sell, as well as related overhead allocations associated with the discontinued manufacturing operations.
General and administrative expenses
Salaries and benefits
Salaries and benefits for the twelve months ended December 31, 2025 were $4.4 million, compared to $7.6 million for the twelve months ended December 31, 2024, a decrease of $3.2 million, or (42%), related to decreased headcount. Salaries and benefits included amortization of stock options granted to employees and officers for the twelve months ended December 31, 2025 of $1.4 million, compared to $4.4 million for the twelve months ended December 31, 2024, decrease of $3.0 million, or -68%, mainly due to forfeitures of unvested stock options during the fourth quarter of 2025. Salaries, payroll tax and benefits other than the amortization of stock options decreased $0.4 million, or 13% over the comparative period, as a result of decreased headcount. Severance cost of $2.4 million incurred in the fourth quarter of 2025 was included in discontinued operations.
Professional services
Professional services were $838.7 thousand for the twelve months ended December 31, 2025, compared to $1.6 million for the twelve months ended December 31, 2024, a decrease of $750.6 thousand, or (47%). The decrease was primarily driven by the absence of professional service costs related to the 2024 underwritten public offering and reduced services as a result of scaling down activities during the twelve months ended December 31, 2025.
Other general and administrative expenses
Other general and administrative expenses for the twelve months ended December 31, 2025 was $1.3 million, compared to $1.9 million for the twelve months ended December 31, 2024, a decrease of $531.1 thousand, or (29%). The decrease is primarily attributable to a decrease of $388,506 in travel and entertainment costs.
Depreciation
Depreciation of property and equipment was $33.1 thousand and $31.6 thousand for the twelve months ended December 31, 2025 and 2024, respectively.
Other expense
Other expense consisted primarily of interest expense on notes payable of $156.6 thousand and $741.2 thousand for the twelve months ended December 31, 2025 and 2024, respectively, and $57.6 thousand of impairment expense on long lived assets for the twelve months ended December 31, 2025. The decrease in interest expense compared to the prior year was primarily attributable to a reduction in the average outstanding balance of notes payable during the period. Certain interest expense related to discontinued operations was been included in gain (loss) on discontinued operations for all periods presented.
Net loss on continuing operations
Pretax net loss on continuing operations for the twelve months ended December 31, 2025 was $6.8 million, compared to a pretax net loss on continuing operations of $11.8 million during the twelve months ended December 31, 2024, a decreased loss of $5.0 million. The decreased net loss was due primarily to the decreased salaries and benefits of $3.3 million, decreased professional services of $956,375, and decreased other general and administrative costs of $531,112.
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Provision for Income Taxes
The Company maintains a full valuation allowance related to our net deferred tax assets, primarily due to our historical net loss position. For each of the twelve months ended December 31, 2025 and 2024, the Company recognized federal income tax expense of $0, and $0, respectively.
Liquidity and Capital Resources
The following table summarizes our total current assets, liabilities and working capital at December 31, 2025 and December 31, 2023.
December 31,
December 31,
Current Assets
Current Liabilities
Working Capital
As of December 31, 2025, we had working capital of $2.8 million, compared to working capital of $20.2 million as of December 31, 2024. The decreased working capital is mainly attributable to decreases in inventory of approximately $20.4 million and cash of $2.2 million. As of December 31, 2025, our balance of cash and cash equivalents was $1.5 million, compared to $3.7 million at December 31, 2024. Our plan for satisfying our cash requirements for the next twelve months is through cash on hand, however we will require additional financing in the form of equity or debt which may not be available on favorable terms, or at all. We may not have sufficient funds to sustain our operations for the next twelve months. These factors raise substantial doubt about our ability to continue as a going concern. See Note 3 – “Going Concern” of the notes to consolidated financial statements in this Annual Report on Form 10-K for additional information.
Indebtedness
Promissory Notes and Warrants
On April 28, 2025, the Company restructured its outstanding current debt through the issuance of Convertible Notes in a dollar-for-dollar exchange. On April 28, 2025, the Company entered into an exchange agreement (the “Exchange Agreement”) with related party holders of the Company’s outstanding promissory notes (the “Outstanding Notes”) with an aggregate principal amount of $2.7 million, maturity dates ranging from April 8, 2025 to August 23, 2025 and interest rates ranging from 6% to 8%. Pursuant to the Exchange Agreement, holders exchanged their Outstanding Notes for new senior convertible promissory notes (the “Convertible Notes”) in an amount equal to $2.8 million, the aggregate principal amount of the Outstanding Notes, plus accrued and unpaid interest thereunder. The Convertible Notes have a maturity date of April 30, 2030 and will pay interest semiannually in arrears on May 1 and November 1 beginning on November 1, 2025. At the Company’s election, interest payable on an interest payment date may be added to the principal amount of the Convertible Note on the applicable interest payment date and will no longer be owed to holders of the Convertible Notes. The Convertible Notes are convertible at the election of the holders, in whole or in part, into shares of common stock based on a price per share equal to the average closing price of such common stock for the five trading days immediately prior to the execution of and entry into the Convertible Notes, with such conversion prices ranging from $0.62 to $0.63. The Convertible Notes are senior in right of payment to all existing and future debt obligations of the Company and will be secured by all existing and future assets of the
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Company. The Convertible Notes are redeemable by the Company at any time upon ten days’ notice and at the option the holders for the principal amount thereof plus interest, beginning on January 1, 2026.
Cash Flows
The following table summarizes our cash flows during the twelve months ended December 31, 2025 and 2024, respectively.
Year Ended
December 31,
Net cash used in operating activities
Net cash provided by investing activities
Net cash provided by financing activities
Net change in cash and cash equivalents
Net cash used in continuing operating activities was $4.3 million for the twelve months ended December 31, 2025, compared to $4.4 million of cash used in continuing operating activities twelve months ended December 31, 2024. The decrease in cash used in continuing operating activities of $0.6 million was primarily due to cash provided by changes in working capital. Cash used by discontinued operations was $0.6 million twelve months ended December 31, 2025 compared to cash used by discontinued operations of $13.2 million for the twelve months ended December 31, 2024.
Net cash used in investing activities of the continuing operation was $0 for twelve months ended December 31, 2025, and the twelve months ended December 31, 2024. Cash used in investing activities of discontinued operations during the twelve months ended December 31, 2025 was $0, compared to $5.9 million for the twelve months ended December 31, 2024, which was primarily used for additional freezers.
Net cash provided by financing activities for continuing operations was $3.0 million and $0 for the twelve months ended December 31, 2025 and 2024, respectively. Net cash provided by financing activities for the twelve months ended December 31, 2025 consisted of $3.0 million of proceeds from the sale of 1,500,000 convertible preferred shares at $2.00 per share. Cash used by discontinued operations was $943,868 during the twelve month period ended December 31, 2025. This cash was used to pay down related party long term convertible notes payable. Cash provided by financing activities of discontinued operations was $16.7 million for the twelve month period ended December 31, 2024. This cash was raised pursuant multiple private and public offerings, and the issuance of shares related to warrant exercises provided $5.3 million, in exchange for $5.2 million in repayment of notes payable, and $98,750 of repayment of interest during the twelve months ended December 31, 2024. In addition, another $1.6 million was used to repay borrowings during 2024.
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Contractual Obligations and Commitments
On July 1, 2023, the Company entered into a lease for 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 May 22, 2024, the Company entered into an industrial lease (the “Lease”) with USCIF Pinnacle Building B LLC, a Delaware limited liability company. Pursuant to the terms of the Lease, the Company will lease approximately 324,000 rentable square feet from the Lessor at 4024 Rock Quarry Road, Dallas, Texas for a term of approximately 62 months, which the Company intends to use as industrial and manufacturing space. The term of the Lease commenced on May 22, 2024. The Lease provides for graduated rent payments starting at $122,175 per month, and increasing up to $297,289.14 per month by the end of the Lease, plus taxes, insurance and common area maintenance costs. The Company was required to provide a security deposit in the amount of $1,000,000 in connection with the Lease. Effective September 30, 2025, the Company agreed with Pinnacle to exit the facility on January 31, 2026. As a result of reducing the lease term by 42 months, the company reduced the related right-of-use asset by $10,397,922 and the lease liability by $11,829,536, resulting in a noncash gain $1,427,649, which is included in the loss from discontinued operations for the year ended December 31, 2025.
On October 26, 2023, the Company entered into a lease agreement (the “2023 Lease Agreement”) with Prologis, Inc., a Maryland corporation. Pursuant to the terms of the 2023 Lease Agreement, beginning on November 1, 2023 the Company leases approximately 51,264 rentable square feet at Stemmons 10, 308 Mockingbird Lane, Dallas, TX 75247 for a term of approximately five years and two months (the “Initial Term”), which the Company intends to use as warehousing and distribution space. The 2023 Lease Agreement provides for base rent payments starting at approximately $42.5 thousand per month (taking into consideration an initial phase-in of the base rent obligation) in the first year of the Initial Term, and increase each year, up to approximately $51.7 thousand per month during the last year of the Initial Term. The 2023 Lease Agreement 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. Effective September 30, 2025, the Company agreed with Prologis to exit the lease as of September 30, 2025. As a result of reducing the lease term by 39 months, the company derecognized the related right-of-use asset $2,325,675 and the lease liability of $2,673,619, resulting in a noncash gain of $347,853, which is included in the loss from discontinued operations for the year ended December 31, 2025.
The Company was party to a real property lease for its 20,945 square foot facility at 1440 N. Union Bower Rd., Irving, TX 75061, under which an entity owned entirely by Ira Goldfarb, a related party. The lease term is through September 15, 2025, with two five-year options to extend, at a monthly lease term of $10.0 thousand, with approximately a 3% annual escalation of lease payments commencing September 15, 2021. Concurrently with the Asset Sale entered into on December 30, 2025, the company exited this lease and derecognized the related right-of-use asset $1,040,742 and the lease liability of $1,171,490, resulting in a noncash gain of $120,773, which is included in the loss from discontinued operations for the year ended December 31, 2025.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
The preparation of the Company’s financial statements requires management to make judgments and estimates due to uncertainties affecting the application of accounting policies. Different conditions or assumptions could lead to different reported amounts. The Company bases its estimates on historical experience and other reasonable assumptions. If actual results differ from these estimates, adjustments are recognized in the period they become known. Significant accounting policies are detailed in Note 2 of the Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITAT IVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk
We do not expect any significant effects from commodity price risk outside of inherent inflationary risks.
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Interest Rate Risk
We are not a party to agreements that subject us to floating rates of interest and do not anticipate entering into any transactions that would expose us to any direct interest rate risk.
Foreign Currency Risk
We did not hold any significant cash balances in foreign jurisdictions as of December 31, 2025. However, we anticipate that as our foreign operations grow, we will hold more cash in foreign jurisdictions, and thereby expose ourselves to greater currency fluctuation risk than we currently experience.
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