Lifeway Foods, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Accounting Firm (PCAOB ID 248 ) F-1 Consolidated Balance Sheets as of December 31, 2024 and 2023 F-2 Consolidated Statements of Operations for the Years Ended December 31, 2024 and 2023 F-3 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2024 and 2023 F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 2024 and 2023 F-5 Notes to Consolidated Financial Statements F-6 27 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Lifeway Foods, Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Lifeway Foods, Inc. (an Illinois corporation) and subsidiaries (the “Company”) as of December 31, 2024 and 2023, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2024, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. Basis for opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matters The critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2022. Chicago, Illinois March 14, 2025 F- 1 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2024 and 2023 (In thousands) December 31, 2024 2023 Current assets Cash and cash equivalents $ 16,728 $ 13,198 Accounts receivable, net of allowance for credit losses and discounts & allowances of $ 1,590 and $ 1,270 at December 31, 2024 and 2023, respectively 15,424 13,875 Inventories, net 8,678 9,104 Prepaid expenses and other current assets 2,144 2,019 Refundable income taxes 631 – Total current assets 43,605 38,196 Property, plant and equipment, net 26,862 22,764 Operating lease right-of use asset 118 192 Goodwill 11,704 11,704 Intangible assets, net 6,358 6,898 Other assets 1,900 1,900 Total assets $ 90,547 $ 81,654 Current liabilities Current portion of note payable $ – $ 1,250 Accounts payable 10,401 9,976 Accrued expenses 5,103 4,916 Accrued income taxes – 474 Total current liabilities 15,504 16,616 Note payable – 1,483 Operating lease liabilities 70 118 Deferred income taxes, net 3,062 3,001 Total liabilities 18,636 21,218 Commitments and contingencies (Note 9) – – Stockholders’ equity Preferred stock, no par value; 2,500 shares authorized; none issued – – Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,100 and 14,691 shares outstanding at 2024 and 2023 6,509 6,509 Paid-in capital 4,632 4,825 Treasury stock, at cost ( 14,052 ) ( 16,695 ) Retained earnings 74,822 65,797 Total stockholders’ equity 71,911 60,436 Total liabilities and stockholders’ equity $ 90,547 $ 81,654 See accompanying notes to consolidated financial statements F- 2 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the Years Ended December 31, 2024 and 2023 (In thousands, except per share data) 2024 2023 Net sales $ 186,820 $ 160,123 Cost of goods sold 135,400 115,060 Depreciation expense 2,846 2,622 Total cost of goods sold 138,246 117,682 Gross profit 48,574 42,441 Selling expenses 14,743 11,776 General and administrative 19,439 13,130 Amortization expense 540 540 Total operating expenses 34,722 25,446 Income from operations 13,852 16,995 Other income (expense): Interest expense ( 105 ) ( 384 ) Gain (loss) on sale of property and equipment ( 8 ) 34 Other income 230 4 Total other income (expense) 117 ( 346 ) Income before provision for income taxes 13,969 16,649 Provision for income taxes 4,944 5,282 Net income $ 9,025 $ 11,367 Net earnings per common share: Basic $ 0.61 $ 0.77 Diluted $ 0.60 $ 0.75 Weighted average common shares outstanding: Basic 14,769 14,667 Diluted 15,130 15,103 See accompanying notes to consolidated financial statements F- 3 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity For the Years Ended December 31, 2024 and 2023 (In thousands) Common Stock Issued In treasury Paid-In Retained Total Shares $ Shares $ Capital Earnings Equity Balance, January 1, 2023 17,274 $ 6,509 ( 2,629 ) $ ( 16,993 ) $ 3,624 $ 54,430 $ 47,570 Issuance of common stock in connection with stock-based compensation – – 46 298 ( 364 ) – ( 66 ) Stock-based compensation – – – – 1,565 – 1,565 Net income – – – – – 11,367 11,367 Balance, December 31, 2023 17,274 $ 6,509 ( 2,583 ) $ ( 16,695 ) $ 4,825 $ 65,797 $ 60,436 Issuance of common stock in connection with stock-based compensation – – 398 2,573 ( 2,790 ) – ( 217 ) Issuance of common stock on exercise of stock options – – 11 70 36 – 106 Stock-based compensation – – – – 2,561 – 2,561 Net Income – – – – – 9,025 9,025 Balance, December 31, 2024 17,274 $ 6,509 ( 2,174 ) $ ( 14,052 ) $ 4,632 $ 74,822 $ 71,911 See accompanying notes to consolidated financial statements F- 4 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended December 31, 2024 and 2023 (In thousands) 2024 2023 Cash flows from operating activities: Net income $ 9,025 $ 11,367 Adjustments to reconcile net income to operating cash flow: Depreciation and amortization 3,386 3,162 Non-cash interest expense 17 6 Bad debt expense – 2 Stock-based compensation 2,446 1,497 Deferred income taxes 61 ( 28 ) Loss (gain) on sale of property and equipment 8 ( 34 ) (Increase) decrease in operating assets: Accounts receivable ( 1,550 ) ( 2,463 ) Inventories 426 527 Prepaid expenses and other current assets ( 125 ) ( 574 ) Refundable income taxes ( 631 ) 44 Increase (decrease) in operating liabilities: Accounts payable 156 1,859 Accrued expenses 217 1,102 Accrued income taxes ( 474 ) 474 Net cash provided by operating activities 12,962 16,941 Cash flows from investing activities: Purchases of property and equipment ( 6,697 ) ( 4,351 ) Proceeds from sale of equipment 15 41 Purchase of investments – ( 100 ) Net cash used in investing activities ( 6,682 ) ( 4,410 ) Cash flows from financing activities: Repayment of line of credit – ( 2,777 ) Repayment of note payable ( 2,750 ) ( 1,000 ) Net cash used in financing activities ( 2,750 ) ( 3,777 ) Net increase in cash and cash equivalents 3,530 8,754 Cash and cash equivalents at the beginning of the period 13,198 4,444 Cash and cash equivalents at the end of the period $ 16,728 $ 13,198 Supplemental cash flow information: Cash paid for income taxes, net of (refunds) $ 5,987 $ 4,792 Cash paid for interest $ 98 $ 415 Non-cash investing activities Accrued purchase of property and equipment $ 407 $ 137 Right-of-use assets obtained in exchange for lease obligations $ – $ 94 See accompanying notes to consolidated financial statements F- 5 LIFEWAY FOODS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2024 and 2023 (In thousands) Note 1 – Basis of presentation The consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include all of the assets, liabilities and results of operations of Lifeway Foods, Inc. and its wholly owned subsidiaries (collectively “Lifeway” or the “Company”). All inter-company balances and transactions have been eliminated in the consolidated financial statements. Note 2 – Summary of significant accounting policies Use of estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to use judgement 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 consolidated financial statements, and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing the consolidated financial statements include the reserve for promotional allowances, the valuation of goodwill and intangible assets, stock-based and incentive compensation, and deferred income taxes. Cash and cash equivalents Lifeway considers cash and all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates or equals fair value due to their short-term nature. Lifeway from time to time may have bank deposits in excess of insurance limits of the Federal Deposit Insurance Corporation. The Company places its cash and cash equivalents with high credit quality financial institutions. Lifeway has not experienced any losses in such accounts and believes the financial risks associated with these financial instruments are minimal. Revenue Recognition Lifeway sells food and beverage products across select product categories to customers predominantly within the United States (see Note 13 – Disaggregation of Revenue, Significant Customers, and Geographic Information). The Company also sells bulk cream, a byproduct of its fluid milk manufacturing process. In accordance with ASC 606, Revenue from Contracts with Customers, Lifeway recognizes revenue when control over the products transfers to its customers, which generally occurs upon delivery to its customers or their common carriers. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, using the five-step method required by ASC 606. For the Company, the contract is the approved sales order, which may also be supplemented by other agreements that formalize various terms and conditions with customers. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer. F- 6 Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer, which is the delivery of food and beverage products which provide immediate benefit to the customer. Lifeway accounts for product shipping and handling as fulfillment activities with revenues for these activities recorded within net revenue and costs recorded within cost of goods sold. Any taxes collected on behalf of government authorities are excluded from net revenues. Variable consideration, which includes known or expected pricing or revenue adjustments, such as trade discounts, allowances for non-saleable products, product returns, trade incentives and coupon redemption, is estimated utilizing the most likely amount method. Key sales terms, such as pricing and quantities ordered, are established on a frequent basis such that most customer arrangements and related incentives have a one year or shorter duration. As such, the Company does not capitalize contract inception costs and it capitalizes product fulfillment costs in accordance with U.S. GAAP and its inventory policies. It generally does not receive noncash consideration for the sale of goods, nor does it grant payment financing terms greater than one year. Accounts Receivable Lifeway provides credit terms to customers in-line with industry standards and maintains allowances for potential credit losses based on historical collection experiences and the current economic condition of specific customers. All accounts receivables have an original term of less than one year. Customer balances are written off after all collection efforts are exhausted. Estimated product returns, which have not been material, are deducted from sales at the time of revenue recognition. The Company does not charge interest on past due accounts receivable. Accounts receivable, less allowances was $ 15,424 , $ 13,875 and $ 11,414 , as of December 31, 2024, 2023, and 2022 respectively. Inventories Inventories are stated at the lower of cost or net realizable value, valued on a first in, first out basis (“FIFO”). The costs of finished goods inventories include raw materials, direct labor, and overhead costs. Inventories are stated net of reserves for excess or obsolete inventory. Property, plant and equipment Property, plant and equipment are recorded at cost. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets as follows: Schedule of property and equipment, estimated useful lives Asset Useful Life Buildings and improvements 10 – 39 years Machinery and equipment 5 – 12 years Office equipment 3 – 7 years Vehicles 5 years Leasehold improvements Shorter of expected useful life or lease term The Company performs impairment tests when circumstances indicate that the carrying value of an asset may not be recoverable. Expenditures for repairs and maintenance, which do not improve or extend the life of the assets, are expensed as incurred. F- 7 Goodwill Goodwill represents the excess purchase price over the fair value of the net tangible and other identifiable intangible assets acquired. Goodwill is not amortized, but it is subject to an annual assessment for impairment, which the Company performs on its one reporting unit during the fourth quarter (as of December 31), or more frequently if events occur or circumstances change such that it is more likely than not that an impairment may exist. In testing goodwill for impairment, the Company has the option to perform a qualitative test (also known as “Step 0”) or a quantitative test (“Step 1”). Under the Step 0 test, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. Qualitative factors may include, but are not limited to, economic conditions, industry and market considerations, cost factors, overall financial performance of the reporting unit and other entity and reporting unit specific events. If after assessing these qualitative factors, the Company determines it is “more-likely-than-not” that the fair value of the reporting unit is less than the carrying value, then performing the Step 1 quantitative test is necessary. Step 1 of the quantitative test requires comparison of the fair value of the Company’s one reporting unit to the carrying value. If the carrying value of the reporting unit is less than the fair value, no impairment exists. Otherwise, the Company would recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value up to the amount of goodwill allocated to the reporting unit. Under a Step 1 quantitative test, we estimate the fair value of our one reporting unit using a combination of the fair values derived from both the income approach and the market approach. Under the income approach, the Company uses a discounted cash flow methodology which requires management to make significant estimates and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth rates, and long-term discount rates, among others. The discount rate used to determine the present value of future cash flows is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the business’s ability to execute on the projected cash flows. For the market approach, the Company uses the guideline public company method. The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable publicly traded companies with similar operating and investment characteristics. The Company also reconciles the fair value of its reporting unit to its current market capitalization, allowing for a reasonable control premium. Intangible Assets Intangible assets acquired in a business combination are recorded at their estimated fair values at the date of acquisition. Identifiable intangible assets with finite lives are amortized over their estimated useful lives as follows: Schedule of intangible assets useful lives Asset Useful Life Recipes 4 years Brand names 15 years Formula 10 years Customer lists 5-10 years Customer relationships 15 years All amortization expense related to intangible assets is recorded in Amortization expense in the consolidated statements of operations. Amortizable intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Lifeway conducts more frequent impairment assessments if certain conditions exist, such as a change in the competitive landscape, any internal decisions to pursue new or different strategies, a loss of a significant customer, or a significant change in the marketplace including changes in the prices paid for its products or changes in the size of the market for its products. If an evaluation of the undiscounted cash flows indicates impairment, the asset is written down to its estimated fair value, which is generally based on discounted future cash flows. If the estimated remaining useful life of an intangible asset is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life. F- 8 Fair value measurements Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement: Level 1 – Quoted prices in active markets for identical assets or liabilities. Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability. Lifeway’s financial assets and liabilities that are not carried at fair value on a recurring basis include cash and cash equivalents, accounts receivable, other receivables, accounts payable, accrued expenses and revolving line of credit for which carrying value approximates fair value. The Company records its investments in equity securities without a readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. As of December 31, 2024, and 2023, the Company has one equity investment without a readily determinable fair value which is recorded at $ 1,800 in other assets on the consolidated balance sheet. The investment cost of $ 1,800 for this equity investment includes a cumulative unrealized gain of $ 1,731 resulting from an observable price change in 2019. There were no upward or downward observable price change adjustments to the equity investment cost during 2024 or 2023. Income taxes The Provision for income taxes includes federal, state, local and foreign income taxes currently payable, and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using enacted tax rates expected to apply to taxable income in the year in which the deferred tax assets or liabilities are expected to be realized or settled. The principal sources of temporary differences are different depreciation and amortization methods for financial statement and tax purposes, incentive compensation, unrealized gain, capitalization of indirect inventory costs for tax purposes, reserves for excess and obsolete inventory and the allowance for doubtful accounts. Valuation allowances are recorded to reduce deferred tax assets when it is more likely not that a tax benefit will not be realized. Deferred income tax expense or benefit is based on the changes in the asset or liability from period to period. Lifeway analyzes filing positions in all the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company recognizes the income tax benefit from an uncertain tax position when it is more likely than not that, based on technical merits, the position will be sustained upon examination, including resolutions of any related appeals or litigation processes. It applies a more likely than not threshold to the recognition and derecognition of uncertain tax positions. Accordingly, Lifeway recognizes the amount of tax benefit that has a greater than 50% likelihood of being ultimately realized upon settlement. Future changes in judgment related to the expected ultimate resolution of uncertain tax positions will affect earnings in the period of such change. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. The total amount of unrecognized tax benefits can change due to audit settlements, tax examination activities, statute expirations and the recognition and measurement criteria under accounting for uncertainty in income taxes. Lifeway recognizes penalties and interest related to unrecognized tax benefits in the provision (benefit) for income taxes in the consolidated statements of operations. F- 9 Share-based compensation Share-based compensation expense is recognized for equity awards over the vesting period based on their grant date fair value. The fair value of restricted stock and performance share awards are equal to the closing price of Lifeway’s stock on the date of grant. The Company does not estimate forfeitures in measuring the grant date fair value, but rather account for forfeitures as they occur. The fair value of stock options are measured using the Black-Scholes option pricing model. The expected term of options granted was based on the weighted average time of vesting and the end of the contractual term. The Company utilized this simplified method as it did not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The Company issues share-based equity awards from treasury shares. Treasury stock Treasury stock is recorded using the cost method. Advertising costs Advertising costs are expensed as incurred and reported in Selling expense in the Company’s consolidated statements of operations. Total advertising expense was $ 5,447 and $ 3,733 for the years ended December 31, 2024 and 2023, respectively. Earnings per common share Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares issued and outstanding during the reporting period. Diluted earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares issued and outstanding and the effect of all dilutive common stock equivalents related to the Company’s outstanding stock-based compensation awards outstanding during the reporting period. Segments The Company is managed as a single reportable segment. The Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), reviews financial information on an aggregate basis for purposes of allocating resources and assessing financial performance, as well as for making strategic operational decisions and managing the organization. Substantially all of Lifeway’s consolidated revenues relate to the sale of cultured dairy products that it produces using the same processes and materials and are sold to consumers through a common network of distributors and retailers in the United States. Recent accounting pronouncements Issued but not yet effective In November 2024, the Financial Accounting Standards Board (“FASB”) issued ASU 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Topic 220-40): Disaggregation of Income Statement Expenses. The new standard requires additional disclosure of certain amounts included in the expense captions presented on the Statement of Operations as well as disclosures about selling expenses. The new standard is effective on a prospective basis, with the option for retrospective application, for our annual period ending December 31, 2027, and our interim periods during the fiscal year ending December 31, 2028. The new standard does not affect recognition or measurement in the Company’s consolidated financial statements. Upon adoption, the impact of ASU 2024-03 will be limited to certain notes to the Consolidated Financial Statements. F- 10 In December 2023, the FASB issued ASU No. 2023-09: Income Taxes (Topic 740): Improvements to Income Tax Disclosures that requires entities to disclose additional information about federal, state, and foreign income taxes primarily related to the income tax rate reconciliation and income taxes paid. The new standard also eliminates certain existing disclosure requirements related to uncertain tax positions and unrecognized deferred tax liabilities. The new standard is effective for our fiscal year ending December 31, 2025, and our interim periods during the fiscal year ending December 31, 2026. The guidance does not affect recognition or measurement in the Company’s consolidated financial statements. Upon adoption, the impact of ASU 2023-09 will be limited to certain notes to the Consolidated Financial Statements. Adopted In November 2023, the FASB issued Accounting Standards Update (“ASU”) No. 2023-07: Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The new standard requires entities to report incremental information about significant segment expenses included in a segment’s profit or loss measure as well as the name and title of the chief operating decision maker. The new standard also requires interim disclosures related to reportable segment profit or loss and assets that had previously only been disclosed annually. The new standard is effective for our annual period ending December 31, 2024 and our interim periods during the fiscal year ending December 31, 2025. The Company adopted this standard during the fourth quarter of 2024. The new standard did not affect recognition or measurement in the Company’s consolidated financial statements. Note 3 – Inventories, net Schedule of inventories December 31, 2024 2023 Ingredients $ 2,519 $ 2,929 Packaging 2,855 3,014 Finished goods 3,304 3,161 Total inventories, net $ 8,678 $ 9,104 Note 4 – Property, Plant and Equipment, net Schedule of property, plant and equipment December 31, 2024 2023 Land $ 1,565 $ 1,565 Buildings and improvements 23,520 21,661 Machinery and equipment 38,181 33,573 Vehicles 477 705 Office equipment 758 1,072 Construction in process 2,163 2,154 66,664 60,730 Less accumulated depreciation ( 39,802 ) ( 37,966 ) Total property, plant and equipment, net $ 26,862 $ 22,764 F- 11 Note 5 – Goodwill and Intangible Assets Goodwill Goodwill consisted of the following: Schedule of goodwill Total Balance at December 31, 2023 Goodwill $ 12,948 Accumulated impairment losses ( 1,244 ) $ 11,704 Balance at December 31, 2024 Goodwill $ 12,948 Accumulated impairment losses ( 1,244 ) $ 11,704 The Company performed an annual Step 0 impairment assessment for its single reporting unit as of December 31, 2024 and 2023, noting no impairment loss. Approximately $1,664 of goodwill is deductible for income tax purposes. Intangible Assets The gross carrying amounts and accumulated amortization of intangible assets consisted of the following: Schedule of other intangible assets December 31, 2024 December 31, 2023 Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount Recipes $ 44 $ ( 44 ) $ – $ 44 $ ( 44 ) $ – Customer lists and other customer related intangibles 4,529 ( 4,529 ) – 4,529 ( 4,529 ) – Customer relationship 3,385 ( 1,532 ) 1,853 3,385 ( 1,372 ) 2,013 Brand names 7,948 ( 3,443 ) 4,505 7,948 ( 3,063 ) 4,885 Formula 438 ( 438 ) – 438 ( 438 ) – Total intangible assets, net $ 16,344 $ ( 9,986 ) $ 6,358 $ 16,344 $ ( 9,446 ) $ 6,898 F- 12 Estimated amortization expense on intangible assets for the next five years is as follows: Schedule of future amortization expense on intangible assets Year Amortization 2025 $ 540 2026 $ 540 2027 $ 540 2028 $ 540 2029 $ 540 The weighted-average remaining amortization expense period for the customer relationship and brand name intangible assets is 11.6 and 11.9 years, respectively, as of December 31, 2024. The weighted-average remaining amortization expense period for total intangible assets is 11.8 years as of December 31, 2024. Note 6 – Accrued Expenses Accrued expenses consisted of the following: Schedule of accrued expenses December 31, 2024 2023 Payroll and incentive compensation $ 4,188 $ 3,853 Real estate taxes 468 442 Accrued utilities 193 241 Current portion of operating lease liabilities 47 74 Other 207 306 Total accrued expenses $ 5,103 $ 4,916 Note 7 – Debt Note payable consisted of the following: Schedule of note payable December 31, 2024 December 31, 2023 Term loan due August 18, 2026. Interest payable monthly. $ – $ 2,750 Unamortized deferred financing costs – ( 17 ) Total note payable – 2,733 Less current portion – ( 1,250 ) Total long-term portion $ – $ 1,483 The Company paid the outstanding term loan balance of $ 2,250 in full during the second quarter of 2024 and expensed the remaining unamortized deferred financing costs. F- 13 Credit Agreement The Company is party to an Amended and Restated Loan and Security Agreement (as amended and modified from time to time, the “Credit Agreement”) with its existing lender and certain of its subsidiaries. The Credit Agreement provides for, among other things, a $ 5,000 term loan to be repaid in quarterly installments of principal and interest over a term of five years, a revolving line of credit up to a maximum of $ 5,000 (the “Revolving Credit Facility”) and an incremental facility not to exceed $ 5,000 . The termination date of the term loan is August 18, 2026 , unless earlier terminated. The termination date of the revolving credit facility is June 30, 2025 , unless earlier terminated. All outstanding amounts under the Credit Agreement bear interest at the Secured Overnight Financing Rate (“SOFR”), plus 2.07%. Interest is payable monthly in arrears . Lifeway is also required to pay a quarterly unused revolving line of credit fee of 0.20 % and, in conjunction with the issuance of any letters of credit, a letter of credit fee of 0.20 %. The Credit Agreement includes customary representations, warranties, and covenants, including financial covenants requiring the Company to maintain a fixed charge coverage ratio of no less than 1.25 to 1.00, and a minimum working capital financial covenant, as defined, of no less than $11,250, in each of the fiscal quarters ending through the expiration date. The Credit Agreement provides for events of default, including failure to repay principal and interest when due and failure to perform or violation of the provisions or covenants of the agreement, as a result of which amounts due under the Credit Agreement may be accelerated. The loans and all other amounts due and owed under the Credit Agreement and related documents are secured by substantially all of the Company’s assets. Lifeway was in compliance with the fixed charge coverage ratio and minimum working capital covenants at December 31, 2024. Revolving Credit Facility As of December 31, 2024, the Company had $ 0 outstanding under the Revolving Credit Facility. The Company had $ 5,000 available for future borrowings under the Revolving Credit Facility as of December 31, 2024. See Footnote 15 – Subsequent Events, for the February 2025 credit agreement amendment which increased the revolving loan commitment from $ 5,000 to $ 25,000 . Note 8 – Leases The Company leases certain machinery and equipment with fixed base rent payments and variable costs based on usage. Remaining lease terms for these leases range from less than one year to six years. The Company includes lease extension options, if applicable and reasonably certain to be exercised, in the calculation of the right-of-use asset and lease liabilities. Lifeway includes only fixed payments for lease components in the measurement of the right-of-use asset and lease liability. Variable lease payments are those that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time. There are no residual value guarantees. Lifeway does not currently have leases which meet the finance lease classification as defined under ASC 842. Lifeway treats contracts as a lease when the contract conveys the right to use a physically distinct asset for a period of time in exchange for consideration, it directs the use of the asset and obtains substantially all the economic benefits of the asset. F- 14 Right-of-use assets and lease liabilities are measured and recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Lifeway has elected the practical expedient to combine lease and non-lease components into a single component for all of its leases. When the Company is unable to determine an implicit interest rate, it uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments for those leases. Lifeway includes options to extend or terminate the lease in the measurement of the right-of-use asset and lease liability when it is reasonably certain that it will exercise such options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company does not record leases with an initial term of 12 months or less on the balance sheet. Expense for these short-term leases is recorded on a straight-line basis over the lease term. Total lease expense was $ 148 and $ 138 (including short term leases) for the years ended December 31, 2024 and 2023, respectively. Future maturities of lease liabilities were as follows: Schedule of future maturities of lease liabilities Year Operating Leases 2025 $ 54 2026 31 2027 21 2028 17 2029 10 Thereafter 0 Total lease payments 133 Less: Interest ( 16 ) Present value of lease liabilities $ 117 The weighted-average remaining lease term for its operating leases was 3.4 years as of December 31, 2024. The weighted average discount rate of its operating leases was 8.51 % as of December 31, 2024. Cash paid for amounts included in the measurement of lease liabilities was $ 89 and $ 94 for the year ended December 31, 2024 and 2023, respectively. Note 9 – Commitments and Contingencies Litigation Lifeway is involved in various legal proceedings, claims, disputes, regulatory matters, audits, and proceedings arising in the ordinary course of, or incidental, to the Company’s business, including commercial disputes, product liabilities, intellectual property matters and employment-related matters. Lifeway records provisions in the consolidated financial statements for pending legal matters when it believes it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated. The Company evaluates, on a periodic basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable, it does not establish an accrued liability. Currently, none of its accruals for outstanding legal matters are material individually or in the aggregate to its financial position and it is management’s opinion that the ultimate resolution of these outstanding legal matters will not have a material adverse effect on its business, financial condition, results of operations, or cash flows. However, if the Company is ultimately required to make payments in connection with an adverse outcome, it is possible that such contingency could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows. F- 15 Note 10 – Income taxes The provision for income taxes consists of the following: Schedule of provision for income taxes For the Years Ended December 31, 2024 2023 Current: Federal $ 3,371 $ 3,591 State and local 1,512 1,719 Total current 4,883 5,310 Deferred 61 ( 28 ) Provision for income taxes $ 4,944 $ 5,282 The following is a reconciliation of income tax expense computed at the U.S. federal statutory tax rate to income tax expense reported in the consolidated statement of operations: Schedule of reconciliation to effective rate for income taxes 2024 2023 Amount Percentage Amount Percentage Federal income tax at statutory rate $ 2,933 21.0 % $ 3,496 21.0 % State and local tax, net 737 5.3 % 1,126 6.8 % Other permanent differences 29 0.2 % 17 0.1 % Section 162m 1,074 7.7 % 435 2.6 % Stock based compensation 167 1.2 % 203 1.2 % Change in tax rates 2 0.0 % 5 0.0 % Other 2 0.0 % – – % Provision for income taxes $ 4,944 35.4 % $ 5,282 31.7 % The tax effects of temporary differences giving rise to deferred income tax assets and liabilities were: Schedule of deferred tax assets and liabilities December 31, 2024 2023 Deferred tax liabilities attributable to: Accumulated depreciation and amortization $ ( 3,829 ) $ ( 3,519 ) Unrealized gains ( 467 ) ( 469 ) Total deferred tax liabilities ( 4,296 ) ( 3,988 ) Deferred tax assets attributable to: Net operating losses 6 6 Accrued compensation 454 403 Incentive compensation 499 301 Inventory 279 280 Allowances for doubtful accounts and discounts 2 3 Other ( 6 ) ( 6 ) Total net deferred tax assets 1,234 987 Net deferred tax liabilities $ ( 3,062 ) $ ( 3,001 ) F- 16 The following table details the Company’s tax attributes related to net operating losses for which it has recorded deferred tax assets. Schedule of tax attributes related to net operating losses Tax Attributes Gross Amount Net Amount Expiration Years State net operating losses $ 116 $ 6 2035 $ 6 Lifeway is subject to U.S. federal income tax as well as income tax in multiple state and city jurisdictions. With limited exceptions, Lifeway’s calendar year 2021 and subsequent federal and state tax years remain open by statute. As of December 31, 2024, the unrecognized tax benefit is $ 0 . The amount of interest and penalties recognized in the consolidated statements of operations was $ 0 during 2024 and 2023, respectively. The amount of accrued interest and penalties recognized in the consolidated balance sheets was $ 0 at December 31, 2024 and 2023, respectively. Note 11 – Stock-based and Other Compensation Omnibus Incentive Plan In December 2015, Lifeway stockholders approved the 2015 Omnibus Incentive Plan, which authorized the issuance of an aggregate of 3.5 million shares to satisfy awards of stock options, stock appreciation rights, unrestricted stock, restricted stock, restricted stock units, performance shares and performance units to qualifying employees. At December 31, 2024, no shares remain available for award under the 2015 Omnibus Incentive Plan as it was terminated on August 31, 2022. However, any outstanding awards under the 2015 Omnibus Incentive Plan are unaffected by the termination of the 2015 Omnibus Incentive Plan or by the approval of the 2022 Omnibus Incentive Plan (the “2022 Plan”) as described below. On August 31, 2022, Lifeway stockholders approved the 2022 Plan. Under the 2022 Plan, the Compensation Committee of the Board of Directors may grant awards of various types of compensation, including, nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, cash-based awards and other stock-based awards. The maximum number of shares authorized to be awarded under the 2022 Plan is 3.25 million shares of common stock, which includes shares that remained available under the now terminated 2015 Omnibus Incentive Plan. Awards granted under the 2022 Plan are generally subject to a minimum vesting period of at least one year. Awards may be subject to cliff-vesting or graded-vesting conditions, with graded vesting starting no earlier than one year after the grant date. The Plan Administrator may provide for shorter vesting periods in an award agreement for no more than five percent of the maximum number of shares authorized for issuance under the 2022 Plan. As of December 31, 2024, 2.64 million shares remain available to award under the 2022 Plan. F- 17 Stock Options The following table summarizes stock option activity during the year ended December 31, 2024: Schedule of stock option activity Options Weighted average exercise price Weighted average remaining contractual life Aggregate intrinsic value (In thousands) Outstanding at December 31, 2023 41 $ 10.42 2.21 $ 121 Granted – – – – Exercised ( 11 ) 10.41 – – Forfeited – – – – Outstanding at December 31, 2024 30 10.42 1.21 426 Exercisable at December 31, 2024 30 10.42 1.21 426 Restricted Stock Units A Restricted Stock Unit (“RSU”) represents the right to receive one share of common stock in the future. RSUs have no exercise price. The following table summarizes RSU activity during the year ended December 31, 2024. Schedule of RSU activity Restricted Stock Units Weighted Average Grant Date Fair Value (In thousands) Nonvested, at December 31, 2023 207 $ 6.89 Granted 57 13.12 Shares issued upon vesting ( 74 ) 6.84 Forfeited – – Nonvested, at December 31, 2024 190 8.77 Earned and deferred, at December 31, 2024 71 7.56 For the years ended December 31, 2024 and 2023 total pre-tax stock-based compensation expense recognized in the consolidated statements of operations was $ 904 and $ 506 , respectively. For the years ended December 31, 2024 and 2023 tax-related benefits of $ 253 and $ 142 , respectively, were also recognized. Future compensation expense related to nonvested restricted stock units was $ 615 as of December 31, 2024 and will be recognized over a weighted-average period of 1.29 years. Long-Term Incentive Plan Compensation Lifeway has established long-term incentive-based compensation programs for certain senior executives and key employees pursuant to the terms of its incentive plans. F- 18 2020 CEO Incentive Award During 2020, Lifeway awarded a long-term equity-based incentive of $ 750 to its Chief Executive Officer (the “2020 CEO Award”) based on Lifeway’s 2020 performance levels compared to the respective targets. The equity-based incentive compensation is payable in restricted stock that vests one-third in April 2022, one-third in April 2023, and one-third in April 2024. The issuance of vested equity awards is subject to approval under the Stock Purchase Agreement dated October 1, 1999. The RSU awards have a grant date fair value of $5.13 dollars per share. For the years ended December 31, 2024 and 2023, $ 24 and $ 105 was expensed as stock-based compensation expense in the consolidated statements of operations. As of December 31, 2024, all stock-based compensation expense has been recognized. 2021 Equity Award The 2021 long-term equity incentive plan compensation is based on Lifeway’s achievement of adjusted EBITDA performance versus the respective target established by the Board for 2021. Under the 2021 plan, collectively the participants earned equity-based incentive compensation of $ 1,069 based on Lifeway’s achievement of the respective financial target. The equity-based incentive compensation is payable in restricted stock that vests one-third in April 2022, one-third in April 2023, and one-third in April 2024. The RSU awards have a grant date fair value of $6.00 dollars per share. For the years ended December 31, 2024 and 2023, $ 40 and $ 194 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. As of December 31, 2024, all stock-based compensation expense has been recognized. 2022 Equity Award Under the 2022 long-term incentive plan, participants can earn a specified number of target level Performance Share Units (“PSUs”) contingent upon the achievement of strategic milestones during the three-year measurement period, which is fiscal year 2022 to 2024. The strategic milestones are 1) 3-year cumulative net revenue, and 2) 3-year cumulative adjusted EBITDA. The target number of PSU awards are weighted 50% on net revenue and 50% on adjusted EBITDA. Collectively, the participants can earn 125,066 PSUs at the target level. Participants may earn more or less than the target number of shares based on actual results, however the minimum and maximum number of shares that can be earned are bound by minimum and maximum thresholds of net revenue and adjusted EBITDA. The PSU awards will be earned and will vest, if at all, after the end of the three-year measurement period based on achievement of the milestones. The PSU awards do not vest during the three-year measurement period. The PSUs have a grant date fair value of $6.25 dollars per share. For the twelve months ended December 31, 2024, and 2023, $ 542 and $ 473 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. As of December 31, 2024, all stock-based compensation expense has been recognized. The 2022 long-term incentive plan also granted restricted stock unit awards that contain only a service condition and vest on the passage of time in three equal installments on each of the first three anniversaries of the August 31, 2022 grant date. The stock-based compensation expense for these awards is included in the Restricted Stock Units section above. 2023 Equity Award Under the 2023 long-term incentive plan, participants can earn a specified number of target level Performance Share Units (“PSUs”) contingent upon the achievement of strategic milestones during the three-year Measurement Period, which is fiscal year 2023 to 2025. The strategic milestones are 1) 3-year cumulative net revenue, and 2) 3-year cumulative adjusted EBITDA. The target number of PSU awards are weighted 50% on net revenue and 50% on adjusted EBITDA. Collectively, the participants can earn 115,622 PSUs at the target level. Participants may earn more or less than the target number of shares based on actual results, however the minimum and maximum number of shares that can be earned are bound by minimum and maximum thresholds of net revenue and adjusted EBITDA. The PSU awards will be earned and will vest, if at all, after the end of the three-year measurement period based on achievement of the milestones. The PSU awards do not vest during the three-year measurement period. The PSUs have a grant date fair value of $6.88 dollars per share. For the twelve months ended December 31, 2024 and 2023, $ 491 and $ 219 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. F- 19 The 2023 long-term incentive plan also granted restricted stock unit awards that contain only a service condition and vest on the passage of time in three equal installments on each of the first three anniversaries of the June 16, 2023 grant date. The stock-based compensation expense for these awards is included in the Restricted Stock Units section above. 2024 Equity Award Under the 2024 long-term incentive plan, participants can earn a specified number of target level Performance Share Units (“PSUs”) contingent upon the achievement of strategic milestones during the three-year Measurement Period, which is fiscal year 2024 to 2026. The strategic milestones are 1) 3-year cumulative net revenue, and 2) 3-year cumulative adjusted EBITDA. The target number of PSU awards are weighted 50% on net revenue and 50% on adjusted EBITDA. Collectively, the participants can earn 64,986 PSUs at the target level. Participants may earn more or less than the target number of shares based on actual results, however the minimum and maximum number of shares that can be earned are bound by minimum and maximum thresholds of net revenue and adjusted EBITDA. The PSU awards will be earned and will vest, if at all, after the end of the three-year measurement period based on achievement of the milestones. The PSU awards do not vest during the three-year measurement period. The PSUs have a grant date fair value of $13.73 per share. For the twelve months ended December 31, 2024 and 2023, $ 445 and $ 0 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. The 2024 long-term incentive plan also granted restricted stock unit awards that contain only a service condition and vest on the passage of time in three equal installments on each of the first three anniversaries of the January 10, 2024 grant date. The stock-based compensation expense for these awards is included in the Restricted Stock Units section above. Non-Employee Director Plan On August 31, 2022, Lifeway stockholders approved the 2022 Non-Employee Director Equity and Deferred Compensation Plan (the “2022 Director Plan”), which authorizes the grant of restricted stock units (“RSUs”), which will vest on such schedule as the Company, in its sole discretion, shall determine. Each non-employee director of the Company is eligible to be a participant in the 2022 Director Plan until they no longer serve as a non-employee director. As of the date of each annual shareholder meeting, the Company may grant each director a number of RSUs for such year and set the vesting schedule for the RSUs granted. Whether and how many RSUs the Company will grant to directors in any year is subject to the sole discretion of the Company and shall in any event be subject to the 2022 Director Plan’s overall share limits. The maximum aggregate number of shares of common stock that may be issued under the 2022 Directors Plan is 500 thousand shares. As of December 31, 2024, 393 thousand shares remain available to award under the 2022 Director Plan. The aggregate fair market value of shares underlying RSU compensation that may be issued as RSU compensation to a director in any year shall not exceed $170. In addition to the grant of RSUs, the 2022 Director Plan also provides for the deferral by electing participants of all or part of their cash compensation (in 10% increments) into a deferred cash account, and they may defer all or part of their cash and/or RSU compensation (in 10% increments) into a deferred RSU account. Deferred benefits are paid in a lump sum upon the applicable director’s departure from the Board of Directors. Retirement Benefits Lifeway has a defined contribution plan which is available to substantially all full-time employees. Under the terms of the plan we match employee contributions under a prescribed formula. For the years ended December 31, 2024 and 2023 total contribution expense recognized in the consolidated statements of operations was $ 650 and $ 499 , respectively. Note 12 – Earnings Per Share The following table summarizes the effects of the share-based compensation awards on the weighted average number of shares outstanding used in calculating diluted earnings per share: Schedule of weighted average number of shares outstanding Year Ended December 31, 2024 2023 (In thousands) Weighted average common shares outstanding 14,769 14,667 Assumed exercise/vesting of equity awards 361 436 Weighted average diluted common shares outstanding 15,130 15,103 F- 20 Note 13 – Segment, Customer and Geographic Information Segment Information The Company has one reportable segment, which manufactures and distributes cultured dairy products. Our products are produced using the same processes and materials and are sold to consumers through a common network of distributors and retailers. The Company derives revenue primarily in North America and manages the business activities on a consolidated basis. The business activities include selling cultured dairy products across various channels including retail-direct, distributor, and direct store delivery in a refrigerated format. We operate our business with a centralized financial systems infrastructure, and we share centralized resources for procurement and general and administrative activities. The accounting policies of the segment are the same as those described in the Summary of Significant Accounting Policies for the Company. Refer to Note 1 for additional information. The Chief Executive Officer (“CEO”) has been identified as our Chief Operating Decision Maker (“CODM”). The Company manages operations on a company-wide basis, thereby making determinations as to the allocation of resources as one segment. The CODM uses discrete financial information at the consolidated level to assess performance for the segment and decides how to allocate resources based on the Company's consolidated Net income (loss), which is reported on the Consolidated Statement of Operations. The measure of segment assets is reported on the Consolidated Balance Sheet as Total assets. The following table summarizes the reported segment revenue, segment profit, and significant segment expenses for the years ended December 31, 2024 and 2023. Schedule of segment revenue 2024 2023 Net sales $ 186,820 $ 160,123 Cost of goods sold 135,400 115,060 Depreciation expense 2,846 2,622 Total cost of goods sold 138,246 117,682 Gross profit 48,574 42,441 Selling expenses 14,743 11,776 General and administrative 19,439 13,130 Amortization expense 540 540 Total operating expenses 34,722 25,446 Income from operations 13,852 16,995 Other income (expense): Interest expense ( 105 ) ( 384 ) Gain (loss) on sale of property and equipment ( 8 ) 34 Other income 230 4 Total other income (expense) 117 ( 346 ) Income before provision for income taxes 13,969 16,649 Provision for income taxes 4,944 5,282 Net income $ 9,025 $ 11,367 F- 21 The following table summarizes the reported segment total assets as of December 31, 2024 and 2023. Schedule of segment total assets December 31, 2024 2023 Total assets for reportable segment $ 90,547 $ 81,654 Adjustments and reconciling items – – Consolidated total assets $ 90,547 $ 81,654 Products from which the reportable segment derives its revenue Lifeway’s primary product is drinkable kefir. The Company manufactures (directly or through a co-manufacturer) and markets products under the Lifeway, Fresh Made, and GlenOaks Farms brand names, as well as under private labels on behalf of certain customers. The Company’s product categories are: · Drinkable kefir, a cultured dairy product sold in a variety of organic and non-organic sizes, flavors, and types. · European-style soft cheeses, including farmer cheese, white cheese, and Sweet Kiss. · Cream and other, which primarily consists of cream, a byproduct of raw milk processing. · Drinkable yogurt, sold in a variety of sizes and flavors. · ProBugs, a line of kefir products designed for children. · Other dairy, which primarily consists of Fresh Made butter and sour cream. Net sales of products by category were as follows for the years ended December 31: Schedule of segment products by category 2024 2023 In thousands $ % $ % Drinkable Kefir other than ProBugs 153,493 82 % 127,726 80 % Cheese 14,554 8 % 13,781 9 % Cream and other 8,299 4 % 7,382 4 % Drinkable Yogurt 5,619 3 % 6,236 4 % ProBugs Kefir 3,421 2 % 3,429 2 % Other dairy 1,434 1 % 1,569 1 % Net Sales 186,820 100 % 160,123 100 % F- 22 Significant Customers Sales are predominately to companies in the retail food industry located within the United States. Two major customers accounted for a total of 25 % and 24 % of net sales for the years ended December 31, 2024 and 2023, respectively. Two major customers accounted for a total of 26 % and 25 % of accounts receivable as of December 31, 2024 and 2023, respectively. Geographic Information Net sales outside the of the United States represented less than 1% of total consolidated net sales in 2024 and 2023, respectively. Net sales are determined based on the destination where the products are shipped by Lifeway. All the Company’s long-lived assets are in the United States. Note 14 – Shareholder Rights Plan On November 4, 2024, the Company adopted a Shareholder Rights Agreement (the “Rights Agreement”) and designated 40 shares of preferred stock as Series A Junior Participating Preferred Stock, none of which are issued or outstanding as of December 31, 2024. Pursuant to the Rights Agreement, the Company’s board of directors declared a dividend of one preferred share purchase right (each a “Right”) for each outstanding share of Company common stock to stockholders of record as of the close of business on November 18, 2024. Each Right entitles its holder, subject to the terms of the Rights Agreement, to purchase from the Company one one-thousandth of one share of Series A Junior Participating Preferred Stock, no par value, of the Company at an exercise price of $ 130.00 per Right, subject to adjustment. Rights will attach to any shares of Company common stock that become outstanding after November 18, 2024 and prior to the earlier of the Distribution Time (as defined in the Rights Agreement) and the redemption or expiration of the Rights, and in certain other circumstances described in the Rights Agreement. The Right expires at the end of November 4, 2025, or earlier if exercised. Note 15 – Subsequent Events On February 5, 2025, the Company entered into the Fifth Modification to the Amended and Restated Loan and Security Agreement (the “Fifth Modification”) with its current lender. The Fifth Modification, among other things, (i) increased the commitment for revolving loans under the Credit Agreement from $5,000 to $25,000, with interest payable at either the lender Base Rate (the Prime Rate minus 1.00%) or the SOFR plus 1.75%, (ii) extended the termination date of the Credit Agreement to February 5, 2028 and (iii) replaced the quarterly minimum working capital financial covenant with a financial covenant to maintain a maximum cash flow leverage ratio of no greater than 2.00 to 1.00 for each fiscal quarter commencing with the fiscal quarter ending March 31, 2025. The remaining material terms and conditions of the Credit Agreement remain substantially unchanged. The Company had no outstanding borrowings at the time of entry into the Fifth Modification. On February 21, 2025, the Company’s $1,800 equity investment in Simple Mills was liquidated as a result of the sale of Simple Mills. The Company anticipates cash proceeds of approximately $5,150, and to recognize a gain on the sale of investment of approximately $3,350 during the first fiscal quarter of 2025. F- 23 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.