What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2025-05-13 compared with 2024-11-14 · 220 added, 380 removed, 285 unchanged (68% of the section changed)

3 unchanged sentences

Consolidated Balance Sheets

September 30, 2024 and December 31, 2023

March 31, 2025 and December 31, 2024

(In thousands)

September 30, 2024

March 31, 2025

Current assets

Cash and cash equivalents

Accounts receivable, net of allowance for credit losses and discounts & allowances of $ 1,320 and $ 1,270 at September 30, 2024 and December 31, 2023 respectively

Accounts receivable, net of allowance for credit losses and discounts & allowances of $ 2,030 and $ 1,590 at March 31, 2025 and December 31, 2024, respectively

Inventories, net

6 unchanged sentences

Current liabilities

Current portion of note payable

Accounts payable

5 unchanged sentences

Total liabilities

Commitments and contingencies (Note 9)

Stockholders’ equity

1 unchanged sentence

2,500 shares authorized;

no shares issued or outstanding at September 30, 2024 and December 31, 2023

Common stock, no par value;

1 unchanged sentence

17,274 shares issued;

14,816 and 14,691 outstanding at September 30, 2024 and December 31, 2023, respectively

Paid-in capital

15,203 and 15,100 outstanding at March 31, 2025 and December 31, 2024, respectively

Treasury stock, at cost

Paid-in capital

Retained earnings

5 unchanged sentences

Consolidated Statements of Operations

For the three and nine months ended September

30, 2024 and 2023

For the three months ended March 31, 2025

(In thousands, except per share data)

Three Months Ended

September 30,

Nine months Ended

September 30,

Cost of goods sold

8 unchanged sentences

Interest expense

Gain on sale of property and equipment

Gain on sales of investments

Other income (expense), net

12 unchanged sentences

Balance, March 31, 2024

Issuance of common stock in connection with stock-based compensation

Stock-based compensation

Balance, June 30, 2023

Issuance of common stock in connection with stock-based compensation

Stock-based compensation

Balance, September 30, 2023

LIFEWAY FOODS, INC.

3 unchanged sentences

Balance, January 1, 2025

Issuance of Common Stock

Stock-based compensation

Balance, March 31, 2025

Issuance of common stock in connection with stock-based compensation

Issuance of common stock on exercise of stock options

Stock-based compensation

Balance, June 30, 2024

Issuance of common stock in connection with stock-based compensation

Stock-based compensation

Balance, September 30, 2024

See accompanying notes to consolidated financial

3 unchanged sentences

(In thousands)

Nine months ended September 30,

Three months ended March 31,

Cash flows from operating activities:

3 unchanged sentences

Non-cash interest expense

Bad debt expense

Gain on sale of equipment

Gain on sale of investments

Fair value loss on investment

(Increase) decrease in operating assets:

Accounts receivable

Refundable income taxes

Prepaid expenses and other current assets

Refundable income taxes

Increase (decrease) in operating liabilities:

2 unchanged sentences

Accrued income taxes

Net cash provided by operating activities

Net cash (used in) provided by operating activities

Cash flows from investing activities:

Purchases of property and equipment

Proceeds from sales or equipment

Purchase of investments

Net cash used in investing activities

Proceeds from sale of investments

Net cash provided by (used in) investing activities

Cash flows from financing activities:

Repayment of note payable

Payment of deferred financing costs

Net cash used in financing activities

Net increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at the beginning of the period

5 unchanged sentences

Accrued purchase of property and equipment

Increase in right-of-use assets and operating lease obligations

Right-of-use assets obtained in exchange for lease obligations

See accompanying notes to consolidated financial

11 unchanged sentences

The consolidated financial statements and related notes should be read in conjunction with the consolidated financial

statements and related notes included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed by Lifeway Foods,

(together with all of its wholly-owned subsidiaries unless the context otherwise requires, the “Company”).

operations for any interim period are not necessarily indicative of future or annual results.

statements and related notes included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2024.

Results of operations

for any interim period are not necessarily indicative of future or annual results.

Principles of consolidation

1 unchanged sentence

the accounts of Lifeway Foods, Inc.

and all its wholly-owned subsidiaries.

All significant intercompany accounts and transactions have

been eliminated.

and all its wholly owned subsidiaries (collectively “Lifeway” or the “Company”).

All significant intercompany accounts and transactions have been eliminated.

Note 2 – Summary of Significant Accounting

28 unchanged sentences

Total advertising expense was $ 2,136 and $ 1,372

for the nine months ended September 30, 2024 and 2023, respectively.

Total advertising expense was $ 1,599 and $ 878 for the three months

ended September 30, 2024 and 2023, respectively.

for the three months ended March 31, 2025 and 2024, respectively.

Fair value measurements

In February 2025, the Company’s $1,800 equity

investment in Simple Mills was liquidated as a result of the sale of Simple Mills.

The Company received cash proceeds of $ 5,152 and recognized

a gain on the sale of investment of $ 3,352 during the three months ended March 31, 2025.

The Company is managed as a single reportable

8 unchanged sentences

In November 2024, the Financial Accounting Standards

Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

Segment Reporting (Topic 280):

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.

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

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

The new standard does not affect recognition or measurement in the Company’s consolidated financial statements.

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.

In December 2023, the FASB issued ASU No.

5 unchanged sentences

The new standard

is effective for our fiscal year ending December 31, 2025.

The guidance does not affect recognition or measurement in the Company’s

consolidated financial statements.

In November 2024, the FASB issued ASU 2024-03,

Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Topic 220):

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.

is effective for our fiscal year ending December 31, 2025, and our interim periods during the fiscal year ending December 31, 2026.

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.

Note 3 – Inventories, net

Inventories consisted of the following:

Schedule of inventories

September 30,

Finished goods

Total inventories, net

Note 4 – Property, Plant and Equipment, net

Property, plant and equipment consisted of the following:

4 – Property, Plant and Equipment, net

Schedule of property, plant and equipment

September 30,

Buildings and improvements

9 unchanged sentences

Accumulated impairment losses

Balance at September 30, 2024

Balance at March 31, 2025

Accumulated impairment losses

1 unchanged sentence

Other intangible assets, net consisted of the following:

Schedule of other intangible assets, net

September 30, 2024

Schedule of other intangible assets

March 31, 2025

December 31, 2024

Customer lists and other customer related intangibles

Customer lists and other customer

related intangibles

Customer relationships

2 unchanged sentences

for the next five years is as follows:

Schedule of estimated amortization expense on intangible assets

Three months ended December 31, 2024

Schedule of future amortization expense on intangible assets

Nine months ended December 31, 2025

The weighted-average remaining amortization expense

period for the customer relationship and brand name intangible assets is 11.8 and 12.1 years, respectively, as of September 30, 2024.

The weighted-average remaining amortization expense period for total intangible assets is 12.0 years as of September 30, 2024.

period for the customer relationship and brand name intangible assets is 11.3 and 11.6 years, respectively, as of March 31, 2025.

weighted-average remaining amortization expense period for total intangible assets is 11.5 years as of March 31, 2025.

Note 6 – Accrued Expenses

Accrued expenses consisted of the following:

Schedule of accrued expense

September 30,

Schedule of accrued expenses

Payroll and incentive compensation

3 unchanged sentences

Note 7 – Debt

Note payable consisted of the following:

Schedule of note payable

September 30,

Term loan due August 18, 2026.

Interest payable monthly.

Unamortized deferred financing costs

Total note payable

Less current portion

Total long-term portion

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.

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 million 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 million (the “Revolving Credit

Facility”) and an incremental facility not to exceed $ 5 million.

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.

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 $11.25 million, 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 September 30, 2024.

Revolving Credit Facility

As of September 30, 2024, the Company had $ 0 outstanding

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, (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, (iv) increased the quarterly unused revolving line of credit fee to 0.25%, and

(v) increased the letter of credit fee to 1.00%.

The remaining material terms and conditions of the Credit Agreement remain substantially

The Company had no outstanding borrowings at the time of entry into the Fifth Modification.

As of March 31, 2025, the Company had $ 0 outstanding

under the Revolving Credit Facility.

The Company had $ 25,000 available for future borrowings under the Revolving Credit Facility as of

September 30, 2024.

March 31, 2025.

Lifeway was in compliance with the fixed charge

coverage ratio and maximum cash flow leverage ratio covenants at March 31, 2025.

Note 8 – Leases

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 five years.

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.

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 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

4 unchanged sentences

Lifeway has elected the practical expedient to combine lease and non-lease components into a single component for all of its leases.

the Company is unable to determine an implicit interest rate, it uses its incremental borrowing rate based on the information available

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.

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.

2 unchanged sentences

Expense for these short-term leases is recorded on a straight-line basis over the lease

Total lease expense was $ 110 and $ 102 (including short term leases) for the nine months ended September 30, 2024 and 2023, respectively.

Total lease expense was $ 33 and $ 41 (including short term leases) for the three months ended September 30, 2024 and 2023, respectively.

Total lease expense was $ 37 and $ 35 (including short term leases) for the three months ended March 31, 2025 and 2024, respectively.

Future maturities of lease liabilities were as

1 unchanged sentence

Operating Leases

Three months ended December 31, 2024

Nine months ended December 31, 2025

Total lease payments

1 unchanged sentence

The weighted-average remaining lease term for

its operating leases was 3.4 years as of September 30, 2024.

The weighted average discount rate of its operating leases was 8.94 % as of

September 30, 2024.

Cash paid for amounts included in the measurement of lease liabilities was $ 68 and $ 70 for the nine months ended September

its operating leases was 3.3 years as of March 31, 2025.

The weighted average discount rate of its operating leases was 8.79 % as of March

Cash paid for amounts included in the measurement of lease liabilities was $ 19 and $ 24 for the three months ended March 31,

2025 and 2024, respectively.

Cash paid for amounts included in the measurement of lease liabilities was $ 22 and $ 24 for the three

months ended September 30, 2024 and 2023, respectively.

Note 9 – Commitments and contingencies

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 from time to time, may be 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

13 unchanged sentences

Income taxes were recognized at effective rates

of 30.4 % and 32.5 % for the nine months ended September 30, 2024 and 2023, respectively.

Income taxes were recognized at effective rates

of 31.2 % and 30.8 % for the three months ended September 30, 2024 and 2023, respectively.

of 28.7 % and 30.8 % for the three months ended March 31, 2025 and 2024, respectively.

The change in the Company’s effective tax rate

is primarily driven by changes in the amount of non-deductible officer compensation and non-deductible stock-based compensation expense.

The Company calculates the provision for income

7 unchanged sentences

income tax items such as enacted tax rate changes and completed tax audits in the period in which they occur.

The Company consistently

reflects non-deductible officer compensation expense, non-deductible compensation expense related to equity incentive awards and separate

state tax rates from period to period.

Although similar items were reflected in 2024, the percentage effect is different due to the difference

in pre-tax income in 2024 compared to 2023.

Unrecognized tax benefits were $ 0 at September

30, 2024 and 2023.

The Company does not expect material changes to its unrecognized tax benefits during the next twelve months.

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

Under the 2015 Omnibus Incentive Plan, the Board of Directors or its Compensation Committee approves stock awards to executive

officers and certain senior executives, generally in the form of restricted stock or performance shares.

The number of performance shares

that participants may earn depends on the extent to which the corresponding performance goals have been achieved.

Stock awards generally

vest over a three-year performance or service period.

At September 30, 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 September 30,

Employee Incentive and Non-Employee Director

The Board of Directors adopted, and the Company’s

stockholders approved, the “Lifeway Foods, Inc.

2022 Omnibus Incentive Plan” (the “Plan”).

Under the Plan, the Compensation

Committee 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

to qualifying employees.

The maximum number of shares authorized to be awarded under the Plan is 3.25 million.

As of March 31, 2025, 2.62

million shares remain available to award under the Plan.

Lifeway stockholders approved the 2022 Non-Employee

Director Equity and Deferred Compensation Plan (the “2022 Director Plan”), which authorizes the grant of restricted stock

The maximum aggregate number of shares that may be issued under the 2022 Director Plan is 500 thousand.

As of March 31, 2025, 392

thousand shares remain available to award under the 2022 Director Plan.

Total compensation expense related to stock-based

payments and the related income tax benefit recognized in net income are as follows:

Schedule of compensation expense related to stock-based

Three Months Ended

(In Thousands)

Compensation expense related to stock-based payments

Related income tax benefit

Stock Options

The following table summarizes stock option activity during the nine

months ended September 30, 2024:

The following table summarizes stock option activity during the three

months ended March 31, 2025:

Schedule of stock option activity

exercise price

contractual life

remaining contractual life

intrinsic value

1 unchanged sentence

Outstanding at December 31, 2024

Outstanding at September 30, 2024

Exercisable at September 30, 2024

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 grant date fair value of the awards is

determined by the Company’s closing stock price on the grant date.

Lifeway expenses RSUs over the vesting period.

The following

table summarizes RSU activity during the three months ended September 30, 2024.

Schedule of RSUs activity

Outstanding at March 31, 2025

Exercisable at March 31, 2025

Restricted Stock Units

Restricted stock unit awards generally vest based

on the passage of time in approximately three equal installments on each of the first three anniversaries of the grant date.

Certain non-employee

directors have elected to defer receipt of their awards until their departure from the Board of Directors.

The following table summarizes restricted stock

unit activity during the three months ended March 31, 2025.

Schedule of RSU activity

Weighted Average Grant Date Fair Value

2 unchanged sentences

Shares issued upon vesting

Outstanding at September 30, 2024

Vested and deferred at September 30, 2024

For the nine months ended September 30, 2024 and

2023 total pre-tax stock-based compensation expense recognized in the consolidated statements of operations was $ 703 and $ 356 , respectively.

For the nine months ended September 30, 2024 and 2023 tax-related benefits of $ 197 and $ 100 , respectively, were also recognized.

three months ended September 30, 2024 and 2023 total pre-tax stock-based compensation expense recognized in the consolidated statements

of operations was $ 235 and $ 154 , respectively.

For the three months ended September 30, 2024 and 2023 tax-related benefits of $ 66 and

$ 43 , respectively, were also recognized.

Future compensation expense related to restricted stock units was $ 793 as of September 30, 2024

and will be recognized on a weighted average basis over the next 1.25 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.

2020 CEO Incentive Award

During the fourth quarter 2020, Lifeway awarded

a long-term equity-based incentive of $ 750 to its Chief Executive Officer (the “2020 CEO Award”) depending 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.

For the nine months ended September 30, 2024 and 2023, $ 24 and $ 87

was expensed as stock-based compensation expense in the consolidated statements of operations, respectively.

For the three months ended

September 30, 2024 and 2023, $ 0 and $ 18 was expensed as stock-based compensation expense in the consolidated statements of operations,

respectively.

As of September 30, 2024, all compensation 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 of Directors

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.

For the nine months ended September 30, 2024 and 2023, $ 40 and $ 161

was expensed as stock-based compensation expense in the consolidated statements of operations, respectively.

For the three months ended

September 30, 2024 and 2023, $ 0 and $ 33 was expensed as stock-based compensation expense in the consolidated statements of operations,

respectively.

As of September 30, 2024, all compensation 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

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.

have a grant date fair value of $6.25 per share.

For the nine months ended September 30, 2024 and 2023, $ 420 and $ 356 was expensed

as stock-based compensation expense in the consolidated statements of operations, respectively.

For the three months ended September 30,

2024 and 2023, $ 132 and $ 116 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively.

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

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.

have a grant date fair value of $6.88 per share.

For the nine months ended September 30, 2024 and 2023, $ 377 and $ 118 was expensed

as stock-based compensation expense in the consolidated statements of operations, respectively.

For the three months ended September 30,

2024 and 2023, $ 122 and $ 102 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively.

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

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.

have a grant date fair value of $13.73 per share.

For the nine months ended September 30, 2024 and 2023, $ 334 and $ 0 was expensed

as stock-based compensation expense in the consolidated statements of operations, respectively.

For the three months ended September 30,

2024 and 2023, $ 113 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, as amended by Amendment No.

1 approved by the Board on June 7, 2024

(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, or

such other date as the Board shall determine, 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 Director Plan is 500 thousand shares.

As of September 30, 2024, 394 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 and/or RSU compensation (in 10% increments) into

a deferred RSU account as RSUs.

Deferred benefits are paid in a lump sum upon the applicable director’s departure from the Board

of Directors.

Outstanding at March 31, 2025

Vested and deferred at March 31, 2025

Unrecognized compensation expense related to nonvested

restricted stock units was $ 887 as of March 31, 2025 and will be recognized over a weighted average period of 1.3 years.

The grant date

fair value of the awards is equal to the Company’s closing price on the grant date.

Performance Units

Performance unit awards are granted to certain

members of management.

These awards include both service and performance conditions.

For performance unit awards granted in fiscal

years 2023 through 2025, performance goals are established upfront and are measured over a cumulative three-year measurement period.

performance goals are 1) 3-year cumulative net revenue, and 2) 3-year cumulative adjusted EBITDA.

The target number of performance unit

awards are weighted 50% on net revenue and 50% on adjusted EBITDA.

Participants may earn more or less than the target number of units,

and 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.

These awards will be converted to stock upon vesting.

The following table summarizes performance unit

activity during the three months ended March 31, 2025.

Schedule of performance units

Weighted Average Grant Date Fair Value

(In thousands)

Nonvested at December 31, 2024

Shares issued upon vesting

Nonvested at March 31, 2025

55 thousand additional shares granted in connection with the vesting of the 2022 award in

2025 due to above-target performance in accordance with the terms of the award.

Unrecognized compensation expense related to nonvested

performance units is estimated to be approximately $ 2,076 as of March 31, 2025 and are expected to be recognized over a weighted average

period of 1.4 years.

The grant date fair value of the awards is equal to the Company’s closing price on the grant date.

Retirement Benefits

Lifeway has a defined contribution plan which

is available to all full-time employees.

Under the terms of the plan, the Company matches employee contributions under a prescribed formula.

For the nine months ended September 30, 2024 and 2023 total contribution expense recognized in the consolidated statements of operations

was $ 495 and $ 364 , respectively.

For the three months ended September 30, 2024 and 2023, total contribution expense recognized in the

consolidated statements of operations was $ 133 and $ 106 , respectively.

is available to substantially all full-time employees.

Under the terms of the plan, the Company matches employee contributions under a

prescribed formula.

For the three months ended March 31, 2025 and 2024, total contribution expense recognized in the consolidated statements

of operations was $ 261 and $ 193 , respectively.

Note 12 - Earnings Per Share

3 unchanged sentences

Three Months Ended

Nine months Ended

September 30,

(In Thousands)

3 unchanged sentences

Note 13 – Disaggregation of Revenue and Significant Customers

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 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 consolidated single-segment financial information

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.

Products from which the reportable segment

derives its revenue

Lifeway’s primary product is drinkable

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:

6 unchanged sentences

Net sales of products by category were as follows

for the nine months ended September 30:

Schedule of net sales of products by category

Drinkable Kefir other than ProBugs

Cream and other

Drinkable Yogurt

ProBugs Kefir

Net sales of products by category were as follows

for the three months ended September 30:

for the three months ended March 31:

Schedule of segment products by category

Drinkable Kefir other than ProBugs

5 unchanged sentences

food industry located within the United States.

Two major customers accounted for a total of approximately 25 % and 23 % of net sales for

the nine months ended September 30, 2024 and 2023, respectively.

Two major customers accounted for a total of approximately 24 % of net

sales for the three months ended September 30, 2024 and 2023.

Two major customers accounted for a total of 24 % and 25 % of net sales for the three months

ended March 31, 2025 and 2024, respectively.

Geographic Information

Net sales outside the of the United States represented

less than 1% of total consolidated net sales for the nine months and three months ended September 30, 2024 and 2023.

Net sales outside

of the United States are determined based on where ownership transfers to the customer.

less than 1% of total consolidated net sales for the three months ended March 31, 2025 and 2024.

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 – Subsequent Events

On November 4, 2024, the Company entered

into a Shareholder Rights Agreement with Computershare Trust Company, N.A., as rights agent (the “Rights Agreement”).

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

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements