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Item 8. Financial Statements and Supplementary Data

2026-03-17 compared with 2025-03-14 · 364 added, 450 removed, 480 unchanged (63% of the section changed)

FINANCIAL STATEMENTS AND

SUPPLEMENTARY DATA

FINANCIAL STATEMENTS

AND SUPPLEMENTARY DATA

Report of Independent Registered Accounting Firm (PCAOB ID 248 )

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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”).

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.

(an Illinois corporation) and subsidiaries (the “Company”) as of December 31, 2025 and

2024, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period

ended December 31, 2025, 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, 2025

and 2024, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2025, in conformity

with accounting principles generally accepted in the United States of America.

Basis for opinion

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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

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.

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.

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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

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

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,

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We determined that there are no critical audit matters.

/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2022.

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Current liabilities

Current portion of note payable

Accounts payable

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15,232 and 15,100 shares outstanding at 2025 and 2024

Paid-in capital

Treasury stock, at cost

Paid-in capital

Retained earnings

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Interest expense

Fair value loss on investment

Gain on sale of investment

Gain (loss) on sale of property and equipment

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AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Stockholders’

For the Years Ended December 31, 2025 and 2024

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Balance, January 1, 2024

Issuance of common stock in connection with stock-based compensation

Issuance of common stock in connection

with stock-based compensation

Issuance of common stock on exercise

of stock options

Stock-based compensation

Balance, December 31, 2024

Issuance of common stock in connection with stock-based compensation

Issuance of common stock on exercise of stock options

Issuance of common stock in connection

with stock-based compensation

Issuance of common stock on exercise

of stock options

Stock-based compensation

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Depreciation and amortization

Non-cash interest expense

Bad debt expense

Stock-based compensation

Non-cash interest expense

(Gain) loss on sale of equipment

Gain on sale of investments

Fair value loss on investment

Deferred income taxes

Loss (gain) on sale of property and equipment

(Increase) decrease in operating assets:

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Proceeds from sale of equipment

Purchase of investments

Proceeds from sale of investments

Net cash used in investing activities

Cash flows from financing activities:

Repayment of line of credit

Repayment of note payable

Payment of deferred financing costs

Net cash used in financing activities

Net increase in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at the beginning of the period

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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.

reported amounts of revenue and expenses during the reporting period.

Actual results could differ from those estimates.

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.

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

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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.

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).

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,

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.

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to which the Company expects to be entitled to receive in exchange for these goods or services, using the five-step method required by

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.

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

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.

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.

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.

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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.

such, the Company does not capitalize contract inception costs and it capitalizes product fulfillment costs in accordance with U.S.

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.

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

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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 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.

Accounts receivable, less allowances

was $ 16,643 , $ 15,424 and $ 13,875 , as of December 31, 2025, 2024, and 2023 respectively.

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.

Property, plant and equipment are recorded at

Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets as follows:

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extend the life of the assets, are expensed as incurred.

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),

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”).

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.

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”).

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

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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 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

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Customer relationships

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.

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.

Fair value measurements

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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

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

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

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

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

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.

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

$ 5,206 and recognized a gain on the sale of investment of $ 3,407 during 2025.

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.

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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.

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

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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.

Advertising costs are expensed as incurred and

reported in Selling expense in the Company’s consolidated statements of operations.

Total advertising expense was $ 9,837 and $ 5,447

for the years ended December 31, 2025 and 2024, 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

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

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.

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.

The Company is managed as a single reportable

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

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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.

In November 2023, the FASB issued Accounting Standards

Update (“ASU”) No.

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.

Company adopted the standard retrospectively during the fourth quarter of 2025.

The guidance did not affect recognition or measurement

in the Company’s consolidated financial statements.

See Note 12 – Income Taxes for additional disclosures.

Note 3 – Inventories, net

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Accumulated impairment losses

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.

The Company performed an annual Step 1

impairment assessment for its single reporting unit as of December 31, 2025 and an annual Step 0 impairment assessment for its

single reporting unit as of December 31, 2024, 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:

The gross carrying amounts and accumulated amortization of intangible

assets consisted of the following:

Schedule of other intangible assets

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December 31, 2024

Customer lists and other customer

related intangibles

Customer lists and other customer related intangibles

Customer relationship

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Note 7 – Debt

Note payable consisted of the following:

Schedule of note payable

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 $ 5,000 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

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 $11,250, 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

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.

On December 29, 2025,

the Company entered into the Sixth Modification to the Amended and Restated Loan and Security Agreement (the “Sixth Modification”)

with its current lender.

The Sixth Modification, provides for, among other things, (i) modification of the Fixed Charge Coverage Ratio

only for the period from December 31, 2025 through June 30, 2027 to exclude the Waukesha, WI unfinanced capital expenditures attributable

to plant optimization and manufacturing capacity expansion as approved by Lender, up to $50,000 (ii) modification of the Change of Control

definition to reflect that specified changes to the Company’s board of directors do not constitute a Change of Control and (iii)

extended the termination date of the Credit Agreement to February 5, 2029.

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 Sixth Modification.

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

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December 31, 2025.

See Footnote 15 – Subsequent Events, for the

February 2025 credit agreement amendment which increased the revolving loan commitment from $ 5,000 to $ 25,000 .

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 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, 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 maximum cash flow leverage ratio covenants at December 31, 2025.

Note 8 – Leases

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and obtains substantially all the economic benefits of the asset.

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.

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.

expense for minimum lease payments is recognized on a straight-line basis over the lease term.

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.

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

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Present value of lease liabilities

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

The weighted-average remaining lease term for

its operating leases was 4.2 years as of December 31, 2025.

The weighted average discount rate of its operating leases was 10.59 % as of

December 31, 2025.

Cash paid for amounts included in the measurement of lease liabilities was $ 110 and $ 89 for the year ended December

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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

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.

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

Note 10 – Income taxes

The provision for income taxes consists of the following:

The provision for income taxes consists of the

Schedule of provision for income taxes

3 unchanged sentences

Provision for income taxes

The following is a reconciliation of income tax expense

computed at the U.S.

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:

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Federal income tax at statutory rate

State and local tax, net

Other permanent differences

State and local income tax, net (a)

Stock based compensation

Change in tax rates

Other permanent differences

Change in tax laws or rates

Provision for income taxes

The tax effects of temporary differences giving rise

to deferred income tax assets and liabilities were:

(a) State taxes in Illinois made up the majority (greater than 50 percent) of this category.

The income taxes paid (net of refunds) to a jurisdiction that represent

greater than 5% of the total income taxes paid are as follows:

Schedule of income paid (net of refunds) to a jurisdiction

Other (individually below 5% of total income taxes paid)

The tax effects of temporary differences giving

rise to deferred income tax assets and liabilities were:

Schedule of deferred tax assets and liabilities

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Net operating losses

Unrealized loss

Accrued compensation

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Net deferred tax liabilities

The following table details the Company’s tax

attributes related to net operating losses for which it has recorded deferred tax assets.

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

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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.

federal income tax

as well as income tax in multiple state and city jurisdictions.

With limited exceptions, Lifeway’s calendar year 2022 and subsequent

federal and state tax years remain open by statute.

As of December 31, 2025, 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 interest and penalties recognized

in the consolidated statements of operations was $ 0 during 2025 and 2024, respectively.

The amount of accrued interest and penalties recognized

in the consolidated balance sheets was $ 0 at December 31, 2025 and 2024, respectively.

On July 4, 2025, the One Big Beautiful Bill Act

("OBBBA") was signed into law, which includes a broad range of tax reform provisions that may affect the Company’s financial

The OBBBA changes to corporate taxation include, but are not limited to, 100% bonus depreciation for purchases of qualified property,

an elective deduction for domestic research and experimental expenditures, changes to the definition of adjusted taxable income for purposes

of determining the interest deduction limitation under Internal Revenue Code Section 163(j), and a more favorable tax rate on Foreign-Derived

Deduction Eligible Income and income from non-U.S.

subsidiaries (Net CFC Tested Income).

The OBBBA does not have a material impact on

our estimated annual effective tax rate or cash flows in the current fiscal year.

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

At December 31, 2024, no shares remain available for award under the 2015 Omnibus Incentive Plan as it was terminated on August

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

As of December 31, 2024, 2.64 million shares remain available to award under the 2022 Plan.

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.

December 31, 2025, 2.61 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 December 31, 2025,

382 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 payments

(In Thousands)

Compensation expense related to stock-based payments

Related income tax benefit

Stock Options

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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.

Restricted stock unit awards are granted to certain

members of management and the Board of Directors.

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 year ended December 31, 2025.

Schedule of RSU activity

Restricted Stock Units

Weighted Average Grant Date Fair Value

Weighted Average Grant

Date Fair Value

(In thousands)

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Earned and deferred, at December 31, 2025

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.

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.

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.

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

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 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

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 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.

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 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

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.

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

Unrecognized compensation expense related to nonvested

restricted stock units was $ 785 as of December 31, 2025 and will be recognized over a weighted average period of 1.1 years.

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 year ended December 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 December 31, 2025

Includes 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 $ 1,281 as of December 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 substantially all full-time employees.

Under the terms of the plan we match employee contributions under a prescribed formula.

the years ended December 31, 2024 and 2023 total contribution expense recognized in the consolidated statements of operations was $ 650

and $ 499 , respectively.

Lifeway has a defined contribution plan which

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 years ended December 31, 2025 and 2024 total contribution expense recognized in the consolidated statements

of operations was $ 736 and $ 650 , 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:

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

3 unchanged sentences

Weighted average diluted common shares outstanding

Note 13 – Segment, Customer and Geographic Information

Segment Information

Note 13 – Disaggregation of Revenue, Significant Customers,

and Geographic Information

The Company has one reportable segment, which

12 unchanged sentences

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

Cost of goods sold

Depreciation expense

Total cost of goods sold

Selling expenses

General and administrative

Amortization expense

Total operating expenses

Income from operations

Other income (expense):

Interest expense

Gain (loss) on sale of property and equipment

Total other income (expense)

Income before provision for income taxes

Provision for income taxes

The following table summarizes the reported segment

total assets as of December 31, 2024 and 2023.

Schedule of segment

Total assets for reportable segment

Adjustments and reconciling items

Consolidated total assets

Products from which the reportable segment derives

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 kefir.

24 unchanged sentences

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.

less than 1% of total consolidated net sales in 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 – Shareholder Rights Plan

11 unchanged sentences

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.

On October 29, 2025, the Company entered into

Amendment No.

1 to the Shareholder Rights Agreement (the “Rights Agreement”).

The Rights Agreement was originally scheduled

to expire at the end of November 4, 2025.

The Company entered into the Amendment, which extended the expiration to the end of October

29, 2026 (and made other conforming changes to the Rights Agreement).

No other material changes were made to the Rights Agreement.

Note 15 – Organic Milk Supply

To increase the supply of organic milk available

to the Company for the manufacture of finished goods, the Company is purchasing mature dairy cows (or the “herd”) which will

be managed by a third-party dairy facility (the “Dairy”), and entered into a supply and purchase agreement (“SPA”)

with a COOP (the “COOP”) to purchase the milk produced by the herd.

The Company purchased 799 mature dairy cows during 2025

for $ 2,870 .

As amended in September 2025, the Company entered

into a sixty month agreement (the “Herd Agreement”) with a third-party Dairy who will manage care of the herd, milk the herd,

and sell the milk to the COOP under the SPA, with a right to purchase the herd at the end of the agreement period for a nominal amount.

Beginning December 1, 2025, the Dairy will make monthly payments to Lifeway over the five year agreement period in exchange for its right

to possess and control the herd, including the right to sell milk produced by the herd to the COOP.

The herd agreement is treated as a sale of non-financial

assets to a party that is not a customer.

The Company will recognize a sale upon the delivery of each herd to the Dairy, with interest

income recognized over the agreement period.

The Company has recorded $ 635 in prepaid and other current assets and $ 2,235 in other assets

as of December 31, 2025 related to the herd agreement with no recorded gain or loss on sale.

The Company records the purchases of dairy

cows as investing outflows, principal payments received as investing inflows and interest income as operating inflows on the statement

of cash flows.

CHANGES IN AND DISAGREEMENTS

1 unchanged sentence

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-K

Item 8. Financial Statements and Supplementary Data