Lifeway Foods, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS. LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Balance Sheets March 31, 2026 and December 31, 2025 (In thousands) March 31, 2026 December 31, (Unaudited) 2025 Current assets Cash and cash equivalents $ 5,604 $ 5,571 Accounts receivable, net of allowance for credit losses and discounts & allowances of $ 2,530 and $ 1,730 at March 31, 2026 and December 31, 2025, respectively 22,985 16,643 Inventories, net 11,452 11,890 Prepaid expenses and other current assets 2,588 2,627 Refundable income taxes 41 325 Total current assets 42,670 37,056 Property, plant and equipment, net 57,844 48,282 Operating lease right-of-use asset 553 465 Goodwill 11,704 11,704 Intangible assets, net 5,683 5,818 Other assets 2,051 2,285 Total assets $ 120,505 $ 105,610 Current liabilities Accounts payable $ 13,845 $ 11,008 Accrued expenses 4,589 5,413 Accrued income taxes 1,518 218 Total current liabilities 19,952 16,639 Line of credit 6,939 – Operating lease liabilities 426 360 Deferred income taxes, net 2,792 2,792 Other long-term liabilities 74 – Total liabilities 30,183 19,791 Commitments and contingencies (Note 9) – – Stockholders’ equity Preferred stock, no par value; 2,500 shares authorized; none issued – – Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,282 and 15,232 outstanding at March 31, 2026 and December 31, 2025, respectively 6,509 6,509 Treasury stock, at cost ( 12,889 ) ( 13,214 ) Paid-in capital 3,347 3,843 Retained earnings 93,355 88,681 Total stockholders’ equity 90,322 85,819 Total liabilities and stockholders’ equity $ 120,505 $ 105,610 See accompanying notes to consolidated financial statements 3 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the three months ended March 31, 2026 and 2025 (Unaudited) (In thousands, except per share data) 2026 2025 Net Sales $ 63,012 $ 46,091 Cost of goods sold 44,741 34,254 Depreciation expense 920 802 Total cost of goods sold 45,661 35,056 Gross profit 17,351 11,035 Selling expense 6,188 4,698 General and administrative expense 4,703 4,628 Amortization expense 135 135 Total operating expenses 11,026 9,461 Income from operations 6,325 1,574 Other income (expense): Interest expense ( 68 ) ( 14 ) Gain on sales of investments – 3,352 Other income (expense), net – 54 Total other (expense) income ( 68 ) 3,392 Income before provision for income taxes 6,257 4,966 Provision for income taxes 1,583 1,426 Net income $ 4,674 $ 3,540 Net earnings per common share: Basic $ 0.31 $ 0.23 Diluted $ 0.30 $ 0.23 Weighted average common shares outstanding: Basic 15,257 15,134 Diluted 15,559 15,333 See accompanying notes to consolidated financial statements 4 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity (Unaudited) (In thousands) Common Stock Issued In treasury Paid-In Retained Total Shares $ Shares $ Capital Earnings Equity Balance, January 1, 2025 17,274 $ 6,509 ( 2,174 ) $ ( 14,052 ) $ 4,632 $ 74,822 $ 71,911 Issuance of common stock – – 103 669 ( 2,278 ) – ( 1,609 ) Stock-based compensation – – – – 326 – 326 Net income – – – – – 3,540 3,540 Balance, March 31, 2025 17,274 $ 6,509 ( 2,071 ) $ ( 13,383 ) $ 2,680 $ 78,362 $ 74,168 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity (Unaudited) (In thousands) Common Stock Issued In treasury Paid-In Retained Total Shares $ Shares $ Capital Earnings Equity Balance, January 1, 2026 17,274 $ 6,509 ( 2,042 ) $ ( 13,214 ) $ 3,843 $ 88,681 $ 85,819 Issuance of common Stock – – 50 325 ( 761 ) – ( 436 ) Equity award settled in cash – – – – ( 283 ) – ( 283 ) Stock-based compensation – – – – 548 – 548 Net income – – – – – 4,674 4,674 Balance, March 31, 2026 17,274 $ 6,509 ( 1,992 ) $ ( 12,889 ) $ 3,347 $ 93,355 $ 90,322 See accompanying notes to consolidated financial statements 5 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (In thousands) Three months ended March 31, 2026 2025 Cash flows from operating activities: Net income $ 4,674 $ 3,540 Adjustments to reconcile net income to operating cash flow: Depreciation and amortization 1,055 937 Stock-based compensation 548 326 Non-cash interest expense 5 3 Bad debt expense 87 – Gain on sale of investments – ( 3,352 ) Fair value loss on investment – 20 (Increase) decrease in operating assets: Accounts receivable ( 6,429 ) ( 1,259 ) Inventories 438 ( 563 ) Prepaid expenses and other current assets 228 136 Refundable income taxes 283 631 Increase (decrease) in operating liabilities: Accounts payable 3,397 1,401 Accrued expenses ( 1,282 ) ( 2,765 ) Accrued income taxes 1,300 795 Other long-term liabilities 74 – Net cash provided by (used in) operating activities 4,378 ( 150 ) Cash flows from investing activities: Purchases of property and equipment ( 11,041 ) ( 2,219 ) Proceeds from sale of investments – 5,152 Net cash (used in) provided by investing activities ( 11,041 ) 2,933 Cash flows from financing activities: Borrowings under line of credit 8,000 – Repayments under line of credit ( 1,000 ) – Payment of deferred financing costs ( 21 ) ( 65 ) Equity award settled in cash ( 283 ) – Net cash provided by (used in) financing activities 6,696 ( 65 ) Net increase in cash and cash equivalents 33 2,718 Cash and cash equivalents at the beginning of the period 5,571 16,728 Cash and cash equivalents at the end of the period $ 5,604 $ 19,446 Supplemental cash flow information: Cash paid for income taxes, net of (refunds) $ – $ – Cash paid for interest $ 45 $ 11 Non-cash investing activities Accrued purchase of property and equipment $ 216 $ 239 Right-of-use assets obtained in exchange for lease obligations $ 119 $ 8 See accompanying notes to consolidated financial statements 6 LIFEWAY FOODS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (In thousands, except per share data) Note 1 – Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) for interim financial information, and do not include certain information and footnote disclosures required for complete, audited financial statements. In the opinion of management, these statements include all adjustments necessary for a fair presentation of the results of all interim periods reported herein. 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, 2025. Results of operations for any interim period are not necessarily indicative of future or annual results. Principles of consolidation The consolidated financial statements include the accounts of Lifeway Foods, Inc. 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 Policies Our significant accounting policies, which are summarized in detail in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025, have not materially changed. The following is a description of certain of our significant accounting policies. Use of estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing the consolidated financial statements include the reserve for promotional allowances, the valuation of goodwill and intangible assets, stock-based and incentive compensation, and deferred income taxes. Cash and cash equivalents Lifeway considers cash and all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates or equals fair value due to their short-term nature. Lifeway from time to time may have bank deposits in excess of insurance limits of the Federal Deposit Insurance Corporation. The Company places its cash and cash equivalents with high credit quality financial institutions. Lifeway has not experienced any losses in such accounts and believes the financial risks associated with these financial instruments are minimal. 7 Advertising and promotional costs Advertising costs are expensed as incurred and reported in Selling expense in the Company’s consolidated statement of operations. Total advertising expense was $ 3,375 and $ 2,136 for the three months ended March 31, 2026 and 2025, 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. Segments The Company is managed as a single reportable segment. The Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), reviews financial information on an aggregate basis for purposes of allocating resources and assessing financial performance, as well as for making strategic operational decisions and managing the organization. Substantially all of Lifeway’s consolidated revenues relate to the sale of cultured dairy products that it produces using the same processes and materials and are sold to consumers through a common network of distributors and retailers in the United States. Recent accounting pronouncements Issued but not yet effective In November 2024, the Financial Accounting Standards Board (“FASB”) issued ASU 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Topic 220-40): Disaggregation of Income Statement Expenses. The new standard requires additional disclosure of certain amounts included in the expense captions presented on the Statement of Operations as well as disclosures about selling expenses. The new standard is effective on a prospective basis, with the option for retrospective application, for our annual period ending December 31, 2027, and our interim periods during the fiscal year ending December 31, 2028. The new standard does not affect recognition or measurement in the Company’s consolidated financial statements. Upon adoption, the impact of ASU 2024-03 will be limited to certain notes to the Consolidated Financial Statements. Note 3 – Inventories, net Schedule of inventories March 31, 2026 December 31, 2025 Ingredients $ 3,816 $ 4,141 Packaging 3,172 3,452 Finished goods 4,464 4,297 Total inventories, net $ 11,452 $ 11,890 8 Note 4 – Property, Plant and Equipment, net Schedule of property, plant and equipment March 31, 2026 December 31, 2025 Land $ 1,565 $ 1,565 Buildings and improvements 24,508 24,497 Machinery and equipment 43,675 43,433 Vehicles 477 477 Office equipment 694 694 Construction in process 30,031 19,803 100,950 90,469 Less accumulated depreciation ( 43,106 ) ( 42,187 ) Total property, plant and equipment, net $ 57,844 $ 48,282 Note 5 – Goodwill and Intangible Assets Goodwill Goodwill consisted of the following: Schedule of goodwill Total Balance at December 31, 2025 Goodwill $ 12,948 Accumulated impairment losses ( 1,244 ) $ 11,704 Balance at March 31, 2026 Goodwill $ 12,948 Accumulated impairment losses ( 1,244 ) $ 11,704 9 Intangible Assets Other intangible assets, net consisted of the following: Schedule of other intangible assets March 31, 2026 December 31, 2025 Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount Recipes $ 44 $ ( 44 ) $ – $ 44 $ ( 44 ) $ – Customer lists and other customer related intangibles 4,529 ( 4,529 ) – 4,529 ( 4,529 ) – Customer relationships 3,385 ( 1,732 ) 1,653 3,385 ( 1,692 ) 1,693 Brand names 7,948 ( 3,918 ) 4,030 7,948 ( 3,823 ) 4,125 Formula 438 ( 438 ) – 438 ( 438 ) – Total intangible assets, net $ 16,344 $ ( 10,661 ) $ 5,683 $ 16,344 $ ( 10,526 ) $ 5,818 Estimated amortization expense on intangible assets for the next five years is as follows: Schedule of future amortization expense on intangible assets Year Amortization Nine months ended December 31, 2026 $ 405 2027 $ 540 2028 $ 540 2029 $ 540 2030 $ 540 The weighted-average remaining amortization expense period for the customer relationship and brand name intangible assets is 10.3 and 10.6 years, respectively, as of March 31, 2026. The weighted-average remaining amortization expense period for total intangible assets is 10.5 years as of March 31, 2026. Note 6 – Accrued Expenses Accrued expenses consisted of the following: Schedule of accrued expenses March 31, 2026 December 31, 2025 Payroll and incentive compensation $ 3,416 $ 4,386 Real estate taxes 372 483 Utilities 239 189 Current portion of operating lease liabilities 127 106 Other 435 249 Total accrued expenses $ 4,589 $ 5,413 10 Note 7 – Debt 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 unchanged. 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 March 31, 2026, the Company had $ 7,000 outstanding under the Revolving Credit Facility. The Company had $ 18,000 available for future borrowings under the Revolving Credit Facility as of March 31, 2026. Lifeway’s interest rate on debt outstanding under the Revolving Credit Facility as of March 31, 2026 was 5.54 %. Lifeway was in compliance with the fixed charge coverage ratio and maximum cash flow leverage ratio covenants at March 31, 2026. Note 8 – Leases The Company leases certain machinery and equipment with fixed base rent payments and variable costs based on usage. Remaining lease terms for these leases range from less than one year to six years. The Company includes lease extension options, if applicable and reasonably certain to be exercised, in the calculation of the right-of-use asset and lease liabilities. Lifeway includes only fixed payments for lease components in the measurement of the right-of-use asset and lease liability. Variable lease payments are those that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time. There are no residual value guarantees. Lifeway does not currently have leases which meet the finance lease classification as defined under ASC 842. Lifeway treats contracts as a lease when the contract conveys the right to use a physically distinct asset for a period of time in exchange for consideration, it directs the use of the asset and obtains substantially all the economic benefits of the asset. Right-of-use assets and lease liabilities are measured and recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Lifeway has elected the practical expedient to combine lease and non-lease components into a single component for all of its leases. When the Company is unable to determine an implicit interest rate, it uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments for those leases. Lifeway includes options to extend or terminate the lease in the measurement of the right-of-use asset and lease liability when it is reasonably certain that it will exercise such options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. 11 The Company does not record leases with an initial term of 12 months or less on the balance sheet. Expense for these short-term leases is recorded on a straight-line basis over the lease term. Total lease expense was $ 62 and $ 37 (including short term leases) for the three months ended March 31, 2026 and 2025, respectively. Future maturities of lease liabilities were as follows: Schedule of future maturities of lease liabilities Year Operating Leases Nine months ended December 31, 2026 $ 132 2027 169 2028 153 2029 106 2030 78 Thereafter 41 Total lease payments 679 Less: Interest ( 126 ) Present value of lease liabilities $ 553 The weighted-average remaining lease term for its operating leases was 4.3 years as of March 31, 2026. The weighted average discount rate of its operating leases was 9.70 % as of March 31, 2026. Cash paid for amounts included in the measurement of lease liabilities was $ 45 and $ 19 for the three months ended March 31, 2026 and 2025, respectively. Note 9 – Commitments and contingencies Litigation Lifeway is involved in various legal proceedings, claims, disputes, regulatory matters, audits, and proceedings arising in the ordinary course of, or incidental, to the Company’s business, including commercial disputes, product liabilities, intellectual property matters and employment-related matters. Lifeway records provisions in the consolidated financial statements for pending legal matters when it believes it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated. The Company evaluates, on a periodic basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable, it does not establish an accrued liability. Currently, none of its accruals for outstanding legal matters are material individually or in the aggregate to its financial position and it is management’s opinion that the ultimate resolution of these outstanding legal matters will not have a material adverse effect on its business, financial condition, results of operations, or cash flows. However, if the Company is ultimately required to make payments in connection with an adverse outcome, it is possible that such contingency could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows. 12 Note 10 – Income taxes Income taxes were recognized at effective rates of 25.3 % and 28.7 % for the three months ended March 31, 2026 and 2025, respectively. The change in the Company’s effective tax rate is primarily driven by the increase in pre-tax book income and changes in the amount of non-deductible officer compensation and non-deductible stock-based compensation expense. The Company calculates the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full year, excluding unusual or infrequently occurring discrete items, and applies that rate to income (loss) before provision for income taxes for the period. The Company’s effective tax rate may change from period to period based on recurring and non-recurring factors including the relative mix of pre-tax earnings (or losses), the jurisdictional mix of earnings, enacted tax legislation, state income taxes, the impact of non-deductible items, changes in valuation allowances, settlement of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits. The Company records discrete income tax items such as enacted tax rate changes and completed tax audits in the period in which they occur. 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 results. 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. Management is assessing the impact on cash flows for the current fiscal year. Note 11 – Stock-based and Other Compensation Employee Incentive and Non-Employee Director Plans 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, 2026, 2.57 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 units. The maximum aggregate number of shares that may be issued under the 2022 Director Plan is 500 thousand. As of March 31, 2026, 379 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 Three Months Ended March 31, 2026 2025 (In Thousands) Compensation expense related to stock-based payments $ 548 $ 326 Related income tax benefit 154 91 13 Stock Options The following table summarizes stock option activity during the three months ended March 31, 2026: Schedule of stock option activity Options Weighted average exercise price Weighted average remaining contractual life Aggregate intrinsic value (In thousands) Outstanding at December 31, 2025 13 $ 9.57 0.49 $ 193 Granted – – – – Exercised – – – – Forfeited – – – – Outstanding at March 31, 2026 13 $ 9.57 0.24 $ 128 Exercisable at March 31, 2026 13 $ 9.57 0.24 $ 128 Restricted Stock Units Restricted stock unit awards generally vest in approximately three equal installments on each yearly anniversary 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, 2026. Schedule of RSU activity Restricted Stock Units Weighted Average Grant Date Fair Value (In thousands) Nonvested, at December 31, 2025 171 $ 11.55 Granted 9 21.50 Shares issued upon vesting ( 23 ) 10.22 Shares settled in cash ( 13 ) 6.25 Forfeited – – Nonvested, at March 31, 2026 144 $ 12.90 Earned and deferred at March 31, 2026 90 $ 9.44 Unrecognized compensation expense related to nonvested restricted stock units was $ 759 as of March 31, 2026 and will be recognized over a weighted average period of 1.1 years. The grant date fair value of the awards is equal to the Company’s closing price on the grant date. 14 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 2024 through 2026, performance goals are established upfront and are measured over a cumulative three-year measurement period. The 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, 2026. Schedule of performance units Performance Units Weighted Average Grant Date Fair Value (In thousands) Nonvested, at December 31, 2025 199 $ 12.10 Granted (1) 70 10.78 Shares issued upon vesting ( 47 ) 6.88 Forfeited – – Nonvested, at March 31, 2026 222 12.79 (1) Includes 51 thousand additional shares granted in connection with the vesting of the 2023 award in 2026 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 $ 1,627 as of March 31, 2026 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. Deferred Time-Vested and Performance-Based Cash Awards On March 6, 2026, the Company granted deferred cash awards, consisting of time-vested and performance-based awards, to the Chief Executive Officer and Chief of Staff. These awards were issued as part of the Company’s fiscal-year 2026 long-term incentive program, structured as cash awards to comply with the Company’s contractual obligations prohibiting the issuance of equity to the Chief Executive Officer and certain of her affiliates. The deferred time-vested cash awards vest in approximately three equal installments on each yearly anniversary of the grant date. The deferred performance-based cash award performance goals are established upfront and are measured over a cumulative three-year measurement period. The performance goals are 1) 3-year cumulative net revenue, and 2) 3-year cumulative adjusted EBITDA. The target cash awards are weighted 50% on net revenue and 50% on adjusted EBITDA. Participants may earn more or less than the target cash award, and are bound by minimum and maximum thresholds of net revenue and adjusted EBITDA. The deferred performance-based cash awards will be earned and will vest, if at all, after the end of the three-year measurement period. Retirement Benefits 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 three months ended March 31, 2026 and 2025, total contribution expense recognized in the consolidated statements of operations was $ 251 and $ 261 , respectively. 15 Note 12 - Earnings Per Share The following table summarizes the effects of the share-based compensation awards on the weighted average number of shares outstanding used in calculating diluted earnings per share: Schedule of weighted average number of shares outstanding Three Months Ended March 31, 2026 2025 (In Thousands) Weighted average common shares outstanding 15,257 15,134 Assumed exercise/vesting of equity awards 302 199 Weighted average diluted common shares outstanding 15,559 15,333 Note 13 – Disaggregation of Revenue and Significant 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 kefir. The Company manufactures (directly or through a co-manufacturer) and markets products under the Lifeway, Fresh Made, and GlenOaks Farms brand names, as well as under private labels on behalf of certain customers. The Company’s product categories are: · Drinkable kefir, a cultured dairy product sold in a variety of organic and non-organic sizes, flavors, and types. · European-style soft cheeses, including farmer cheese, white cheese, and Sweet Kiss. · Cream and other, which primarily consists of cream, a byproduct of raw milk processing. · Drinkable yogurt, sold in a variety of sizes and flavors. · ProBugs, a line of kefir products designed for children. · Other dairy, which primarily consists of Fresh Made butter and sour cream. 16 Net sales of products by category were as follows for the three months ended March 31: Schedule of segment products by category 2026 2025 In thousands $ % $ % Drinkable Kefir other than ProBugs 55,090 87 % 38,050 83 % Cheese 4,684 7 % 3,812 8 % Cream and other 2,049 3 % 2,459 5 % Drinkable Yogurt 584 1 % 634 1 % ProBugs Kefir 325 1 % 746 2 % Other dairy 280 1 % 390 1 % Net Sales 63,012 100 % 46,091 100 % Significant Customers Sales are predominately to companies in the retail food industry located within the United States. Two major customers accounted for a total of 26 % and 24 % of net sales for the three months ended March 31, 2026 and 2025, respectively. Geographic Information Net sales outside the of the United States represented less than 1% of total consolidated net sales for the three months ended March 31, 2026 and 2025. Net sales are determined based on the destination where the products are shipped by Lifeway. All the Company’s long-lived assets are in the United States. Note 14 – Shareholder Rights Plan On November 4, 2024, the Company adopted a Shareholder Rights Agreement (the “Rights Agreement”) and designated 40 shares of preferred stock as Series A Junior Participating Preferred Stock, none of which are issued or outstanding as of December 31, 2025. 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. 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. 17 Note 15 – Organic Milk Supply To increase the supply of organic milk available to the Company for the manufacture of finished goods, the Company purchased 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 $ 824 in prepaid and other current assets and $ 2,046 in other assets as of March 31, 2026 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. 18