Lifeway Foods, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS. LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Balance Sheets June 30, 2026 and December 31, 2025 (In thousands) June 30, 2026 December 31, (Unaudited) 2025 Current assets Cash and cash equivalents $ 7,087 $ 5,571 Accounts receivable, net of allowance for credit losses and discounts & allowances of $ 2,800 and $ 1,730 at June 30, 2026 and December 31, 2025, respectively 22,861 16,643 Inventories, net 13,987 11,890 Prepaid expenses and other current assets 2,526 2,627 Refundable income taxes 728 325 Total current assets 47,189 37,056 Property, plant and equipment, net 65,596 48,282 Operating lease right-of-use asset 521 465 Goodwill 11,704 11,704 Intangible assets, net 5,548 5,818 Other assets 1,841 2,285 Total assets $ 132,399 $ 105,610 Current liabilities Accounts payable $ 17,483 $ 11,008 Accrued expenses 4,745 5,413 Accrued income taxes 304 218 Total current liabilities 22,532 16,639 Line of credit 21,945 – Operating lease liabilities 393 360 Deferred income taxes, net 2,792 2,792 Other long-term liabilities 163 – Total liabilities 47,825 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; 15,105 and 15,232 outstanding at June 30, 2026 and December 31, 2025, respectively 6,509 6,509 Treasury stock, at cost ( 17,217 ) ( 13,214 ) Paid-in capital 1,800 3,843 Retained earnings 93,482 88,681 Total stockholders’ equity 84,574 85,819 Total liabilities and stockholders’ equity $ 132,399 $ 105,610 See accompanying notes to consolidated financial statements 3 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the three and six months ended June 30, 2026 and 2025 (Unaudited) (In thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30, 2026 2025 2026 2025 Net sales $ 66,893 $ 53,901 $ 129,905 $ 99,992 Cost of goods sold 52,859 37,669 97,600 71,923 Depreciation expense 1,008 832 1,928 1,634 Total cost of goods sold 53,867 38,501 99,528 73,557 Gross profit 13,026 15,400 30,377 26,435 Selling expense 7,634 4,718 13,822 9,416 General and administrative expense 4,657 4,752 9,360 9,380 Amortization expense 135 135 270 270 Total operating expenses 12,426 9,605 23,452 19,066 Income from operations 600 5,795 6,925 7,369 Other income (expense): Interest expense ( 215 ) ( 21 ) ( 283 ) ( 35 ) Fair Value Loss on investments – – – ( 20 ) Gain on sale of investments – 55 – 3,407 Other income (expense), net 22 82 22 156 Total other income (expense) ( 193 ) 116 ( 261 ) 3,508 Income before provision for income taxes 407 5,911 6,664 10,877 Provision for income taxes 280 1,662 1,863 3,088 Net income $ 127 $ 4,249 $ 4,801 $ 7,789 Net earnings per common share: Basic $ 0.01 $ 0.28 $ 0.32 $ 0.51 Diluted $ 0.01 $ 0.28 $ 0.31 $ 0.51 Weighted average common shares outstanding: Basic 15,161 15,206 15,209 15,170 Diluted 15,289 15,390 15,334 15,359 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 Issuance of common stock in connection with stock-based compensation – – 18 115 ( 437 ) – ( 322 ) Stock-based compensation – – – – 601 – 601 Net income – – – – – 4,249 4,249 Balance, June 30, 2025 17,274 $ 6,509 ( 2,053 ) $ ( 13,268 ) $ 2,844 $ 82,611 $ 78,696 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 Issuance of common Stock – – 77 609 ( 2,082 ) – ( 1,473 ) Repurchase of common stock – – ( 253 ) ( 4,937 ) – – ( 4,937 ) Stock-based compensation – – – – 535 – 535 Net income – – – – – 127 127 Balance, June 30, 2026 17,274 $ 6,509 ( 2,168 ) $ ( 17,217 ) $ 1,800 $ 93,482 $ 84,574 See accompanying notes to consolidated financial statements 5 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (In thousands) Six months ended June 30, 2026 2025 Cash flows from operating activities: Net income $ 4,801 $ 7,789 Adjustments to reconcile net income to operating cash flow: Depreciation and amortization 2,198 1,904 Stock-based compensation 1,083 927 Non-cash interest expense 11 9 Bad debt expense 87 – Gain on sale of equipment ( 19 ) ( 115 ) Gain on sale of investments – ( 3,407 ) Fair value loss on investment – 20 (Increase) decrease in operating assets: Accounts receivable ( 6,305 ) ( 640 ) Inventories ( 2,097 ) ( 1,546 ) Prepaid expenses and other current assets 297 322 Refundable income taxes ( 404 ) 631 Increase (decrease) in operating liabilities: Accounts payable 6,739 500 Accrued expenses ( 2,601 ) ( 2,632 ) Accrued income taxes 86 – Other long-term liabilities 163 – Net cash provided by operating activities 4,039 3,762 Cash flows from investing activities: Purchases of property and equipment ( 19,505 ) ( 4,526 ) Proceeds from sale of equipment 223 115 Proceeds from sale of investments – 5,206 Net cash (used in) provided by investing activities ( 19,282 ) 795 Cash flows from financing activities: Purchase of treasury stock ( 4,937 ) – Borrowings under line of credit 23,000 – 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 16,759 ( 65 ) Net increase in cash and cash equivalents 1,516 4,492 Cash and cash equivalents at the beginning of the period 5,571 16,728 Cash and cash equivalents at the end of the period $ 7,087 $ 21,220 Supplemental cash flow information: Cash paid for income taxes, net of (refunds) $ 2,180 $ 2,457 Cash paid for interest $ 200 $ 26 Non-cash investing activities Accrued purchase of property and equipment $ 512 $ 1,083 Right-of-use assets obtained in exchange for lease obligations $ 119 $ 196 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 $ 8,162 and $ 4,418 for the six months ended June 30, 2026 and 2025, respectively. Total advertising expense was $ 4,787 and $ 2,282 for the three months ended June 30, 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 $ 5,206 and recognized a gain on the sale of investment of $ 3,407 during the six months ended June 30, 2025. The Company received cash proceeds of $ 54 and recognized a gain on the sale of investment of $ 54 during the three months ended June 30, 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 June 30, 2026 December 31, 2025 Ingredients $ 4,299 $ 4,141 Packaging 4,324 3,452 Finished goods 5,364 4,297 Total inventories, net $ 13,987 $ 11,890 8 Note 4 – Property, Plant and Equipment, net Schedule of property, plant and equipment June 30, 2026 December 31, 2025 Land $ 1,565 $ 1,565 Buildings and improvements 32,208 24,497 Machinery and equipment 43,778 43,433 Vehicles 477 477 Office equipment 639 694 Construction in process 30,903 19,803 109,570 90,469 Less accumulated depreciation ( 43,974 ) ( 42,187 ) Total property, plant and equipment, net $ 65,596 $ 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 June 30, 2026 Goodwill $ 12,948 Accumulated impairment losses ( 1,244 ) $ 11,704 Intangible Assets Other intangible assets, net consisted of the following: Schedule of other intangible assets June 30, 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 ( 1,772 ) 1,613 3,385 ( 1,692 ) 1,693 Brand names 7,948 ( 4,013 ) 3,935 7,948 ( 3,823 ) 4,125 Formula 438 ( 438 ) – 438 ( 438 ) – Total intangible assets, net $ 16,344 $ ( 10,796 ) $ 5,548 $ 16,344 $ ( 10,526 ) $ 5,818 9 Estimated amortization expense on intangible assets for the next five years is as follows: Schedule of future amortization expense on intangible assets Year Amortization Six months ended December 31, 2026 $ 270 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 10.1 and 10.4 years, respectively, as of June 30, 2026. The weighted-average remaining amortization expense period for total intangible assets is 10.3 years as of June 30, 2026. Note 6 – Accrued Expenses Accrued expenses consisted of the following: Schedule of accrued expenses June 30, 2026 December 31, 2025 Payroll and incentive compensation $ 3,533 $ 4,386 Real estate taxes 517 483 Utilities 215 189 Current portion of operating lease liabilities 128 106 Other 352 249 Total accrued expenses $ 4,745 $ 5,413 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 Secured Overnight Financing Rate (“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. 10 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 June 30, 2026, the Company had $ 22,000 outstanding under the Revolving Credit Facility and net unamortized deferred financing costs of $ 55 related to the Revolving Credit Facility which were included as a direct deduction from the outstanding line of credit. The Company had $ 3,000 available for future borrowings under the Revolving Credit Facility as of June 30, 2026. Lifeway’s interest rate on debt outstanding under the Revolving Credit Facility as of June 30, 2026 was 5.48 %. Interim Funding Agreement On June 30, 2026, the Company entered into a Master Security Agreement (the “MSA”) with its current lender. The MSA provides for loan advances under an Interim Funding Agreement (the “Interim Funding Agreement”) to finance or refinance the acquisition of equipment, subject to lender’s acceptance of collateral documentation, up to $ 22,000,000 in the aggregate, during an interim funding period which expires June 30, 2027 . Interest on the loan advances is payable monthly in arrears at the 1-month Term SOFR plus 1.65 %. Upon the conclusion of loan advances under the Interim Funding Agreement, and the execution of a Collateral Schedule by lender and Lifeway, all loan advances outstanding on the date of such Collateral Schedule (the “Conversion Date”), shall be converted into the Equipment Guidance Line Note (the “Note”). The note is payable in monthly installments of principal and interest and matures five years after the Conversion Date. Interest is payable monthly in arrears at the 1-month Term SOFR plus 1.65 %. There were no advances outstanding under the Interim Funding Agreement as of June 30, 2026. Lifeway was in compliance with the fixed charge coverage ratio and maximum cash flow leverage ratio covenants at June 30, 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. 11 Right-of-use assets and lease liabilities are measured and recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Lifeway has elected the practical expedient to combine lease and non-lease components into a single component for all of its leases. When the Company is unable to determine an implicit interest rate, it uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments for those leases. Lifeway includes options to extend or terminate the lease in the measurement of the right-of-use asset and lease liability when it is reasonably certain that it will exercise such options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company does not record leases with an initial term of 12 months or less on the balance sheet. Expense for these short-term leases is recorded on a straight-line basis over the lease term. Total lease expense was $ 135 and $ 95 (including short term leases) for the six months ended June 30, 2026 and 2025, respectively. Total lease expense was $ 73 and $ 58 (including short term leases) for the three months ended June 30, 2026 and 2025, respectively. Future maturities of lease liabilities were as follows: Schedule of future maturities of lease liabilities Year Operating Leases Six months ended December 31, 2026 $ 87 2027 169 2028 153 2029 106 2030 78 Thereafter 41 Total lease payments 634 Less: Interest ( 113 ) Present value of lease liabilities $ 521 The weighted-average remaining lease term for its operating leases was 4.1 years as of June 30, 2026. The weighted average discount rate of its operating leases was 9.74 % as of June 30, 2026. Cash paid for amounts included in the measurement of lease liabilities was $ 90 and $ 47 for the six months ended June 30, 2026 and 2025, respectively. Cash paid for amounts included in the measurement of lease liabilities was $ 45 and $ 28 for the three months ended June 30, 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 28.0 % and 28.4 % for the six months ended June 30, 2026 and 2025, respectively. Income taxes were recognized at effective rates of 68.7 % and 28.1 % for the three months ended June 30, 2026 and 2025, respectively. Statutory Federal and state tax rates remained consistent from 2025 to 2026. The Company has items that are nondeductible or are discrete adjustments to tax expense. The Company consistently reflects non-deductible officer compensation expense, non-deductible stock-based compensation expense and separate state tax rates from period to period. Although similar items were reflected in the three months ended June 30 , 2026, the percentage effect is different due to the difference in pre-tax income in the three months ended June 30, 2026 compared to the same period in 2025. 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 June 30, 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 June 30, 2026, 376 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 Six Months Ended June 30, June 30, 2026 2025 2026 2025 (In Thousands) Compensation expense related to stock-based payments $ 535 $ 601 $ 1,083 $ 927 Related income tax benefit 150 168 303 259 13 Stock Options The following table summarizes stock option activity during the six months ended June 30, 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 ( 13 ) 9.57 – – Outstanding at June 30, 2026 – $ – 0.00 $ – Exercisable at June 30, 2026 – $ – 0.00 $ – 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 six months ended June 30, 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 ( 51 ) 10.58 Shares settled in cash ( 13 ) 6.25 Forfeited – – Nonvested, at June 30, 2026 116 $ 13.38 Earned and deferred at June 30, 2026 92 $ 9.98 Unrecognized compensation expense related to nonvested restricted stock units was $ 559 as of June 30, 2026 and will be recognized over a weighted average period of 0.9 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. The following table summarizes performance unit activity during the six months ended June 30, 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 ( 155 ) 6.88 Forfeited – – Nonvested, at June 30, 2026 114 $ 18.43 (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 $ 1,365 as of June 30, 2026 and is expected to 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. 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 applicable at the time of the grant prohibiting the issuance of equity to the Company’s 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. The deferred cash awards may be settled in cash, common stock or a combination of cash and common stock at the discretion of the Company. 15 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 six months ended June 30, 2026 and 2025, total contribution expense recognized in the consolidated statements of operations was $ 473 and $ 413 , respectively. For the three months ended June 30, 2026 and 2025, total contribution expense recognized in the consolidated statements of operations was $ 222 and $ 152 , respectively. Note 12 - Earnings Per Share The following table summarizes the effects of the share-based compensation awards on the weighted average number of shares outstanding used in calculating diluted earnings per share: Schedule of weighted average number of shares outstanding Three Months Ended Six Months Ended June 30, June 30, 2026 2025 2026 2025 (In thousands) Weighted average common shares outstanding 15,161 15,206 15,209 15,170 Assumed exercise/vesting of equity awards 128 184 125 189 Weighted average diluted common shares outstanding 15,289 15,390 15,334 15,359 Note 13 – Reportable Segments and Disaggregated Revenue 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. 16 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. · Other dairy, which primarily consists of butter and sour cream. Net sales of products by category were as follows for the six months ended June 30: Schedule of net sales products by category 2026 2025 In thousands $ % $ % Drinkable Kefir 114,829 88 % 85,554 85 % Cheese 9,338 7 % 7,811 8 % Cream and other 3,935 3 % 4,825 5 % Drinkable Yogurt 1,260 1 % 1,083 1 % Other dairy 543 1 % 719 1 % Net Sales 129,905 100 % 99,992 100 % Net sales of products by category were as follows for the three months ended June 30: 2026 2025 In thousands $ % $ % Drinkable Kefir 59,414 89 % 46,758 86 % Cheese 4,654 7 % 3,999 8 % Cream and other 1,886 3 % 2,366 4 % Drinkable Yogurt 676 1 % 449 1 % Other dairy 263 – % 329 1 % Net Sales 66,893 100 % 53,901 100 % Beginning in the second quarter of 2026, ProBugs Kefir net sales are included in Drinkable Kefir. Prior period amounts have been reclassified in the three and six-month tables above. Significant Customers Sales are predominately to companies in the retail food industry located within the United States. Two major customers accounted for a total of 25 % of net sales for the six months ended June 30, 2026 and 2025. Two major customers accounted for a total of 25 % of net sales for the three months ended June 30, 2026 and 2025. 17 Geographic Information Net sales outside the of the United States represented less than 1% of total consolidated net sales for the six and three months ended June 30, 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 June 5, 2026, the board of directors authorized and directed the Company to redeem rights of shareholders outstanding on June 5, 2026 to a dividend of Series A Junior Participating Preferred Stock (the “Rights”) declared pursuant to that certain Shareholder Rights Agreement with Computershare Trust Company, N.A., as rights agent dated November 4, 2024, as amended (as amended from time to time, the “Rights Agreement”). Upon such redemption, the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the redemption price of $ 0.001 for each Right so held and the Rights Agreement will terminate and be of no further force or effect. 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 . On September 15, 2025, the Company entered into the First Amended Herd Agreement (the “Herd Agreement”) with the 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 sixty-month 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. On June 30, 2026, the Company entered into the Second Amended Herd Agreement with the Dairy, with an effective date (“effective date”) of April 1, 2026. The Second Amendment, among other things, (1) modifies the agreement period to thirty-six months from the effective date, and (2) modifies the monthly payment amount to Lifeway over the thirty-six month agreement period. 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 $ 830 in prepaid and other current assets and $ 1,836 in other assets as of June 30, 2026 related to the herd agreement with no recorded gain or loss on sale during 2026 or 2025. 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