ITEM 1A. RISK FACTORS
In evaluating and understanding us and our business,
you should carefully consider the risks described below, in conjunction with all of the other information included in this Annual Report
on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained
in Part II, Item 7. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that
we are unaware of, or that we currently believe are not material, may become important factors that adversely affect our business. If
any of the events or circumstances described in the following risk factors actually occurs, our business, financial condition, results
of operations, and future prospects could be materially and adversely affected.
RISKS RELATED TO OUR BUSINESS
Our product categories face a high level
of competition, which could negatively impact our sales and results of operations.
We compete with a limited number of other
domestic kefir producers and consequently face a small amount of direct competition for kefir products. However, our kefir-based
products compete with other dairy products, notably spoonable and drinkable yogurt, and, increasingly, with non-dairy probiotic
products that incorporate kefir cultures but are not kefir. We face significant competition for limited retailer shelf space in each
of our product categories. Competition in our product categories is based on product innovation, product quality, price, brand
recognition and loyalty, effectiveness of marketing, promotional activity, and our ability to identify and satisfy consumer tastes
and preferences. We believe that our brands have benefited in many cases from being the first to introduce products in their
categories, and their success has attracted competition from other food and beverage companies that produce branded products, as
well as from private label competitors. Some of our competitors, such as Danone, General Mills, Chobani, Hain Celestial Group,
Horizon and Nestle, have substantial financial and marketing resources. These competitors and others may be able to introduce
innovative products more quickly or market their products more successfully than we can, which could cause our growth rate to be
slower than we anticipate and could cause sales to decline.
We also compete with producers of non-dairy products
that have lower ingredient and production-related costs. As a result, these competing producers may be able to offer their products to
customers at a lower price point. This could cause us to lower our prices, resulting in lower profitability or, in the alternative, cause
us to lose market share if we fail to lower prices. Furthermore, private label competitors are generally able to sell their products at
lower prices because private label products typically have lower marketing costs than their branded counterparts. If our products fail
to compete successfully with other branded or private label offerings, demand for our products and our sales volumes could be negatively
impacted.
Additionally, due to high levels of competition,
certain of our key retailers may demand price concessions on our products or may become more resistant to price increases for our products.
Increased price competition and resistance to price increases have had, and may continue to have, a negative effect on our results of
operations.
We may not be able to successfully implement our business strategy
for our brands on a timely basis or at all.
We believe that our future success depends, in
part, on our ability to implement our strategy of leveraging our existing brands with our new products to maintain our market position
in our product categories; drive increased sales; acquire or establish new brands; and create strategic alliances including potential
joint ventures. Our ability to implement this strategy depends, among other things, on our ability to:
· compete successfully in the product categories in which we choose to operate;
· increase our brand recognition and loyalty;
· negotiate acquisitions and joint ventures on terms acceptable to us; and
If we fail to execute these and other important
elements of our business strategy, our business and results of operations could be adversely affected.
One key element of our business strategy is to
introduce timely, new, cost-effective, and appealing products and to innovate successfully within our existing product categories. However,
consumer tastes and preferences change rapidly, and evolve over time. Factors that may affect consumer tastes and preferences include:
Our future investments may not produce the results
we expect when we expect them for a variety of reasons including those described herein. Our future product development and innovation
will be reliant on our ability to identify and develop potential new growth opportunities. This process is inherently risky and will result
in investments of substantial time and resources for which we may not achieve any return or value. Successful product development and
innovation is also affected by our ability to launch new or improved products successfully and on a timely and cost-effective basis.
We may have to pay cash, incur debt, or issue
equity, equity-linked, or debt securities to fund our business strategy, or may be unable to fund that strategy. Any of these events could
adversely affect our financial results and our business. We could experience similar effects if we invest resources in a strategy that
ultimately proves unsuccessful. If, due to a failure of our strategy or any other reason, consumer demand for our products declines, our
sales volumes, results of operations, and our business could be negatively affected, and we may not be able to create or sustain growth
or successfully implement our business strategy.
Interruption of our supply chain could affect
our ability to manufacture or distribute products, could adversely affect our business and sales, and/or could increase our operating
costs and capital expenditures.
We have several supply agreements with suppliers
and co-packers that require them to provide us with certain ingredients, packaging, other inputs, and finished goods. For certain items,
we rely on a single supplier or co-packer as our sole source for the item. Our suppliers and co-packers are subject to risk, including
labor disputes, union organizing activities, financial liquidity, inclement weather, natural disasters, supply constraints, and general
economic and political conditions that could limit their ability to timely provide us with acceptable product. Although other sources
are available for these items, if our current sources are unable to fulfill our needs for any reason, we may not be able to timely engage
a replacement source that can timely provide us with acceptable products or on terms favorable to us or at all, which could disrupt our
ability to manufacture and distribute products. Such disruptions could have a material adverse effect on our business, consolidated financial
condition or results of operations.
Disruption of our manufacturing or distribution
chains or information technology systems, including disruption due to cybersecurity threats, could adversely affect our business.
The success of our business depends, in part,
on maintaining a strong manufacturing platform and we rely primarily on internal production resources to fulfill our manufacturing needs.
Our ongoing initiatives to expand our manufacturing platform and our productive capacity could fail to achieve such objectives and, in
any case, could increase our operating costs beyond our expectations and could require significant additional capital expenditures. If
we cannot maintain sufficient production, warehousing, and distribution capacity, either internally or through third party agreements,
we may be unable to meet customer demand and/or our manufacturing, distribution, and warehousing costs may increase, which could negatively
affect our business.
Furthermore, damage or disruption to our manufacturing
or distribution capabilities due to weather, natural disaster, fire, environmental incident, terrorism, cybersecurity threats and other
security breaches, pandemic, strikes, the financial or operational instability of key distributors, warehousing, and transportation providers,
or other reasons could impair our ability to manufacture or distribute our products.
We rely on a limited number of production and
distribution facilities. A disruption in operations at any of these facilities or any other disruption in our supply chain relating to
common carriers, supply of raw materials and finished goods, or otherwise, whether as a result of casualty, natural disaster, power loss,
telecommunications failure, cybersecurity threat, terrorism, labor shortages, contractual disputes or other causes, could significantly
impair our ability to operate our business and adversely affect our relationship with our customers. Furthermore, our insurance coverage
may not be adequate to cover all related costs.
Our information technology systems are also critical
to the operation of our business and essential to our ability to successfully perform day-to-day operations. These systems include, without
limitation, networks, applications, and outsourced services in connection with the operation of our business. A failure of our information
technology systems to perform as we anticipate could disrupt our business and result in transaction errors, processing inefficiencies,
and sales losses, causing our business to suffer. In addition, our information technology systems may be vulnerable to damage or interruption
from circumstances beyond our control, including fire, natural disasters, systems failures, and cybersecurity threats. Cybersecurity threats
in particular are persistent, evolve quickly and include, without limitation, computer viruses, unauthorized attempts to access information,
denial of service attacks, and other electronic security breaches. Like our customers, suppliers, subcontractors and other third parties
with whom we do business generally, we expect that we will continue to be the subject of cybersecurity threats. In some cases, we must
rely on the safeguards put in place by the third parties with whom we do business to protect against security threats. We believe we have
implemented appropriate measures and controls and have invested in sufficient resources to appropriately identify and monitor these threats
and mitigate potential risks, including risks involving our customers and suppliers. However, there can be no assurance that any such
actions will be sufficient to prevent cybersecurity breaches, disruptions to mission critical systems, the unauthorized release of sensitive
information or corruption of data, or harm to facilities or personnel.
These threats and other events could disrupt our
operations, or the operations of our customers, suppliers, subcontractors and other third parties; could require significant management
attention and resources; could result in the loss of business, regulatory actions and potential liability; and could negatively impact
our reputation among our customers and the public. Any of these outcomes could have a negative impact on our financial condition, results
of operations, or liquidity.
Our debt and financial obligations could
adversely affect our financial condition, our ability to obtain future financing, and our ability to operate our business.
Although the Company does not have any indebtedness
outstanding as of December 31, 2025, the Company may incur indebtedness in the future. Outstanding debt obligations could adversely affect
our financial condition and limit our ability to successfully implement our business strategy. Furthermore, from time to time, we may
need additional financing to support our business and pursue our business strategy, including strategic acquisitions. Our ability to obtain
additional financing, if and when required, will depend on our operating performance, the condition of the capital markets, and other
factors. We cannot assure that additional financing will be available to us on favorable terms when required, or at all. If we raise additional
funds through the issuance of equity, equity-linked, or debt securities, those securities may have rights, preferences, or privileges
senior to those of our common stock, and, in the case of equity and equity-linked securities, our existing stockholders may experience
dilution.
As of December 31, 2025, we had $0 outstanding
under the Revolving Credit Facility. Our loan agreement contains certain restrictions and requirements that among other things:
· impose on us financial and operational restrictions.
Our ability to meet our debt service obligations
will depend on our future performance, which will be affected by the other risk factors described in this Annual Report on Form 10-K.
If we do not generate enough cash flow to pay our debt service obligations, we may be required to refinance all or part of our existing
debt, sell our assets, borrow more money or raise equity. There is no guarantee that we will be able to take any of these actions on a
timely basis, on terms satisfactory to us, or at all.
Our Revolving Credit Facility bears interest at
variable rates. If market interest rates increase, it will increase our debt service requirements, which could adversely affect our cash
flow.
Our loan agreements also contain provisions that restrict our ability
to:
· borrow money or guarantee debt;
· create liens;
· make specified types of investments and acquisitions;
· pay dividends on or redeem or repurchase stock;
· enter into new lines of business;
· enter into transactions with affiliates; and
· sell assets or merge with other companies.
These restrictions on the operation of our business
could harm our ability to execute on our business strategy by, among other things, limiting our ability to take advantage of financing,
merger and acquisition opportunities, and other corporate opportunities. Various risks, uncertainties, and events beyond our control could
affect our ability to comply with these covenants. Unless cured or waived, a default would permit lenders to accelerate the maturity of
the debt under the credit agreement and to foreclose upon the collateral securing the debt.
Loss of our key management or other personnel,
or an inability to attract such management and other personnel, could negatively impact our business.
We depend on the skills, working relationships,
and continued services of key personnel, including our experienced senior management team. We also depend on our ability to attract and
retain qualified personnel to operate and expand our business. If we lose one or more members of our senior management team whose responsibilities
cannot otherwise be distributed among our other officers, or if we fail to attract talented new employees, our business and results of
operations could be negatively affected.
Employee strikes and other labor-related
disruptions may adversely affect our operations.
We have a union contract governing the terms and
conditions of employment for a significant portion of our manufacturing workforce in Illinois. Although we believe union relations since
the union’s certification as the exclusive bargaining representative of this portion of our workforce have been amicable, there
is no assurance that this will continue in the future or that we will not be subject to future union organizing activity. There are potential
adverse effects of labor disputes with our own employees or by others who provide warehousing, transportation, and distribution, both
domestic and foreign, of our raw materials or other products. Strikes or work stoppages or other business interruptions could occur if
we are unable to renew collective bargaining agreements on satisfactory terms or enter into new agreements on satisfactory terms, which
could impair manufacturing and distribution of our products or result in a loss of sales, which could adversely impact our business, financial
condition, or results of operations. The terms and conditions of existing, renegotiated, or new collective bargaining agreements could
also increase our costs or otherwise affect our ability to fully implement future operational changes to enhance our efficiency or to
adapt to changing business needs or strategy.
Our intellectual property rights are valuable, and any inability
to protect them could reduce the value of our products and brands.
We consider our intellectual property rights,
particularly our trademarks, but also our copyrights, registered domain names, and proprietary trade secrets, technology, know-how, processes
and other proprietary rights to be a significant and valuable aspect of our business. We attempt to protect our intellectual property
rights by relying on a combination of trademark, copyright, trade dress, trade secret, and other intellectual property laws, and domain
name dispute resolution systems; as well as licensing agreements, third-party confidentiality, nondisclosure, and assignment agreements;
and by policing third-party misuses of our intellectual property. Our failure to obtain or maintain adequate protection of our intellectual
property rights, or any change in law or other changes that serve to lessen or remove the current legal protections of our intellectual
property, may diminish our competitiveness and could materially harm our business.
We also face the risk of claims that we have infringed
third parties’ intellectual property rights. Any claims of intellectual property infringement, even those without merit, could be
expensive and time consuming to defend, cause us to cease making, licensing, or using products that incorporate the challenged intellectual
property, require us to redesign or rebrand our products or packaging, divert management’s attention and resources, or require us
to enter into royalty or licensing agreements to obtain the right to use a third party’s intellectual property. Any royalty or licensing
agreements, if required, may not be available to us on acceptable terms or at all. Additionally, a successful claim of infringement against
us could result in our being required to pay significant damages, enter into costly license or royalty agreements, or stop the sale of
certain products, any of which could have a negative effect on our results of operations.
A substantial portion of our common stock
is held by members of the Smolyansky family, Danone and Divisadero Street Partners, L.P. (“Divisadero”), and they have the
ability to control the outcome of matters submitted for stockholder approval.
Our five largest shareholders, Julie Smolyansky
(the Company’s chief executive officer and the daughter of our founder), Edward Smolyansky (our former chief operations officer
and son of our founder), Ludmila Smolyansky (a former member of our Board and the widow of our founder), Danone North America PBC and
its affiliates (collectively, “Danone”) and Divisadero, beneficially owned approximately 18%, 20%, 6%, 23% and 9% of the Company’s
outstanding common stock, respectively, as of December 31, 2025. Certain of these shareholders, together, could significantly influence
any matter requiring approval by our stockholders, including the election or removal of all of our directors, amendments to our articles
of incorporation and the approval or rejection of any merger, change of control, or other significant corporate transaction. It is unlikely
that any person interested in acquiring Lifeway will be able to do so without obtaining the consent of some combination of Julie Smolyansky,
Edward Smolyansky, Ludmila Smolyansky, Danone and Divisadero. The interests of the Smolyansky family members, Danone and Divisadero could
differ from those of other stockholders in ways that could be adverse to the interests of other stockholders. By exercising their influence,
such stockholders could cause Lifeway to take actions that are at odds with the investment goals of institutional, short-term, non-voting,
or other non-controlling investors, or that have a negative effect on our stock price. Additionally, concentration of ownership could
also harm the market price of our common stock if investors perceive disadvantages in owning stock in a company of which a substantial
portion of common stock is beneficially owned by a small number of stockholders.
Our business could be adversely affected
as a result of proposals to acquire the Company or other actions taken by stockholders related to a possible acquisition of the Company.
Proposals to acquire the Company that we may receive
in the future and any other actions by stockholders or others relating to a potential change of control transaction involving the Company
could interfere with our ability to execute our strategic plans, make it more difficult to attract and retain qualified executives and
employees, cause management distraction, require us to utilize more resources than anticipated towards review of strategic alternatives
and result in the loss of potential business opportunities, any of which could have a material negative impact on the Company. In addition,
our business and operations may be harmed to the extent that our customers or suppliers or others believe that we cannot effectively compete
in the marketplace without completing a transaction, or if there is customer, supplier or employee uncertainty surrounding the future
direction of our product offerings and our strategy. There can be no assurance that any such transaction will be completed now or in the
future.
Any proposals that we may receive in the future
or any actual or perceived actions by our stockholders or others relating to a potential transaction involving the Company may cause significant
fluctuations in our stock price based upon temporary or speculative market perceptions or other factors that do not necessarily reflect
the Company’s underlying fundamentals and prospects.
The actions of certain of our shareholders
could cause us to incur significant expense, disrupt our business, result in a proxy contest or litigation and adversely impact our stock
price.
We value constructive input from investors and
regularly engage in dialogue with our shareholders regarding strategy and performance. Our Board and management team are committed to
acting in the best interests of all of our shareholders.
We may be subject to shareholder activism in the
future, including nominations of candidates for election to our Board to replace current Board members or other shareholder proposals,
which could cause us to incur significant expense, hinder execution of our business strategy and adversely impact the market price of
Company common stock. Shareholder actions, including potential proxy contests, require significant time and attention by management and
our Board, potentially interfering with our ability to execute our strategic plan. Such shareholder action could give rise to perceived
uncertainties as to our future, adversely affect our relationships with our employees, customers or suppliers and make it more difficult
to attract and retain qualified personnel and business partners. These perceived uncertainties may also be exploited by our competitors
or other shareholders, which could result in lost business opportunities and make it more difficult to execute on our long-term strategic
plan. If customers choose to delay, defer or reduce transactions with us or do business with our competitors instead of us, then our business,
financial condition and operating results would be adversely affected. We may be required to incur significant legal fees and other expenses
related to shareholder actions, and the attention of our management may be diverted by such actions. Any of these impacts could materially
and adversely affect our business, operating results and financial condition, and the market price of Company common stock could be subject
to significant fluctuation or otherwise be adversely affected. If individuals are elected or appointed to our Board with a specific agenda,
the ability of our Board to function effectively could be adversely affected, which could in turn adversely affect our ability to effectively
and timely implement our strategic plan and create additional value for our shareholders, and adversely affect our business, operating
results and financial condition.
Litigation regarding the Stockholders’
Agreement may be protracted and costly.
Danone has filed suit in the Circuit Court of Cook County, Law Division,
in part, to enforce the Stockholders’ Agreement. Pursuant to the Cooperation Agreement, the parties have jointly sought a stay of
the pending litigation relating. If such litigation is recommenced, it may be protracted and expensive, and under certain circumstances,
the Company may be required to reimburse Danone for its legal fees incurred in connection with such litigation.
Our shareholder rights plan includes terms
and conditions that could discourage a takeover or other transaction that stockholders may consider favorable.
On November 4, 2024, in response to Danone’s
original proposal and Danone’s substantial ownership position in the Company, our Board approved and adopted the Shareholder Rights
Agreement with Computershare Trust Company, N.A., as rights agent (the “Rights Agreement”), and declared a dividend of one
preferred share purchase right (each, a “Right”) for each outstanding share of Company common stock to stockholders of record
at 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 a 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 generally become exercisable only if any person or entity (or any persons
or entities acting as a group) acquires 20% or more of the outstanding shares of Company common stock (or, to the extent any person, entity
or group beneficially owned 20% or more of the outstanding shares of Company common stock as of immediately prior to the first public
announcement of the adoption of the Rights Agreement, such person, entity or group acquires any additional shares). If Rights become exercisable,
all holders of Rights (other than the person, entity or group triggering the Rights Agreement, whose Rights will become void and will
not be exercisable) will have the right to purchase from the Company for $130.00, subject to certain potential adjustments, shares of
Company common stock having a market value of twice that amount. The Rights Agreement was originally scheduled to expire on November 4,
2025. On October 29, 2025, the Company and the Rights Agent entered into the Amendment No. 1 to Shareholder Rights Agreement (the “Amendment”)
which extended the scheduled expiration of the Rights Agreement to October 29, 2026, unless earlier terminated or the Rights are redeemed
or exchanged by the Board. Additional information regarding the Rights Agreement and the Amendment are contained in the Company’s
Current Report on Form 8-K filed with the SEC on November 5, 2024 and the Company’s Current Report on Form 8-K filed with the SEC
on October 30, 2025, respectively.
The Rights Agreement will cause substantial dilution
to any person, entity or group that acquires beneficial ownership of 20% or more of the outstanding shares of Company common stock (or,
to the extent any person, entity or group beneficially owned 20% or more of the outstanding shares of Company common stock as of immediately
prior to the first public announcement of the adoption of the Rights Agreement, such person, entity or group acquires any additional shares).
As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to discourage any person, entity or group
from gaining a control or control-like position in the Company or engaging in other tactics, potentially disadvantaging the interests
of the Company’s stockholders, without negotiating with the Board and without paying an appropriate control premium to all stockholders.
The Rights Agreement has similar provisions to those of other plans adopted by publicly-held companies in comparable circumstances. It
is intended to protect stockholders’ interests, including by providing the Board sufficient time to make informed judgments and
take actions that are in the best interests of all of the Company’s stockholders and other stakeholders. Nevertheless, the Rights
Agreement may be considered to have certain anti-takeover effects, including potentially discouraging a third party from attempting to
obtain a substantial position in the Company common stock or seeking to obtain control of the Company and discouraging a takeover attempt
that stockholders may consider favorable or that could result in a premium over the market price of Company common stock. Even in the
absence of a takeover attempt, the Rights Agreement may adversely affect the prevailing market price of Company common stock if it is
viewed as discouraging takeover attempts in the future.
Adverse economic conditions in the United
States or any of the other countries in which we conduct significant business in the future could negatively affect our business, financial
condition and results of operations.
Many of our products may be considered discretionary
items for consumers. Consumer spending on discretionary products is influenced by general economic conditions and the availability of
discretionary income. Adverse economic conditions in the United States, our primary market, or any of the other jurisdictions in which
we conduct significant business in the future, such as the current inflationary economic environment, rising interest rates, financial
distress caused by recent or potential bank failures and the associated banking crisis, an economic recession, depression or downturn,
a tightening of the credit markets, high energy prices or higher unemployment levels, may lead to decreased consumer spending, reduced
credit availability and a decline in consumer confidence and demand, each of which poses a risk to our business. For example, US and global
markets have in the past experienced volatility and disruption due to interest rate and inflation increases, as well as the continued
escalation of geopolitical tensions, including those as a result of the conflicts between Russia and Ukraine and in the Middle East. Although
our business has not yet been materially negatively impacted by such inflationary pressures, we cannot be certain that neither we nor
our consumers will be materially impacted by continued pressures.
The change in administration following the 2024
United States presidential election could further impact trade and tariff policies, and could also result in substantial changes to fiscal,
tax, or regulatory policies that may impact our business. These additional tariffs, as well as a government’s adoption of “buy
national” policies or retaliation by another government against such tariffs or policies have introduced significant uncertainty
into the market and may affect the prices of and demand for our products, as well as the cost to acquire machinery and equipment from
international sources, which could have a material and adverse effect on our business, financial condition and results of operations.
Other significant events may impact economic conditions
and affect discretionary spending, including events such as catastrophic environmental disasters or global pandemics. As global economic
conditions continue to be volatile and economic uncertainty remains, trends in consumer discretionary spending also remain unpredictable
and subject to reductions due to credit constraints and uncertainties about the future. A decrease in consumer spending or in retailer
and consumer confidence and demand for our products could have a significant negative impact on our net sales and profitability, including
our operating margins and return on invested capital. These economic conditions could cause some of our retail customers or suppliers
to experience cash flow or credit problems and impair their financial condition, which could disrupt our business and adversely affect
product orders, payment patterns and default rates and increase our bad debt expense.
The increasing use of artificial intelligence
technologies by our competitors, customers, and suppliers could impact our competitive position.
Artificial intelligence (“AI”) and
machine learning technologies are rapidly evolving and are increasingly being adopted across industries, including in manufacturing. Our
competitors, customers, and suppliers may adopt AI technologies that could affect our competitive position. If we fail to effectively
adopt and integrate AI technologies, or if our competitors do so more successfully, we could experience a decline in our competitive position.
We may also face risks from AI technologies used
by third parties, including vendors, customers, and service providers, over which we have limited control. Any material disruption to
our supply chain or competitive disadvantage resulting from third-party AI adoption could adversely affect our business, financial condition,
and results of operations.
RISKS RELATED TO OUR INDUSTRY
The consolidation of our customers or the
loss of any of our largest customers could negatively impact our sales and results of operations.
Customers, such as supermarkets and food distributors,
continue to consolidate. This consolidation has produced larger, more sophisticated organizations with increased negotiating and buying
power that are able to resist price increases or demand increased promotional programs, as well as operate with lower inventories, decrease
the number of brands that they carry and increase their emphasis on private label products, all of which could negatively impact our business.
The consolidation of retail customers also increases the risk that a significant adverse impact on their business could have a corresponding
material adverse impact on our business.
Two of our customers together accounted for 24%
of our net sales in the fiscal year ended December 31, 2025. Where we enter into written agreements with our customers, they are generally
terminable after short notice periods by the customer. In addition, our customers sometimes award contracts based on competitive bidding,
which could result in lower profits for contracts we win and the loss of business for contracts we lose. The loss of any large customer,
the reduction of purchasing levels, or the cancellation of any business from a large customer for an extended period of time could negatively
affect our sales and results of operations.
We rely on sales made by or through our independent
distributors to customers. Distributors purchase directly for their own account for resale. The loss of, or business disruption at, one
or more of these distributors may harm our business. If we are required to obtain additional or alternative distribution agreements or
arrangements in the future, we cannot be certain that we will be able to do so on satisfactory terms or in a timely manner. Our inability
to enter into satisfactory distribution agreements may inhibit our ability to implement our business plan or to establish markets necessary
to expand the distribution of our products successfully.
We are subject to the risk of product contamination
and product liability claims, which could harm our reputation, force us to recall products and incur substantial costs.
The sale of food products for human consumption
involves the risk of injury to consumers. Such injuries may result from tampering by unauthorized third parties, inadvertent mislabeling,
product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced
during the storage, processing, handling or transportation phases. We also may be subject to liability if our products or production processes
violate applicable laws or regulations, including environmental, health, and safety requirements, or in the event our products cause injury,
illness, or death.
Under certain circumstances, we may be required
to recall or withdraw products, suspend production of our products, or cease operations, which may lead to a material adverse effect on
our business. In addition, customers may cancel orders for such products as a result of such events. Even if a situation does not necessitate
a recall or market withdrawal, and even if we and each of our co-packers and suppliers comply in all material respects with all applicable
laws and regulations, we may become subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful
or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or physical harm, including
the risk of reputational harm being magnified and/or distorted through the rapid dissemination of information over the Internet, including
through news articles, blogs, chat rooms, and social media, could adversely affect our reputation with existing and potential customers
and consumers and our corporate and brand image. Moreover, claims or liabilities of this type might not be covered by our insurance or
by any rights of indemnity or contribution that we may have against others. We maintain product liability and product recall insurance
in amounts that we believe to be adequate. However, we cannot be sure that we will not incur claims or liabilities for which we are not
insured or that exceed the amount of our insurance coverage. A product liability judgment against us or a product recall could have a
material adverse effect on our business, consolidated financial condition, results of operations or liquidity.
We rely on independent certification for several of our products
and facilities.
We rely on independent certification, such as
certifications of our products as “organic,” or “gluten-free,” to differentiate our products from others. The
loss of any independent certifications could adversely affect our market position as a probiotic-based product and natural, “better
for you” foods company, which could harm our business. We rely on independent SQF certification at some of our facilities, a certification
that some of our customers require us to maintain.
We must comply with the requirements of independent
organizations or certification authorities in order to label our products as certified. For example, we can lose our “organic”
certification if a manufacturing plant becomes contaminated with non-organic materials, or if it is not properly cleaned after a production
run. In addition, all organic raw materials must be certified organic or organic compliant. Our products could lose their organic certifications
if our raw material suppliers lose their organic certifications. Similarly, we could lose our SQF certification if we do not meet the
requirements of the SQF Code. The loss of these certifications could cause us to lose customers that require Lifeway products and/or facilities
to carry some or all of them, which could negatively affect our sales and results of operations.
Increases in the cost of milk could reduce
our gross margin and profit.
Conventional and organic milk, our primary raw
material, is an agricultural commodity that is subject to price fluctuations. Conventional milk prices were lower in fiscal 2025 than
the prior year, and there can be no assurance that such prices will remain at these levels in the future. The supply and price of milk
may be impacted by, among other things, weather, natural disasters, real or perceived supply shortages, lower dairy and crop yields, general
increases in farm inputs and costs of production, political and economic conditions, labor actions, government actions, and trade barriers.
Increases in the market price for milk or over-order premiums charged by producers may also impact our ability to enter into purchase
commitments at a fixed price. There can be no assurance that our purchasing practices will mitigate future price risk. As a result, increases
in the cost of milk could have an adverse impact on our profitability.
In addition, the dairy industry continues to experience
periodic imbalances between supply and demand for organic milk. Industry regulation and the costs of organic farming compared to costs
of conventional farming can impact the supply of organic milk in the market. Oversupply levels of organic milk can increase competitive
pressure on our products and pricing, while supply shortages can cause higher input costs and reduce our ability to deliver product to
our customers. Cost increases in raw materials and other inputs could cause our profits to decrease significantly compared to prior periods,
as we may be unable to increase our prices to offset the increased cost of these raw materials and other inputs. If we are unable to obtain
raw materials and other inputs for our products or offset any increased costs for such raw materials and inputs, our business could be
negatively affected.
Reduced availability of raw materials and
other inputs, as well as increased costs for them, could adversely affect us.
Our business depends heavily on raw materials
and other inputs in addition to conventional and organic raw milk, such as cultures, flavoring, packaging material, and other commodities.
Our raw materials are generally sourced from third-party suppliers, and we are not assured of continued supply, pricing, or exclusive
access to raw materials from any of these suppliers. For market conditions or competitive reasons, our customer pricing actions may lag
input cost changes, or we may not be able to pass along the full effect of increases in raw materials and other input costs as we incur
them.
The organic ingredients we use in some of our
products are less plentiful and available from a fewer number of suppliers than their conventional counterparts. Competition with other
manufacturers in the procurement of organic product ingredients may increase in the future if consumer demand for organic products exceeds
the supply.
Our business is subject to various food,
environmental, and health and safety laws and regulations, which may increase our compliance costs, subject us to liabilities, or otherwise
adversely affect our business.
Our business operations are subject to numerous
requirements in the United States relating to food safety, production, and marketing, as well as the protection of the environment, and
health and safety matters. The food production and marketing industry is subject to a variety of federal, state, local, and foreign laws
and regulations, including food safety requirements related to the ingredients, manufacture, processing, storage, marketing, advertising,
labeling, and distribution of our products, as well as those related to worker health and workplace safety. Our activities, both in and
outside of the United States, are subject to extensive regulation. We are regulated by, among other federal and state authorities, the
FDA, USDA, the U.S. Federal Trade Commission (“FTC”), and the U.S. Departments of Commerce, and Labor, as well as by similar
authorities in the foreign countries in which we do business. Environmental laws including the Clean Air Act, the Clean Water Act, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and the National Organic Standards of the U.S.
Department of Agriculture, as well as similar state and local statutes and regulations in the United States and in each of the foreign
countries in which we do business apply to our business operations as well. These laws and regulations govern, among other things, air
emissions and the discharge of wastewater and other pollutants, the use of refrigerants, the handling and disposal of hazardous materials,
and the cleanup of contamination in the environment. In addition, the marketing and advertising of our products could make us the target
of claims relating to alleged false or deceptive advertising under federal, state, and foreign laws and regulations, and we may be subject
to initiatives that limit or prohibit the marketing and advertising of our products to children.
We are also subject to federal laws and regulations
relating to our organic products and production. For example, as required by the National Organic Program (“NOP”), we rely
on third parties to certify certain of our products and production locations as organic. Regulations and formal and informal positions
taken by the NOP pursuant to the Organic Foods Production Act of 1990, which created the NOP, are subject to continued review and scrutiny.
Changes in these laws or regulations or the introduction
of new laws or regulations could increase our compliance costs, increase other costs of doing business for us, our customers, or our suppliers,
or restrict our actions, which could adversely affect our results of operations. In some cases, new laws and regulations or other federal
and state regulatory initiatives could interrupt distribution of our products or force changes in our production processes and our products.
Governmental regulations also affect taxes and levies, healthcare costs, energy usage, immigration, and other labor issues, all of which
may have a direct or indirect effect on our business or those of our customers or suppliers. These costs could negatively affect our results
of operations and financial condition. Further, if we are found to be in violation of applicable laws and regulations in these areas,
we could be subject to civil remedies, including third-party claims for property damage or personal injury, fines, injunctions, recalls,
cleanup costs, and other civil sanctions, as well as potential criminal sanctions, any of which could have a material adverse effect on
our business.
ITEM 1B. UNRESOLVED
STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Risk Management and
Strategy
Our cybersecurity program is designed to assess,
identify, and manage material risks from cybersecurity threats, and protect and preserve the confidentiality, integrity, and continued
availability of all information owned by, or in the care of, the Company.Cybersecurity risks are incorporated into the Company’s
broader risk management process to evaluate and address cybersecurity risks in alignment with our business objectives and operational
needs. As part of the cybersecurity program, we utilize a combination of internal technology, which we continue to analyze and update
as necessary, and a third-party managed security service provider and their platform to monitor, evaluate and respond to cyber activity.
We monitor and assess the information gathered by our security tools and services to identify gaps, exposures, or weaknesses in our overall
security approach, and make the necessary changes to address such findings.
Impact of Cybersecurity Risks and Threats
We are not aware of having experienced any risks
from cybersecurity threats or incidents through the date of this Report that have materially affected the Company, its business strategy,
results of operation or financial condition or are reasonably likely to have such an effect over the long term. This does not guarantee
that future incidents or threats will not have a material impact or that we are not currently the subject of an undetected incident or
threat that may have such an impact.
Additional information on cybersecurity risk we
face is discussed in Part I, Item A – Risk Factors, which should be read in conjunction with the foregoing information.
Governance
Board of Directors
Our Board of Directors oversees our risk management
process, and cybersecurity risks are monitored as a part of the broader program.Our Board has delegated the primary responsibility to
oversee risks from cybersecurity threats to the Audit and Corporate Governance Committee. The Chief Financial Officer and our Director
of IT present updates to the Audit and Corporate Governance Committee and the full Board of Directors, on, among other things, the Company’s
cyber risks and threats, the status of projects to strengthen the Company’s information security systems, and the emerging threat
landscape.
Management
Our Chief Financial Officer is responsible for
management oversight of our information security program and controls, which includes cybersecurity risk management.Our Director of IT
is responsible for the development, operation, and maintenance of our information security program and controls.The Director of IT has
extensive experience in the information technology field, and cybersecurity knowledge and skills gained through relevant experiences.
The Director and Chief Financial Officer regularly review potential risks and measures implemented by the Company to identify and mitigate
cyber security risks.
ITEM 2. PROPERTIES
We operate the following facilities:
Location Owned / Leased Principal Use
Morton Grove, Illinois Owned Production facility, principal executive offices
Niles, Illinois Owned Warehousing and distribution, administrative offices
Lifeway believes that its facilities are adequate
for its current needs and that suitable additional space will be available on commercially acceptable terms as required. We believe that
we have adequate insurance coverage for all our properties.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are engaged in litigation
matters arising in the ordinary course of business. While the results of litigation and claims cannot be predicted with certainty, Lifeway
believes that no such matter is reasonably likely to have a material adverse effect on our financial position or results of operations.
ITEM 4. MINE
SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock is listed on
the Nasdaq Global Market under the symbol “LWAY.” Trading commenced on March 29, 1988. As of March 7, 2026, there were 49
shareholders of record of our common stock.
Dividend Policy
Lifeway does not routinely declare and pay dividends.
From time to time however our Board of Directors may declare and pay dividends depending on our operating cash flow, financial condition,
capital requirements and such other factors as the Board of Directors may deem relevant.
There were no dividends declared or paid in fiscal
2025 or 2024.
Purchases of Equity Securities by the Issuer
None.
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial
condition and results of operations as of and for the years ended December 31, 2025 and 2024 should be read in conjunction with the audited
consolidated financial statements and the notes to those statements that are included elsewhere in this Annual Report on Form 10-K. In
addition to historical information, the following discussion contains certain forward-looking statements within the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to our future plans, objectives, expectations
and intentions. These statements may be identified by the use of words such as “may,” “could,” “believe,”
“future,” “depend,” “expect,” “will,” “result,” “can,” “remain,”
“assurance,” “subject to,” “require,” “limit,” “impose,” “guarantee,”
“restrict,” “continue,” “become,” “predict,” “likely,” “opportunities,”
“effect,” “change,” and “estimate,” and similar terms or terminology, or the negative of such terms
or other comparable terminology. Although we believe the expectations expressed in these forward-looking statements are based on reasonable
assumptions within the bounds of our knowledge of our business, our actual results could differ materially from those discussed in these
statements. Factors that could contribute to such differences include, but are not limited to, those discussed in the “Risk Factors”
section in Part I, Item 1A. We undertake no obligation to update publicly any forward-looking statements for any reason even if new information
becomes available or other events occur in the future.
Recent Developments
Cooperation Agreement
On September 30, 2025, the Company and Danone entered into a Cooperation
Agreement (the “Cooperation Agreement”) pursuant to which, among other things:
All of Danone’s obligations (other than
the non-disparagement covenants) cease to apply upon certain “triggering events,” including breaches of the Cooperation Agreement
by the Company or certain statements by the Company, Julie Smolyansky or any of their respective affiliates or representatives challenging
the validity of the Cooperation Agreement or the Stockholders’ Agreement. Additionally, if Julie Smolyansky is deemed to have breached
the Cooperation Agreement while she is Chief Executive Officer of the Company, such breach will be a triggering event under the Cooperation
Agreement unless the Board terminates Julie Smolyansky for cause as a result of such breach within a specified time period.
All of the Company’s obligations under the Stockholders’
Agreement (other than those relating to Danone’s registration rights and rights with respect to inspection of our books and records)
cease to apply after Danone and its affiliates no longer collectively beneficially own at least 761,438 (as adjusted for any reverse stock
split or similar recapitalization). The Company’s obligations under the Cooperation Agreement (other than the non-disparagement
covenants) cease to apply after Danone and its affiliates cease to beneficially own any shares of Common Stock.
Debt Refinancing
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 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.
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.
Trends and Uncertainties
Current Macroeconomic Environment
We continue to monitor
macroeconomic conditions and global trade developments, including inflation in key input costs, recently implemented tariffs, and the
potential for additional or modified tariffs or export controls. These evolving global trade policies may contribute to increased supply
chain complexity, commodity cost volatility, and broader economic uncertainty. We do not currently expect these conditions to have
a material adverse impact on our operations or financial results. We are primarily a United States based manufacturer sourcing a vast
majority of our inputs domestically. In addition, all our domestically produced products are sold to customers in the United States. We
expect the accelerating consumer focus on health and wellness to drive increased demand for our products.
Results of Operations
Comparison of Year Ended December 31, 2025
to Year Ended December 31, 2024 (in thousands)
The following table presents certain information
concerning our financial results, including information presented as a percentage of consolidated net sales:
Year Ended December 31,
$ % $ %
Other income (expense):
Fair Value loss on investment (95 ) (0.0% ) – 0.0%
Gain on sale of investment 3,407 1.6% – 0.0%
Gain (loss) on sale of equipment – (0.0% ) (8 ) 0.0%
Net Sales
Net sales were $212,496 for the year ended December
31, 2025, an increase of $25,676 or 13.7% versus prior year. The net sales increase was primarily driven by higher volumes of our branded
drinkable kefir. The fiscal year 2024 benefited from a customer relationship we strategically exited in the third quarter of 2024, and
a significant distributor shifting from Lifeway delivered to customer pick-up in late 2024, which resulted in lower net sales and lower
freight out expense. On a comparable basis adjusting for these two factors, the Company’s net sales increased approximately 19%
in the fiscal year 2025 compared to fiscal year 2024.
Gross Profit
Gross profit as a percentage of net sales increased
to 27.4% during the year ended December 31, 2025 from 26.0% during the same period in 2024. The increase versus the prior year was driven
by higher volumes of our branded products, which provided manufacturing efficiencies and the favorable impact of conventional milk pricing.
Selling Expenses
Selling expenses increased by $5,148 to $19,891