# Lifeway Foods, Inc. (LWAY)

Informational only - not investment advice.

CIK: 0000814586
SIC: 2020 Dairy Products
SIC breadcrumb: [Manufacturing](/division/D/) > [Food And Kindred Products](/major-group/20/) > [SIC 2020 Dairy Products](/industry/2020/)
Latest 10-K filed: 2026-03-17
SEC page: https://www.sec.gov/edgar/browse/?CIK=814586
Filing source: https://www.sec.gov/Archives/edgar/data/814586/000168316826001886/lifeway_i10k-123125.htm

## Selected Fundamentals
| Metric | Value | Unit | FY | Filed |
| --- | ---: | --- | ---: | --- |
| Revenue | 212496000 | USD | 2025 | 2026-03-17 |
| Net income | 13859000 | USD | 2025 | 2026-03-17 |
| Assets | 105610000 | USD | 2025 | 2026-03-17 |

## Financials

Annual standardized facts from SEC companyfacts as of latest extracted filing date 2026-03-17. Source: https://data.sec.gov/api/xbrl/companyfacts/CIK0000814586.json. Derived margins, ratios, and free cash flow are computed from the extracted annual SEC facts.

| Metric | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenue |  |  | 103,350,000 | 93,662,000 | 102,026,000 | 119,065,000 | 141,568,000 | 160,123,000 | 186,820,000 | 212,496,000 |
| Net income | 3,479,000 | -346,000 | -3,086,000 | 453,000 | 3,232,000 | 3,311,000 | 924,000 | 11,367,000 | 9,025,000 | 13,859,000 |
| Operating income | 6,085,000 | -526,000 | -3,110,000 | -1,933,000 | 4,923,000 | 5,880,000 | 2,349,000 | 16,995,000 | 13,852,000 | 16,172,000 |
| Gross profit | 35,032,000 | 30,696,000 | 25,858,000 | 22,149,000 | 26,933,000 | 28,710,000 | 26,786,000 | 42,441,000 | 48,574,000 | 58,206,000 |
| Diluted EPS | 0.22 | -0.02 | -0.19 | 0.03 | 0.21 | 0.21 | 0.06 | 0.75 | 0.60 | 0.89 |
| Operating cash flow | 5,104,000 | 3,808,000 | 2,417,000 | 3,811,000 | 6,385,000 | 5,564,000 | 3,987,000 | 16,941,000 | 12,962,000 | 10,948,000 |
| Capital expenditures | 3,237,000 | 5,341,000 | 2,824,000 | 1,178,000 | 1,895,000 | 1,922,000 | 3,449,000 | 4,351,000 | 6,697,000 | 27,361,000 |
| Assets | 65,214,000 | 64,519,000 | 56,807,000 | 56,987,000 | 61,249,000 | 70,874,000 | 68,999,000 | 81,654,000 | 90,547,000 | 105,610,000 |
| Liabilities | 16,852,000 | 17,929,000 | 14,402,000 | 13,736,000 | 14,395,000 | 21,743,000 | 21,429,000 | 21,218,000 | 18,636,000 | 19,791,000 |
| Stockholders' equity | 48,362,000 | 46,590,000 | 42,405,000 | 43,251,000 | 46,854,000 | 49,131,000 | 47,570,000 | 60,436,000 | 71,911,000 | 85,819,000 |
| Cash and cash equivalents | 8,812,000 | 4,978,000 | 2,998,000 | 3,836,000 | 7,926,000 | 9,233,000 | 4,444,000 | 13,198,000 | 16,728,000 | 5,571,000 |
| Free cash flow | 1,867,000 | -1,533,000 | -407,000 | 2,633,000 | 4,490,000 | 3,642,000 | 538,000 | 12,590,000 | 6,265,000 | -16,413,000 |

### Ratios

ROE and ROA use period-end equity/assets. Liabilities / equity uses total liabilities divided by stockholders' equity. Current ratio uses current assets divided by current liabilities when both are reported.

| Metric | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net margin |  |  | -2.99% | 0.48% | 3.17% | 2.78% | 0.65% | 7.10% | 4.83% | 6.52% |
| Operating margin |  |  | -3.01% | -2.06% | 4.83% | 4.94% | 1.66% | 10.61% | 7.41% | 7.61% |
| Return on equity | 7.19% | -0.74% | -7.28% | 1.05% | 6.90% | 6.74% | 1.94% | 18.81% | 12.55% | 16.15% |
| Return on assets | 5.33% | -0.54% | -5.43% | 0.79% | 5.28% | 4.67% | 1.34% | 13.92% | 9.97% | 13.12% |
| Liabilities / equity | 0.35 | 0.38 | 0.34 | 0.32 | 0.31 | 0.44 | 0.45 | 0.35 | 0.26 | 0.23 |
| Current ratio | 2.94 | 1.87 | 2.54 | 2.02 | 2.85 | 2.41 | 2.07 | 2.30 | 2.81 | 2.23 |

## Quarterly

Quarterly standardized facts from SEC companyfacts as of latest extracted filing date 2026-05-14. Source: https://data.sec.gov/api/xbrl/companyfacts/CIK0000814586.json.

Flow metrics use discrete quarter-length periods from 10-Q/10-Q/A filings. Q4 revenue and net income are derived only when annual FY and nine-month YTD facts exist for the same fiscal year; derived Q4 values are labeled. EPS Q4 is not derived.

| Quarter | End date | Revenue | Net income | Diluted EPS | Method |
| --- | --- | ---: | ---: | ---: | --- |
| 2022-Q2 | 2022-06-30 |  |  | 0.01 | reported discrete quarter |
| 2022-Q3 | 2022-09-30 |  |  | 0.06 | reported discrete quarter |
| 2023-Q1 | 2023-03-31 |  |  | 0.06 | reported discrete quarter |
| 2023-Q2 | 2023-03-31 |  | 830,000 |  | reported discrete quarter |
| 2023-Q2 | 2023-06-30 | 39,230,000 |  | 0.21 | reported discrete quarter |
| 2023-Q3 | 2023-06-30 |  | 3,156,000 |  | reported discrete quarter |
| 2023-Q3 | 2023-09-30 | 40,896,000 |  | 0.23 | reported discrete quarter |
| 2023-Q4 | 2023-12-31 | 42,093,000 | 3,969,000 |  | derived Q4 = FY annual - nine-month YTD |
| 2024-Q1 | 2024-03-31 | 44,634,000 | 2,426,000 | 0.16 | reported discrete quarter |
| 2024-Q2 | 2024-03-31 |  | 2,426,000 |  | reported discrete quarter |
| 2024-Q2 | 2024-06-30 | 49,157,000 |  | 0.25 | reported discrete quarter |
| 2024-Q3 | 2024-06-30 |  | 3,783,000 |  | reported discrete quarter |
| 2024-Q3 | 2024-09-30 | 46,095,000 |  | 0.19 | reported discrete quarter |
| 2024-Q4 | 2024-12-31 | 46,934,000 | -160,000 |  | derived Q4 = FY annual - nine-month YTD |
| 2025-Q1 | 2025-03-31 | 46,091,000 | 3,540,000 | 0.23 | reported discrete quarter |
| 2025-Q2 | 2025-03-31 |  | 3,540,000 |  | reported discrete quarter |
| 2025-Q2 | 2025-06-30 | 53,901,000 |  | 0.28 | reported discrete quarter |
| 2025-Q3 | 2025-06-30 |  | 4,249,000 |  | reported discrete quarter |
| 2025-Q3 | 2025-09-30 | 57,143,000 |  | 0.23 | reported discrete quarter |
| 2025-Q4 | 2025-12-31 | 55,361,000 | 2,541,000 |  | derived Q4 = FY annual - nine-month YTD |
| 2026-Q1 | 2026-03-31 | 63,012,000 | 4,674,000 | 0.30 | reported discrete quarter |

## Macro Cross-References
- [CPIAUCSL](/indicator/CPIAUCSL/): Consumer Price Index for All Urban Consumers: All Items in U.S. City Average
- [UNRATE](/indicator/UNRATE/): Unemployment Rate
- [FEDFUNDS](/indicator/FEDFUNDS/): Federal Funds Effective Rate
- [CES0500000003](/indicator/CES0500000003/): Average Hourly Earnings of All Employees, Total Private
- [DFEDTARU](/indicator/DFEDTARU/): Federal Funds Target Range - Upper Limit
- [DFEDTARL](/indicator/DFEDTARL/): Federal Funds Target Range - Lower Limit
- [DGS3MO](/indicator/DGS3MO/): Market Yield on U.S. Treasury Securities at 3-Month Constant Maturity
- [DGS2](/indicator/DGS2/): Market Yield on U.S. Treasury Securities at 2-Year Constant Maturity
- [DGS10](/indicator/DGS10/): Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity
- [DGS30](/indicator/DGS30/): Market Yield on U.S. Treasury Securities at 30-Year Constant Maturity
- [T10Y2Y](/indicator/T10Y2Y/): 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity
- [CPILFESL](/indicator/CPILFESL/): Consumer Price Index for All Urban Consumers: All Items Less Food and Energy
- [CPIUFDSL](/indicator/CPIUFDSL/): Consumer Price Index for All Urban Consumers: Food
- [CPIENGSL](/indicator/CPIENGSL/): Consumer Price Index for All Urban Consumers: Energy
- [CUSR0000SAH1](/indicator/CUSR0000SAH1/): Consumer Price Index for All Urban Consumers: Shelter
- [PCEPI](/indicator/PCEPI/): Personal Consumption Expenditures: Chain-type Price Index
- [PCEPILFE](/indicator/PCEPILFE/): Personal Consumption Expenditures Excluding Food and Energy: Chain-type Price Index
- [PPIACO](/indicator/PPIACO/): Producer Price Index by Commodity: All Commodities
- [T10YIE](/indicator/T10YIE/): 10-Year Breakeven Inflation Rate
- [U6RATE](/indicator/U6RATE/): Total Unemployed, Plus All Marginally Attached Workers Plus Total Employed Part Time for Economic Reasons
- [PAYEMS](/indicator/PAYEMS/): All Employees, Total Nonfarm
- [CIVPART](/indicator/CIVPART/): Labor Force Participation Rate
- [EMRATIO](/indicator/EMRATIO/): Employment-Population Ratio
- [UNEMPLOY](/indicator/UNEMPLOY/): Unemployed
- [CE16OV](/indicator/CE16OV/): Employment Level
- [ICSA](/indicator/ICSA/): Initial Claims
- [JTSJOL](/indicator/JTSJOL/): Job Openings: Total Nonfarm
- [JTSQUR](/indicator/JTSQUR/): Quits: Total Nonfarm
- [GDPC1](/indicator/GDPC1/): Real Gross Domestic Product
- [A191RL1Q225SBEA](/indicator/A191RL1Q225SBEA/): Real Gross Domestic Product: Percent Change from Preceding Period
- [INDPRO](/indicator/INDPRO/): Industrial Production: Total Index
- [TCU](/indicator/TCU/): Capacity Utilization: Total Index
- [HOUST](/indicator/HOUST/): New Privately-Owned Housing Units Started: Total Units
- [PERMIT](/indicator/PERMIT/): New Privately-Owned Housing Units Authorized in Permit-Issuing Places: Total Units
- [RSAFS](/indicator/RSAFS/): Advance Retail Sales: Retail Trade
- [PCE](/indicator/PCE/): Personal Consumption Expenditures
- [DSPIC96](/indicator/DSPIC96/): Real Disposable Personal Income
- [PSAVERT](/indicator/PSAVERT/): Personal Saving Rate
- [M2SL](/indicator/M2SL/): M2
- [BOPGSTB](/indicator/BOPGSTB/): U.S. International Trade in Goods and Services: Balance
- [MSPUS](/indicator/MSPUS/): Median Sales Price of Houses Sold for the United States
- [HSN1F](/indicator/HSN1F/): New One Family Houses Sold: United States
- [RHORUSQ156N](/indicator/RHORUSQ156N/): Homeownership Rate in the United States
- [TTLCONS](/indicator/TTLCONS/): Total Construction Spending: Total Construction in the United States
- [RRVRUSQ156N](/indicator/RRVRUSQ156N/): Rental Vacancy Rate in the United States
- [TOTALSL](/indicator/TOTALSL/): Total Consumer Credit Owned and Securitized
- [REVOLSL](/indicator/REVOLSL/): Revolving Consumer Credit Owned and Securitized
- [DRCCLACBS](/indicator/DRCCLACBS/): Delinquency Rate on Credit Card Loans, All Commercial Banks
- [GDP](/indicator/GDP/): Gross Domestic Product
- [GPDI](/indicator/GPDI/): Gross Private Domestic Investment
- [GCE](/indicator/GCE/): Government Consumption Expenditures and Gross Investment
- [PCEC](/indicator/PCEC/): Personal Consumption Expenditures
- [NETEXP](/indicator/NETEXP/): Net Exports of Goods and Services
- [GFDEBTN](/indicator/GFDEBTN/): Federal Debt: Total Public Debt
- [GFDEGDQ188S](/indicator/GFDEGDQ188S/): Federal Debt: Total Public Debt as Percent of Gross Domestic Product
- [FYFSD](/indicator/FYFSD/): Federal Surplus or Deficit
- [FGRECPT](/indicator/FGRECPT/): Federal Government Current Receipts
- [FGEXPND](/indicator/FGEXPND/): Federal Government: Current Expenditures
- [MANEMP](/indicator/MANEMP/): All Employees, Manufacturing
- [USCONS](/indicator/USCONS/): All Employees, Construction
- [USTRADE](/indicator/USTRADE/): All Employees, Retail Trade
- [USFIRE](/indicator/USFIRE/): All Employees, Financial Activities
- [USGOVT](/indicator/USGOVT/): All Employees, Government
- [AWHAETP](/indicator/AWHAETP/): Average Weekly Hours of All Employees, Total Private
- [DGORDER](/indicator/DGORDER/): Manufacturers' New Orders: Durable Goods
- [NEWORDER](/indicator/NEWORDER/): Manufacturers' New Orders: Nondefense Capital Goods Excluding Aircraft
- [BUSINV](/indicator/BUSINV/): Total Business Inventories
- [EXPGS](/indicator/EXPGS/): Exports of Goods and Services
- [IMPGS](/indicator/IMPGS/): Imports of Goods and Services
- [IR](/indicator/IR/): Import Price Index (End Use): All Commodities
- [PPIFIS](/indicator/PPIFIS/): Producer Price Index by Commodity: Final Demand

## Latest quarter (10-Q)

Latest 10-Q source: https://www.sec.gov/Archives/edgar/data/814586/000168316826003839/lifeway_i10q-033126.htm

Extracted structurally from real Item 2 body heading to real Item 3/4 boundary.
Confidence: high
Filing date: 2026-05-14
Report date: 2026-03-31

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

Management’s Discussion and Analysis of
Financial Condition and Results of Operations (“MD&A”) in this Form 10-Q is provided as a supplement to, and should be
read in conjunction with, our audited consolidated financial statements, the accompanying notes, and the MD&A included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2025 (the “Form 10-K”). Unless otherwise specified, any description
of “our”, “we”, and “us” in this MD&A refer to Lifeway Foods, Inc. (“Lifeway”) and
our wholly-owned subsidiaries.

Cautionary Statement Regarding Forward-Looking
Statements

In addition to historical information, this quarterly
report contains “forward-looking” statements within the meaning of the “safe harbor” provisions of the Private
Securities Litigation Reform Act of 1995. These statements may be identified by the use of words such as “anticipate,” “from
time to time,” “intend,” “plan,” “ongoing,” “realize,” “should,” “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,” “predict,” and “estimate,”
and similar terms or terminology, or the negative of such terms or other comparable terminology. Examples of forward-looking statements
include, among others, statements we make regarding:

·

Expectations of the effect on our financial condition of claims, litigation, environmental costs, contingent liabilities and governmental and regulatory investigations and proceedings, if any;

·

Strategy for acquisitions, customer retention, growth, product development, market position, financial results and reserves;

·

Estimates of the amounts of sales allowances and discounts to our customers and consumers;

·

Our belief that we will maintain compliance with our loan agreements and have sufficient liquidity to fund our business operations.

Forward looking statements are based on management’s
beliefs, assumptions, estimates and observations of future events based on information available to our management at the time the statements
are made and include any statements that do not relate to any historical or current fact. These statements are not guarantees of future
performance and they involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may
differ materially from what is expressed, implied or forecast by our forward-looking statements due in part to the risks, uncertainties,
and assumptions that include:

·

Changes in the pricing of commodities;

·

The actions and decisions of our competitors and customers, including those related to price competition;

·

Our ability to successfully implement our business strategy;

·

The effects of government regulation;

·

Disruptions to our supply chain, or our manufacturing and distribution capabilities, including those due to cybersecurity threats;

·

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, and resultant changes in consumer spending; and

·

Such other factors as discussed throughout Part I, Item 1 “Business”; Part I, Item 1A “Risk Factors”; and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2025 , Part II, Item 1A of this Form 10-Q and that are described from time to time in our other periodic reports filed with the SEC.

19

These factors are not necessarily all of the important
factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown
or unpredictable factors could also have material adverse effects on future results. The Company intends these forward-looking statements
to speak only at the date made. Except as otherwise required to be disclosed in periodic reports required to be filed by public companies
with the SEC pursuant to the SEC’s rules, Lifeway has no duty to update these statements, and it undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Business Overview

Lifeway was founded in 1986 by Michael Smolyansky,
ten years after he and his family emigrated from Eastern Europe to the United States. Lifeway was the first to successfully introduce
kefir to the U.S. consumer on a commercial scale, initially catering to ethnic consumers in the Chicago, Illinois metropolitan area. Lifeway
has grown to become the largest producer and marketer of kefir in the U.S. and an important player in the broader market spaces of probiotic-based
products and natural, “better for you” foods.

Our primary product is drinkable kefir, a cultured
dairy product. Lifeway Kefir is tart and tangy, high in protein, calcium and vitamin D. The Company manufactures (directly or through
a co-manufacturer) and markets products under the Lifeway, Fresh Made, and GlenOaks Farms brand names, as well as under private labels
on behalf of certain customers.

The Company’s product categories are:

·

Drinkable Kefir, a cultured dairy product sold in a variety of organic and non-organic sizes, flavors, and types.

·

European-style soft cheeses, including farmer cheese, white cheese, and Sweet Kiss.

·

Cream and other, which primarily consists of cream, a byproduct of raw milk processing.

·

Drinkable Yogurt, sold in a variety of sizes and flavors.

·

ProBugs, a line of kefir products designed for children.

·

Other Dairy, which primarily consists of Fresh Made butter and sour cream.

Business Trends

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.

20

Results of Operations

Three Months Ended March 31, 2026 Compared to Three Months Ended
March 31, 2025

The following table presents certain information
concerning our financial results, including information presented as a percentage of consolidated net sales:

Three Months Ended March 31,

2026

2025

$

%

$

%

Net sales

63,012

100.0%

46,091

100.0%

Cost of goods sold

44,741

71.0%

34,254

74.3%

Depreciation expense

920

1.5%

802

1.7%

Total cost of goods sold

45,661

72.5%

35,056

76.0%

Gross profit

17,351

27.5%

11,035

24.0%

Selling expenses

6,188

9.8%

4,698

10.2%

General & administrative expense

4,703

7.5%

4,628

10.0%

Amortization expense

135

0.2%

135

0.3%

Total operating expenses

11,026

17.5%

9,461

20.5%

Income from operations

6,325

10.0%

1,574

3.5%

Other income (expense):

Interest expense

(68

)

(0.1%

)

(14

)

0.0%

Gain on sales of investments

–

0.0%

3,352

7.3%

Other income (expense), net

–

0.0%

54

0.1%

Total other income (expense)

(68

)

(0.1%

)

3,392

7.4%

Income before provision for income taxes

6,257

9.9%

4,966

10.9%

Provision for income taxes

1,583

2.5%

1,426

3.1%

Net income

4,674

7.4%

3,540

7.8%

21

Net Sales

Net sales were at $63,012 for the three-month
period ended March 31, 2026, an increase of $16,921 or 36.7% versus prior year. The net sales increase was primarily driven by higher
volumes of our branded drinkable kefir.

Gross Profit

Gross profit as a percentage of net sales was
27.5% and 24.0% in the three-month period ended March 31, 2026 and 2025, respectively. The increase versus the prior year was driven by
the favorable impact of milk pricing and manufacturing efficiencies resulting from increased production volumes.

Selling Expenses

Selling expenses increased by $1,490 to $6,188
during the three-month period ended March 31, 2026 from $4,698 during the same period in 2025. The increase is primarily a result of our
continued investments in marketing activities to drive brand awareness and sales volumes. Selling expenses as a percentage of net sales
decreased to 9.8% in the three-month period ended March 31, 2026 from 10.2% during the same period in 2025.

General and Administrative Expenses

General and administrative expenses increased
$75 to $4,703 during the three-month period ended March 31, 2026 from $4,628 during the same period in 2025. General and administrative
expenses as a percentage of net sales decreased to 7.5% in the three-month period ended March 31, 2026 from 10.0% during the same period
in 2025. During the first quarter of 2025, the Company incurred approximately $985 of legal and professional fees associated with Danone’s
unsolicited purchase proposal and non-routine stockholder action.

Provision for Income Taxes

Income taxes were recognized at effective rates
of 25.3% and 28.7% for the three months ended March 31, 2026 and 2025, respectively. The change in the Company’s effective tax rate
is primarily driven by the increase in pre-tax book income and changes in the amount of non-deductible officer compensation and non-deductible
stock-based compensation expense.

The Company’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.

Liquidity and Capital Resources

Management assesses the Company’s
liquidity in terms of its ability to generate cash to fund its operating, investing, and financing activities. The Company remains in
a strong financial position, and believes that its cash flow from operations, revolving credit facility, and cash and cash equivalents
will continue to provide sufficient liquidity for its working capital needs, capital resource requirements, and growth initiatives and
to ensure the continuation of the Company as a going concern.

If additional borrowings are needed,
$18,000 was available under the Revolving Credit Facility as of March 31, 2026 (see Note 7, Debt).

We are in compliance with the terms
of the Credit Agreement and expect to meet foreseeable financial requirements. The success of our business and financing strategies will
continue to provide us with the financial flexibility to take advantage of various opportunities as they arise. To date, we have been
successful in generating cash and obtaining financing as needed. However, if a serious economic or credit market crisis ensues, it could
have a negative effect on our liquidity, results of operations and financial condition.

22

The Company’s most significant
ongoing short-term cash requirements relate primarily to funding operations (including expenditures for raw materials, labor, manufacturing
and distribution, trade and promotions, advertising and marketing, and tax liabilities) as well as expenditures for property, plant and
equipment.

Long-term cash requirements primarily
relate to funding long-term debt repayments (see Note 7, Debt) and deferred income taxes (see Note 10, In

[Excerpt truncated for page length; source filing is linked above.]

## Latest 10-K MD&A

Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

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.

19

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:

·

The Company refreshed its Board, electing four new directors (the “New Independent Directors”)
selected in accordance with the Cooperation Agreement who are (1) independent under Nasdaq rules and (2) unaffiliated with Julie Smolyansky,
the Company’s Chief Executive Officer,  her spouse, Edward Smolyansky, Ludmila Smolyansky (the foregoing collectively, the
“Smolyansky Family”), Danone, the Company and any director of the Company. Additionally, Jody Levy and Perfecto Sanchez, former
members of the Board, resigned and Pol Sikar was not nominated to stand for re-election at the Company’s 2025 annual meeting of
shareholders. Additional changes to the Board during the quarter ended December 31, 2025, include the appointment of Dorri McWhorter as
Chairperson of the Board, resignation of Ms. McWhorter from the Compensation Committee of the Board,  the appointment of Andee Harris
as a member of the Audit and Corporate Governance Committee of the Board and the appointment of Susan Hultquist and Kirk Chartier to the
Compensation Committee of the Board.

·

The Company and Danone jointly stayed the pending litigation relating to the Stockholders’ Agreement,
dated October 1, 1999, by and among the Company, Danone Foods, Inc., Michael Smolyansky, Ludmila Smolyansky, Julie Smolyansky and Edward
Smolyansky (as amended, the “Stockholders’ Agreement”).

·

Danone waived certain of its right under that certain Stockholders’ Agreement,
including its right to Board representation, and agreed that its consent will not be required for the Company to issue bona fide equity-based
compensation to members of management (excluding Julie Smolyansky, her immediate family and their affiliates) so long as the grants are
on market terms and are approved by the Company’s Compensation Committee (a majority of which must be New Independent Directors);

·

The Company agreed to hold its 2026 annual meeting of shareholders on or before June 30, 2026 and to include
as nominees for election a slate of seven individuals (unless the size of the Board is increased by adding any additional directors through
the process required in the Cooperation Agreement) that includes the New Independent Directors and that excludes Jason Scher. Danone has
agreed to vote all of the shares of Common Stock it beneficially owns in favor of this slate if nominated in accordance with the Cooperation
Agreement.

·

Danone agreed that if, at any time prior to June 30, 2026, Edward Smolyansky or Ludmila Smolyansky or
any person with whom Edward Smolyansky or Ludmila Smolyansky has formed a group (as such term is defined under the Exchange Act, and the
rules and regulations promulgated thereunder) calls a special meeting of the Company’s shareholders or commences a consent solicitation,
Danone will vote or consent, as applicable, with respect to all shares of Common Stock it beneficially owns in accordance with the Board’s
recommendations on all matters relating to Board composition and, with certain exceptions, the Company’s organizational documents.

·

The Company filed a “shelf” registration statement with the SEC covering the resale of all
shares of Common Stock beneficially owned by Danone and its affiliates, which registration statement was declared effective by the SEC.
The Cooperation Agreement provides that Danone may not request more than (a) two underwritten offerings not involving any “road
show,” which is commonly known as a “block trade” or (b) one underwritten offering that is not a block trade under the
registration statement of which this prospectus forms a part in any 60-day period. The Company also agreed to use reasonable best efforts
to take such further action as Danone may reasonably request, all to the extent required from time to time, to enable Danone to sell shares
of Registrable Stock (as defined in the Stockholders’ Agreement) without registration under the Securities Act within the safe harbor
provided by Rule 144 thereunder.

·

Both the Company and Danone, on behalf of themselves and their respective affiliates and representatives,
agreed to mutual non-disparagement provisions, effective until two years after Danone and its affiliates cease to beneficially own any
shares of Common Stock.

20

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.

21

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,

2025

2024

$

%

$

%

Net sales

212,496

100.0%

186,820

100%

Cost of goods sold

150,850

71.0%

135,400

72.5%

Depreciation expense

3,440

1.6%

2,846

1.5%

Total cost of goods sold

154,290

72.6%

138,246

74.0%

Gross profit

58,206

27.4%

48,574

26.0%

Selling expense

19,891

9.4%

14,743

7.9%

General & administrative expense

21,603

10.2%

19,439

10.4%

Amortization expense

540

0.3%

540

0.3%

Total operating expenses

42,034

19.9%

34,722

18.6%

Income from operations

16,172

7.5%

13,852

7.4%

Other income (expense):

Interest expense

(77

)

(0.0%

)

(105

)

(0.1%

)

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%

Other income (expense), net

279

0.1%

230

0.1%

Total other income (expense)

3,514

1.7%

117

0.0%

Income before provision for income taxes

19,686

9.2%

13,969

7.4%

Provision for income taxes

5,827

2.7%

4,944

2.6%

Net income

13,859

6.5%

9,025

4.8%

22

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
during the year ended December 31, 2025 from $14,473 during the same period in 2024. Selling expenses as a percentage of net sales increased
to 9.4% during the year ended December 31, 2025 from 7.9% during the same period in 2024. The increase is primarily a result of our continued
investments in marketing activities to drive brand awareness and sales volumes.

General and Administrative Expenses

General and administrative expenses increased
$2,164 to $21,603 during the year ended December 31, 2025 from $19,439 during the same period in 2024. The Company incurred approximately
$6,200 of legal and professional fees associated with Danone’s unsolicited purchase proposal and non-routine stockholder action
during 2025. During 2024, the Company incurred approximately $4,500 of legal and professional fees associated with Danone’s unsolicited
purchase proposal, non-routine stockholder action, and the CEO retention bonus awarded in the fourth quarter of 2024.

Provision for Income Taxes

The provision for income taxes includes federal,
state and local income taxes. The provision for income taxes was $5,827 and $4,944 during the year ended December 31, 2025, and 2024,
respectively.

The effective income tax rate was 29.6% in 2025 compared to 35.4% in
2024. The statutory federal and state tax rates remained consistent from 2024 to 2025. The Company consistently reflects non-deductible
items such as non-deductible officer compensation expense, non-deductible compensation expense related to equity incentive awards, and
separate state tax rates from year to year. Although similar items were reflected in 2025, the percentage effect is different primarily
due to the decrease in certain non-deductible compensation in 2025 compared to 2024.

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 underlying
income tax rates applicable to various state and local taxing jurisdictions, enacted tax legislation, 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 in the period in which they occur.

Section 162(m) of the Internal Revenue Code (the
“Code”) limits the deductibility of compensation paid to certain of our executives to the extent their total compensation
exceeds $1 million in any taxable year.

23

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 or cash flows in the current fiscal year.

Income taxes are discussed
in Note 10 in the Notes to the Consolidated Financial Statements.

Liquidity and Capital Resources

Management assesses the Company’s
liquidity in terms of its ability to generate cash to fund its operating, investing, and financing activities. The Company remains in
a strong financial position, and believes that its cash flow from operations, revolving credit facility, and cash and cash equivalents
will continue to provide sufficient liquidity for its working capital needs, capital resource requirements, and growth initiatives and
to ensure the continuation of the Company as a going concern.

If additional borrowings are needed,
$25,000 was available under the Revolving Credit Facility as of December 31, 2025 (see Note 7, Debt). We are in compliance with the terms
of the Credit Agreement and expect to meet foreseeable financial requirements. The success of our business and financing strategies will
continue to provide us with the financial flexibility to take advantage of various opportunities as they arise. To date, we have been
successful in generating cash and obtaining financing as needed. However, if a serious economic or credit market crisis ensues, it could
have a negative effect on our liquidity, results of operations and financial condition.

The Company’s most significant
ongoing short-term cash requirements relate primarily to funding operations (including expenditures for raw materials, labor, manufacturing
and distribution, trade and promotions, advertising and marketing, and tax liabilities) as well as expenditures for property, plant and
equipment.

Long-term cash
requirements primarily relate to funding long-term debt repayments (see Note 7, Debt) and deferred income taxes (see Note 10, Income Taxes).

Cash Flow

The following table is derived from our Consolidated
Statement of Cash Flows:

Year Ended

December 31,

2025

2024

Net Cash Flows Provided By (Used In):

Operating activities

$

10,948

$

12,962

Investing activities

$

(22,040

)

$

(6,682

)

Financing activities

$

(65

)

$

(2,750

)

Operating Activities

Net cash provided by operating activities was
$10,948 in 2025 compared to $12,962 in 2024. The decrease was primarily due to the change in working capital.

24

Investing Activities

Net cash used in investing activities was $22,040
in 2025 compared to $6,682 in 2024. The increase in cash used reflects our planned capital spending increase during 2025 compared to 2024.

The increase in purchases of property and equipment
is primarily driven by the expansion of manufacturing capacity and modernization of our Waukesha, Wisconsin facility. This project will
enable Lifeway to meet increasing sales demand and will double the facility’s manufacturing capacity and improve packaging efficiency,
as well as other operational improvements. The Company currently estimates investing approximately $48,000. As of December 31, 2025, $21,547
is included on the consolidated balance sheet in property, plant and equipment, with cumulative cash paid of $20,926. The project will
be funded primarily through cash on-hand and cash flow from operations, with further requirements available under the Company’s
revolving credit facility. The project is expected to be completed during the fourth fiscal quarter of 2026.

The increase in cash used was partially offset
by cash proceeds of $5,152 received in the first quarter and $54 in the second quarter of 2025 from the sale of our Simple Mills investment.

Our capital spending is focused in three core
areas: growth, cost reduction, and facility improvements. Growth capital spending supports capacity expansion and new product innovation
and enhancements. Cost reduction and facility improvements support manufacturing efficiency, safety, and productivity. We continue to
make capital expenditures primarily to modernize manufacturing facilities and support productivity initiatives.

Financing Activities

Net cash used in financing activities was $65
in 2025 compared to $2,750 in 2024. The cash used in 2025 represents credit agreement amendment expenses incurred during the first quarter.
The cash used in 2024 represented the quarterly principal payments under the term loan, which was paid in full during the second quarter
of 2024.

Debt Obligations

The Company is party to an Amended and Restated
Loan and Security Agreement (as amended and modified from time to time, the “Credit Agreement”) with its existing lender and
certain of its subsidiaries. The Credit Agreement provides for, among other things, a revolving line of credit up to a maximum of $25,000
(the “Revolving Credit Facility”) and an incremental facility not to exceed $5,000. The termination date of the revolving
credit facility is February 5, 2029, unless earlier terminated.

As of December 31, 2025, the Company had $0 outstanding
under the Revolving Credit Facility. The Company had $25,000 available for future borrowings under the Revolving Credit Facility as of
December 31, 2025.

All outstanding amounts under the revolving line
of credit bear interest at the Secured Overnight Financing Rate (“SOFR”), plus 1.75%. Interest is payable monthly in arrears.
Lifeway is also required to pay a quarterly unused line fee of 0.25% on the Revolving Credit Facility, and in conjunction with the issuance
of any letters of credit, a letter of credit fee of 1.00%.

The Credit Agreement includes customary representations,
warranties, and covenants, including financial covenants requiring the Company to maintain a fixed charge coverage ratio of no less than
1.25 to 1.00, and a maximum cash flow leverage ratio of no greater than 2.00 to 1.00 for each fiscal quarter commencing with the fiscal
quarter ending March 31, 2025.

The Company is in compliance with all applicable
financial debt covenants as of December 31, 2025. See Note 7 to our Consolidated Financial Statements for additional information regarding
our indebtedness and related agreements.

25

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing
arrangements.

Critical Accounting Estimates

Critical accounting estimates are defined as those
most important to the portrayal of a company’s financial condition and results, and require the most difficult, subjective, or complex
judgments. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP with no need for
the application of our judgement. In certain circumstances, the preparation of our Consolidated Financial Statements in conformity with
U.S. GAAP requires us to use our judgment to make certain estimates and assumptions. These estimates affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported
amounts of net sales and expenses during the reporting period. We believe in the quality and reasonableness of our critical accounting
estimates; however, materially different amounts might be reported under different conditions or using assumptions, estimates or making
judgments different from those that we have applied. Management has discussed the development and selection of these critical accounting
policies, as well as our significant accounting policies (see Note 2 to the Consolidated Financial Statements), with the Audit and Corporate
Governance Committee of our Board of Directors. We have identified the policies described below as our critical accounting policies that
require us to make subjective or complex judgments.

Goodwill impairment

Goodwill totaled $11,704 as of December 31, 2025.
Goodwill represents the excess purchase price over the fair value of the net tangible and other identifiable intangible assets acquired.
Goodwill is not amortized.

The Company has one reporting unit within its
single reportable segment. We review and evaluate our goodwill for potential impairment at a minimum annually, as of December 31, or more
frequently if circumstances indicate that impairment is possible. We completed our annual goodwill impairment analysis as of December
31, 2025. Our assessment did not result in impairment.

In testing goodwill for impairment, the Company
has the option to perform a qualitative test (also known as “Step 0”) or a quantitative test (“Step 1”). Under
the Step 0 test, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of
the reporting unit is less than its carrying value. Qualitative factors may include, but are not limited to, economic conditions, industry
and market considerations, cost factors, overall financial performance of the reporting unit and other entity and reporting unit specific
events. If after assessing these qualitative factors, the Company determines it is “more-likely-than-not” that the fair value
of the reporting unit is less than the carrying value, then performing the Step 1 quantitative test is necessary.

Step 1 of the quantitative test requires comparison
of the fair value of the Company’s one reporting unit to the carrying value. If the carrying value of the reporting unit is less
than the fair value, no impairment exists. Otherwise, the Company would recognize an impairment charge for the amount by which the carrying
amount of the reporting unit exceeds its fair value up to the amount of goodwill allocated to the reporting unit.

Under a Step 1 quantitative test, we estimate
the fair value of our one reporting unit using a combination of the fair values derived from both the income approach and the market approach.
Under the income approach, the Company uses a discounted cash flow methodology which requires management to make significant estimates
and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth
rates, and long-term discount rates, among others. The discount rate used to determine the present value of future cash flows is based
on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty
related to the business’s ability to execute on the projected cash flows. For the market approach, the Company uses the guideline
public company method. The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable
publicly traded companies with similar operating and investment characteristics. The Company also reconciles the fair value of its reporting
unit to its current market capitalization, allowing for a reasonable control premium.

26

Sales discounts & allowance

We offer various trade promotions and sales incentive
programs to customers and consumers. From time to time, we grant certain sales discounts to customers which are classified as a reduction
in sales. The measurement and recognition of discounts and allowances involve the use of judgment, and our estimates are made based on
historical experience and specific customer program accruals. Differences between estimated and actual discount and allowance costs are
normally not material and are recognized in earnings in the period such differences are determined. The process for analyzing trade promotion
programs could impact our results of operations and trade spending accruals depending on how actual results of the programs compare to
original estimates. As of December 31, 2025, we had $1,730 of accrued discounts and allowances.

Share-based compensation

Certain members of management and non-employee
directors receive various forms of share-based payment awards, and we recognize compensation expense for these awards based on their grant
date fair values. The grant date fair value of Restricted Stock Units (“RSUs”) and Performance Share Unit (“PSUs”)
awards is equal to the Company’s closing stock price on the grant date. The Company granted RSU and PSU awards during 2025 to employees.
The PSU awards are contingent upon the achievement of strategic milestones during a three-year measurement period. The expense recognition
of PSU awards therefore requires management to make judgements and estimates at the end of each reporting period as to the cumulative
three-year milestone achievements. Changes in management’s estimate of the three-year cumulative milestone achievements are recognized
as change in management estimate in a subsequent period. We do not estimate forfeitures in measuring the grant date fair value of RSUs
and PSUs but rather account for forfeitures as they occur. Forfeitures have historically been immaterial. See Note 11 to our consolidated
financial statements for further detail.

Income taxes

We pay income taxes based on tax statutes, regulations,
and case law of the various jurisdictions in which we operate. At any given time, multiple tax years are subject to audit by the various
taxing authorities. Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are
recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for
the years in which the differences are expected to reverse. The assumptions about future taxable income require the use of significant
judgment and are consistent with the plans and estimates we are using to manage our underlying businesses.

We recognize an income tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based
on the technical merits of the position. The income tax benefit recognized in our financial statements from such a position is measured
based on the largest estimated benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. These judgments
and estimates made at a point in time may change based on the outcome of tax audits and changes to, or further interpretations of, regulations.
If such changes take place, there is a risk that our tax rate may increase or decrease in any period, which would impact our earnings.
Future business results may affect deferred tax liabilities or the valuation of deferred tax assets over time.

Recent Accounting Pronouncements.

See Note 2, Summary of Significant Accounting
Policies, in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for information
regarding recent accounting pronouncements.

27