What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-03-25 compared with 2020-04-14 · 260 added, 385 removed, 692 unchanged (48% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reports of Independent Registered Accounting Firm

Report of Independent Registered Accounting Firm

Consolidated Balance Sheets as of December 31, 2020 and 2019

20 unchanged sentences

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

We also have audited, in accordance with

the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial

reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control - Integrated Framework issued by

the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated April 14, 2020 expressed an unqualified

opinion on the effectiveness of the company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 2 to the financial

statements, the Company changed its method of accounting for leases as a result of the adoption of Accounting Standards Codification

Topic 842, Leases effective January 1, 2019, under the modified retrospective method.

Basis for Opinion

11 unchanged sentences

the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have,

nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required

to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the

effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures

7 unchanged sentences

reasonable basis for our opinion.

Critical Audit Matters

Critical audit matters are matters arising

from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee

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

subjective, or complex judgments.

We determined that there are no critical audit matters.

/s/ Mayer Hoffman McCann P.C.

1 unchanged sentence

Chicago, Illinois

April 14, 2020

Report of Independent Registered Public

Accounting Firm

To the Board of Directors and Stockholders

of Lifeway Foods, Inc.

and Subsidiaries

Opinion on Internal Control over Financial

We have audited Lifeway Foods, Inc.

Subsidiaries’

(“Company”) internal control over financial reporting as of December 31, 2019, based on criteria

established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of

the Treadway Commission (COSO criteria).

In our opinion, the Company maintained, in all material respects, effective internal control

over financial reporting as of December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with

the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance

sheets of the Company as of December 31, 2019 and 2018, and the related consolidated statements of operations, stockholders’

equity, and cash flows for each of the years in the two year period ended December 31, 2019 and the related notes to the to the

consolidated financial statements (collectively referred to as the “financial statements”) of the Company and our report

dated April 14, 2020 expressed an unqualified opinion that included an explanatory paragraph regarding the Company’s change

in method of accounting for leases as a result of the adoption of Accounting Standards Codification Topic 842, Leases, effective

January 1, 2019, under the modified retrospective method.

Basis for Opinion

The Company’s management is responsible

for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control

over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance

with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the

We conducted our audit in accordance with

the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether

effective internal control over financial reporting was maintained in all material respects.

Our audit of internal control over

financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a

material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed

Our audit also included performing such other procedures as we considered necessary in the circumstances.

We believe that

our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal

Control over Financial Reporting

A company’s internal control over

financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and

the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the

United States of America.

A company’s internal control over financial reporting includes those policies and procedures that

(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions

of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation

of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the

company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable

assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets

that could have a material effect on the financial statements.

Because of its inherent limitations, internal

control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness

to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree

of compliance with the policies or procedures may deteriorate.

/s/ Mayer Hoffman McCann P.C.

Chicago, Illinois

April 14, 2020

March 25 2021

LIFEWAY FOODS, INC.

26 unchanged sentences

Total liabilities

Commitments and contingencies

Stockholders’

23 unchanged sentences

General and administrative

Goodwill and intangible asset impairment

Amortization expense

Total operating expenses

Loss from operations

Income (loss) from operations

Other income (expense):

2 unchanged sentences

Realized gain on investments, net

Gain on sale of property and equipment

Total other income (expense)

Income (loss) before provision for income taxes

Provision (benefit) for income taxes

Net income (loss)

Basic loss per common share

Diluted loss per common share

(Loss) gain on sale of property and equipment

Total other (expense) income

Income before provision for income taxes

Provision for income taxes

Basic earnings per common share

Diluted earnings per common share

Weighted average number of shares outstanding - Basic

8 unchanged sentences

Balance, January 1, 2019

Cumulative impact of change

in accounting principles, net of tax

Treasury stock purchased

Issuance of common stock in connection with stock-based compensation

Issuance of common stock in

connection with stock-based compensation

Stock-based compensation

Balance, December 31, 2019

Cumulative impact of change in accounting principles, net of tax

Treasury stock purchased

Issuance of common stock in connection with stock-based compensation

Issuance of common stock in

connection with stock-based compensation

Stock-based compensation

Balance, December 31, 2019

December 31, 2020

See accompanying notes to consolidated

6 unchanged sentences

Cash flows from operating activities:

Net income (loss)

Adjustments to reconcile net income (loss) to operating cash flow:

Adjustments to reconcile net income to operating cash flow:

Depreciation and amortization

8 unchanged sentences

Net gain on sale of investment

Gain on sale of property and equipment

Goodwill impairment

(Loss) gain on sale of property and equipment

(Increase) decrease in operating assets:

13 unchanged sentences

Proceeds from sale of property and equipment

Net cash used in investing activities

Net cash (used in) provided by investing activities

Cash flows from financing activities:

Purchase of treasury stock

Borrowings under revolving credit facility

Repayment of line of credit

Payment of deferred financing costs

Repayment of notes payable

Net cash used in financing activities

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents

Cash and cash equivalents at the beginning of the period

3 unchanged sentences

Cash paid for interest

Right-of-use assets and operating lease obligations recognized at ASU 2016-02 transition

Right-of-use assets and operating lease obligations recognized after ASU 2016-02 transition

Non-cash investing activities

Right-of-use assets recognized at ASU 2016-02 transition

Operating lease liability recognized at ASU 2016-02 transition

Increase (decrease) in right-of-use assets and operating lease obligations

Non-cash financing activities

Issuance of common stock under equity incentive plans

See accompanying notes to consolidated

31 unchanged sentences

to assess an entity’s ability to continue as a going concern and to provide related disclosure in certain circumstances.

There were no conditions or events, when considered in the aggregate, that raise substantial doubt about the Company’s

ability to continue as a going concern within one year after the date the financial statements are issued.

There were no conditions or events, when considered in the aggregate, that raise substantial doubt about the Company’s ability

to continue as a going concern within one year after the date the financial statements are issued.

Revenue Recognition

5 unchanged sentences

to our customers or their common carriers.

The Company adopted this standard at the beginning of fiscal year 2018, with no significant

impact to its financial position or results of operations, using the modified retrospective method.

The amount of revenue recognized

reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, using

the five-step method required by ASC 606.

The amount of revenue recognized reflects the consideration to which the Company expects

to be entitled to receive in exchange for these goods or services, using the five-step method required by ASC 606.

For the Company, the contract is the approved

25 unchanged sentences

sales at the time of revenue recognition.

The Company does not charge interest on past due accounts receivable.

Cash and cash equivalents

44 unchanged sentences

and market approaches, is then compared to the carrying value to determine if impairment is necessary.

In the fourth quarter of

2018, we early adopted ASU 2017-04, Intangibles —

Goodwill and Other:

Simplifying the Test for Goodwill Impairment,

which simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test.

We assess whether indefinite-lived intangible

57 unchanged sentences

(expense) on the consolidated statements of operations.

As of December 31, 2019, the Company has one investment without a readily

determinable fair value which is recorded at $1,800 in other assets on the consolidated balance sheet.

As of December 31, 2020, and 2019, the Company has one investment without

a readily determinable fair value which is recorded at $1,800 in other assets on the consolidated balance sheet.

The Provision for income taxes includes

5 unchanged sentences

The principal sources

of temporary differences are different depreciation and amortization methods for financial statement and tax purposes, net operating

carryforwards, incentive compensation, unrealized gain, capitalization of indirect inventory costs for tax purposes, reserves for

excess and obsolete inventory, the allowance for doubtful accounts, and interest expense limitations.

of temporary differences are different depreciation and amortization methods for financial statement and tax purposes, incentive

compensation, unrealized gain, capitalization of indirect inventory costs for tax purposes, reserves for excess and obsolete inventory

and the allowance for doubtful accounts.

Valuation allowances are recorded to reduce

2 unchanged sentences

is based on the changes in the asset or liability from period to period.

Lifeway has analyzed filing positions in

all the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these

Lifeway has analyzed filing positions

in all the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these

jurisdictions.

We recognize the income tax benefit from an uncertain tax position when it is more likely than not that, based on

technical merits, the position will be sustained upon examination, including resolutions of any related appeals or litigation processes.

We recognize the income tax benefit from an uncertain tax position when it is more likely than not that, based

on technical merits, the position will be sustained upon examination, including resolutions of any related appeals or litigation

We apply a more likely than not threshold to the recognition and derecognition of uncertain tax positions.

Accordingly, we recognize

the amount of tax benefit that has a greater than 50% likelihood of being ultimately realized upon settlement.

Future changes in

judgment related to the expected ultimate resolution of uncertain tax positions will affect earnings in the period of such change.

For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been

recognized in the financial statements.

The total amount of unrecognized tax benefits can change due to audit settlements, tax

examination activities, statute expirations and the recognition and measurement criteria under accounting for uncertainty in income

Lifeway recognizes penalties and interest related to unrecognized tax benefits in the provision (benefit) for income taxes

in the consolidated statements of operations.

we recognize the amount of tax benefit that has a greater than 50% likelihood of being ultimately realized upon settlement.

changes in judgment related to the expected ultimate resolution of uncertain tax positions will affect earnings in the period

of such change.

For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax

benefit has been recognized in the financial statements.

The total amount of unrecognized tax benefits can change due to audit

settlements, tax examination activities, statute expirations and the recognition and measurement criteria under accounting for

uncertainty in income taxes.

Lifeway recognizes penalties and interest related to unrecognized tax benefits in the provision (benefit)

for income taxes in the consolidated statements of operations.

Share-based compensation

3 unchanged sentences

to the closing price of our stock on the date of grant.

We do not estimate forfeitures in measuring the grant date fair value,

but rather account for forfeitures as they occur.

The Company issues share based equity awards from treasury shares.

Treasury stock

13 unchanged sentences

For the years ended December 31, 2020 and 2019, there were 169 and 56 common stock equivalents outstanding, respectively.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued Accounting

Recent accounting pronouncements

Issued by not yet effective

In March 2020, the FASB issued Accounting

Standards Update (“ASU”) No.

2016-02, Leases (Topic 842), which affects any entity that enters into a lease (as that

term is defined in ASU 2016-02), with some specified scope exceptions.

Under ASU 2016-02, companies can adopt the amended guidance

using a modified retrospective transition approach, using an application date of either the beginning of the earliest comparative

period presented or the beginning of the reporting period in which the companies first apply the new standard.

We adopted this

standard on January 1, 2019 using the application date of January 1, 2019, and elected certain practical expedients allowed under

the standard.

In July 2018, the FASB issued ASU No.

2018-11, Leases (842), Targeted Improvements, which provides an additional

transition election to not restate comparative periods for the effects of applying the new standard.

The guidance requires lessees

to recognize right-of-use assets and lease liabilities in the balance sheet and disclose key information about leasing arrangements,

such as information about variable lease payments and options to renew and terminate leases.

The amended guidance will require

both operating and finance leases to be recognized in the balance sheet.

A lessee should recognize in the statement of financial

position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying

asset for the lease term.

Lifeway elected certain of the practical

expedients that are permitted under the transition guidance within ASU 2016-02 and related standards.

Among other things, this

practical expedient allowed us to carryforward the historical lease classification, and not reassess initial direct costs for any

existing leases as of January 1, 2019 or reassess whether any expired or existing contracts are or contain leases.

we elected to adopt the hindsight practical expedient to determine the reasonably certain lease term for existing leases.

an accounting policy election to continue recording leases with an initial term of 12 months or less consistent with our prior

financial reporting and elect the practical expedient to combine lease and non-lease components.

We have revised our relevant policies

and procedures, as applicable, to meet the new accounting, reporting and disclosure requirements of Topic 842 and have updated

internal controls accordingly.

The main difference between the guidance

in ASU 2016-02 and prior GAAP is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified

as operating leases under current GAAP.

Recognition of the right-of-use assets and liabilities had a material impact to our consolidated

balance sheet upon adoption.

However, since all our leases are operating leases under ASC 840 and we will carryforward the historical

lease classification, the new standard did not have a material impact on our Consolidated Statements of Operations, Consolidated

Statements of Stockholders’

Equity, or Consolidated Statements of Cash Flows for the year ended December 31, 2019.

resulted in an increase of the right-of-use assets of approximately $944 and lease liabilities of $997, and an adjustment to beginning

retained earnings of $53 as of January 1, 2019.

Recently Issued Accounting Pronouncements

In March 2020, the FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

guidance provides optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts,

hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because

of reference rate reform.

The guidance will be effective prospectively as of March 12, 2020 through December 31, 2022 and interim

periods within those fiscal years.

Management is currently evaluating the impact that the new guidance will have on the consolidated

financial statements.

Facilitation of the Effects of Reference Rate

Reform on Financial Reporting.

The new guidance provides optional expedients and exceptions for applying generally accepted accounting

principles (GAAP) to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected

to be discontinued because of reference rate reform.

The guidance will be effective prospectively as of March 12, 2020 through

December 31, 2022 and interim periods within those fiscal years.

Management is currently evaluating the impact that the new guidance

will have on the consolidated financial statements.

In December 2019, the FASB issued ASU No.

9 unchanged sentences

for periods for which financial statements have not yet been issued.

Management is currently evaluating the impact that the new

guidance will have on the consolidated financial statements.

Management does not anticipate the adoption of this ASU will

have a material impact on our consolidated financial statements and disclosures.

In June 2016, the FASB issued ASU No.

37 unchanged sentences

The Company performed the annual impairment

assessment of goodwill for our single reporting unit as of December 31, 2019, noting no impairment loss.

The fair value exceeded

the carrying value by 2.4%.

Considerable management judgment is necessary to evaluate goodwill for impairment.

We estimate fair

value using widely accepted valuation techniques including discounted cash flows and market multiples analysis with respect to

our single reporting unit.

These valuation approaches are dependent upon a number of factors, including estimates of future growth

rates, our cost of capital, capital expenditures, income tax rates, and other variables.

Assumptions used in our valuations were

consistent with our internal projections and operating plans.

Our discounted cash flows forecast could be negatively impacted by

a change in the competitive landscape, any internal decisions to pursue new or different strategies, a loss of a significant customer,

or a significant change in the market place including changes in the prices paid for our products or changes in the size of the

market for our products.

Additionally, under the market approach analysis, we used significant other observable inputs including

various guideline company comparisons.

We base our fair value estimates on assumptions we believe to be reasonable, but which are

unpredictable and inherently uncertain.

Changes in these estimates or assumptions could materially affect the determination of

fair value and the conclusions of the quantitative goodwill test for our one reporting unit.

Upon completion of the annual goodwill

impairment analysis as of December 31, 2018, the Company recorded impairment losses of $1,244.

The goodwill impairment loss is

included in Goodwill and intangible asset impairment on the Consolidated Statements of Operations.

assessment of goodwill for our single reporting unit as of December 31, 2020 and 2019, noting no impairment loss.

management judgment is necessary to evaluate goodwill for impairment.

We estimate fair value using widely accepted valuation techniques

including discounted cash flows and market multiples analysis with respect to our single reporting unit.

These valuation approaches

are dependent upon a number of factors, including estimates of future growth rates, our cost of capital, capital expenditures,

income tax rates, and other variables.

Assumptions used in our valuations were consistent with our internal projections and operating

Our discounted cash flows forecast could be negatively impacted by a change in the competitive landscape, any internal decisions

to pursue new or different strategies, a loss of a significant customer, or a significant change in the market place including

changes in the prices paid for our products or changes in the size of the market for our products.

Additionally, under the market

approach analysis, we used significant other observable inputs including various guideline company comparisons.

We base our fair

value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain.

Changes in these

estimates or assumptions could materially affect the determination of fair value and the conclusions of the quantitative goodwill

test for our one reporting unit.

Indefinite-lived Intangible Assets

8 unchanged sentences

Intangible assets, net

The remaining $152 of intangible asset

at December 31, 2019 is expected to be amortized in 2020.

Note 6 –

2 unchanged sentences

Payroll and incentive compensation

Current portion of operating lease liabilities

Real estate taxes

Current portion of operating lease liabilities

Total accrued expenses

Note 7 –

Notes Payable

The two term loans were refinanced and

paid in full on May 7, 2018.

The term loans were subject to interest at the prime rate or at the LIBOR plus 2.5% and were collateralized

by substantially all of Lifeway’s assets.

See Line of Credit below.

Line of Credit

1 unchanged sentence

Amended and Restated Loan and Security Agreement (the “Revolving Credit Facility”) with its existing lender.

The Revolving

Credit Facility provides for a revolving line of credit up to a maximum of $10 million (the “Revolving Loan”) with

an incremental facility not to exceed $5 million (the “Incremental Facility”

and together with the Revolving Loan,

the “Loans”).

The proceeds of the Loans were used to pay off Lifeway’s existing debt with the lender under the

Loan and Security Agreement, Revolving Note, and Term Note entered into on February 6, 2009, and for general working capital purposes.

Upon closing, we retired all the then-outstanding term loans described above.

As of December 31, 2019, we had $2,745

net of $32 of unamortized deferred financing costs, outstanding under the Revolving Credit Facility.

We had approximately $5,412

available under the Borrowing Base for future borrowings as of December 31, 2019.

All outstanding amounts under the Loans

bear interest, at Lifeway’s election, at either the lender Base Rate (the greater of either the Federal Funds Rate plus 0.5%,

or the Prime Rate) or the LIBOR plus 2.50%, payable monthly in arrears.

Lifeway is also required to pay a quarterly unused line

fee and, in conjunction with the issuance of any letters of credit, a letter of credit fee.

The commitment under the Revolving Credit

Facility matures May 7, 2021.

The Revolving Credit Facility is presented as a long-term debt obligation as of December 31, 2019.

The Loans and all other amounts due and owed under the Revolving Credit Facility and related documents are secured by substantially

all of our assets.

Amounts available for borrowing under the

Revolving Credit Facility equal the lesser of (i) the Borrowing Base (as defined below), or (ii) $10 million (plus the amount of

any Incremental Facility requested by Lifeway and approved by lender), in each case, as the same is reduced by the aggregate principal

amount outstanding under the Loans.

“Borrowing Base”

under the Revolving Credit Facility means, generally, an amount

equal to our cash and cash equivalents plus our eligible accounts receivable and eligible inventory, less certain reserves, divided

The Revolving Credit Facility contains

customary representations, warranties, and covenants on the part of Lifeway, including financial covenants requiring us to achieve

a minimum EBITDA threshold for each of the fiscal quarters through December 31, 2018;

maintain (a) a fixed charge coverage ratio

of no less than 1.25 to 1.0, and (b) a Senior Debt to EBITDA ratio of not more than 3.00 to 1.0 at December 31, 2018 and for each

of the succeeding fiscal quarters ending through the expiration date.

The Revolving Credit Facility also provides for events of

default, including failure to repay principal and interest when due and failure to perform or violation of the provisions or covenants

of the agreement, as a result of which amounts due under the Revolving Credit Facility may be accelerated.

On April 10, 2019, effective March 31,

2019, Lifeway entered into the First Modification to the Amended and Restated Loan and Security Agreement (the “Modified

Revolving Credit Facility”) with its existing lender.

Under the amendment, the Modified Revolving Credit Facility provides

for a revolving line of credit up to a maximum of $9 million (the “Revolving Loan”) with an incremental facility not

to exceed $5 million (the “Incremental Facility”

10, 2019, effective March 31, 2019, Lifeway entered into the First Modification to the Amended and Restated Loan and Security Agreement

(the “Modified Revolving Credit Facility”) with its existing lender.

Under the amendment, the Modified Revolving Credit

Facility provides for a revolving line of credit up to a maximum of $9 million (the “Revolving Loan”) with an incremental

facility not to exceed $5 million (the “Incremental Facility”

and together with the Revolving Loan, the “Loans”).

13 unchanged sentences

interest rate.

As amended, all outstanding amounts under

the Loans bear interest, based on a level of the Senior Debt to EBITDA ratio, at Lifeway’s election, at either the lender

Base Rate (the greater of either the Federal Funds Rate plus 0.0% to 0.5%, or the Prime Rate) or the LIBOR plus 2.25% to 3.00%,

payable monthly in arrears.

Lifeway is also required to pay a quarterly unused line fee of 0.25% and, in conjunction with the issuance

of any letters of credit, a letter of credit fee.

Lifeway’s interest rate on debt outstanding under our Revolving Credit

Facility as of December 31, 2019 was 4.36%.

As amended, the Modified Revolving Credit

Facility contains customary representations, warranties, and covenants on the part of Lifeway, including financial covenants requiring

us to achieve a minimum EBITDA threshold for each of the fiscal quarters through December 31, 2019, and maintain a fixed charge

coverage ratio of no less than 1.25 to 1.00 for each of the fiscal quarters ending through the expiration date.

The Modified Revolving

Credit Facility also provides for events of default, including failure to repay principal and interest when due and failure to

On September 30, 2020, Lifeway entered

into the Third Modification to the Amended and Restated Loan and Security Agreement, as amended, (the “Third Modification”)

with its existing lender.

The Third Modification amends the Amended and Restated Loan and Security Agreement, as amended, by removing

the monthly borrowing base reporting requirement effective September 30, 2020, including a covenant to maintain a quarterly minimum

working capital financial covenant, as defined, of no less than $11.25 million each of the fiscal quarters commencing the fiscal

quarter ending December 31, 2020 through the expiration date, and eliminating the tier interest pricing structure.

and Restated Loan and Security Agreement continues to provide Lifeway with a revolving line of credit up to a maximum of $5 million

(the “Revolving Loan”) and provides the Borrowers with an incremental facility not to exceed $5 million (the “Incremental

Facility”

and together with the Revolving Loan, the “Loans”).

The Termination Date of the Revolving Loan was

extended to June 30, 2025, unless earlier terminated.

Except as described above, as amended,

the Modified Revolving Credit Facility remains substantively unchanged and in full force and effect, including customary representations,

warranties, and covenants on the part of Lifeway, including financial covenants requiring us to maintain a fixed charge coverage

ratio of no less than 1.25 to 1.00 each of the fiscal quarters ending through the expiration date.

The Modified Revolving Credit

Facility continues to provide for events of default, including failure to repay principal and interest when due and failure to

perform or violation of the provisions or covenants of the agreement, as a result of which amounts due under the Modified Revolving

Credit Facility may be accelerated.

We were in compliance with the minimum

EBITDA and fixed charge coverage ratio covenants at December 31, 2019.

The loans and all other amounts due and owed under the Revolving Credit Facility and related

documents are secured by substantially all of our assets.

As of December 31, 2020, we had $2,768

net of $9 of unamortized deferred financing costs, outstanding under the Revolving Credit Facility.

We had $2,223 available for

future borrowings as of December 31, 2020.

As amended, all outstanding amounts under

the Loans bear interest, at Lifeway’s election, at either the lender Base Rate (the Prime Rate minus 1.00%) or the LIBOR

plus 1.95%, payable monthly in arrears.

Lifeway is also required to pay a quarterly unused line fee of 0.20% and, in conjunction

with the issuance of any letters of credit, a letter of credit fee of 0.20%.

Lifeway’s interest rate on debt outstanding

under our Revolving Credit Facility as of December 31, 2020 was 2.10%.

We were in compliance with the fixed charge

coverage ratio and minimum working capital covenants at December 31, 2020.

Note 8 –

Lifeway has operating leases for three

retail stores for its Lifeway Kefir Shop subsidiary and office space which includes fixed base rent payments as well as variable

rent payments to reimburse the landlord for operating expenses and taxes.

The Company also lease certain machinery and equipment

with fixed base rent payments and variable costs based on usage.

Remaining lease terms for these leases range from less than 1

year to 5 years.

Some of our leases include options to extend the leases for up to 5 years and have been included in our calculation

of the right-of-use asset and lease liabilities.

Lifeway includes only fixed payments for lease components in the measurement

of the right-of-use asset and lease liability.

Variable lease payments are those that vary because of changes in facts or circumstances

occurring after the commencement date, other than the passage of time.

Lifeway has operating leases for two retail

stores for its Lifeway Kefir Shop subsidiary and office space which includes fixed base rent payments as well as variable rent

payments to reimburse the landlord for operating expenses and taxes.

The Company terminated its office space leases in June 2020.

The Company also lease certain machinery and equipment with fixed base rent payments and variable costs based on usage.

lease terms for these leases range from less than 1 year to 4 years.

Some of our leases include options to extend the leases for

up to 5 years and have been included in our calculation of the right-of-use asset and lease liabilities.

Lifeway includes only

fixed payments for lease components in the measurement of the right-of-use asset and lease liability.

Variable lease payments are

those that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time.

There are no residual value guarantees.

We do not currently

have leases which meet the finance lease classification as defined under ASC 842.

We do not currently have leases which meet the finance lease classification as defined

under ASC 842.

We do not record leases with an initial

1 unchanged sentence

Expense for these short-term leases is recorded on a straight-line basis over the

Total lease expense was $688 and $769 (including short term leases) for the period ended December 31, 2019 and 2018,

Total lease expense was $440 and $688 (including short term leases) for the years ended December 31, 2020 and 2019,

respectively.

6 unchanged sentences

For many of our leases such as real estate leases, we are unable to determine an implicit rate;

therefore, we use our incremental

borrowing rate based on the information available at the commencement date in determining the present value of future payments

for those leases.

We include options to extend or terminate the lease in the measurement of the right-of-use asset and lease liability

when it is reasonably certain that we will exercise such options.

Lease expense for minimum lease payments is recognized on a straight-line

basis over the lease term.

therefore, we use our

incremental borrowing rate based on the information available at the commencement date in determining the present value of future

payments for those leases.

We include options to extend or terminate the lease in the measurement of the right-of-use asset and

lease liability when it is reasonably certain that we will exercise such options.

Lease expense for minimum lease payments is

recognized on a straight-line basis over the lease term.

Future maturities of lease liabilities were as follows

11 unchanged sentences

Lifeway is engaged in various legal actions,

claims, and proceedings arising in the normal course of business, including commercial disputes, product liabilities, intellectual

claims, audits, and proceedings arising in the normal course of business, including commercial disputes, product liabilities, intellectual

property matters and employment-related matters resulting from our business activities.

31 unchanged sentences

Total current

Provision (benefit) for income taxes

Provision for income taxes

A reconciliation of the U.S.

3 unchanged sentences

State and local tax, net

Goodwill impairment

Oher permanent differences

Other permanent differences

Stock based compensation

2 unchanged sentences

Change in tax estimate

Benefit for income taxes

Provision for income taxes

The tax effects of temporary differences giving rise to deferred

6 unchanged sentences

Net operating losses

Capital loss carry-forward & investment impairment

Accrued compensation

7 unchanged sentences

Tax Attributes

Net Attribute Amount

Expiration Years

net operating losses

No expiration

Illinois net operating losses

Other state net operating losses

State net operating losses

A reconciliation of the beginning and ending

9 unchanged sentences

federal and state tax years remain open by statute.

The annual effective tax rate would have decreased by 11.5% as of December

31, 2019 if the unrecognized tax benefits were recognized.

The amount of unrecognized tax benefits that, if recognized, would impact

the annual effective tax rate was not significant as of December 31, 2020.

The annual effective tax rate would have decreased

by 2.0% as of December 31, 2019 if the unrecognized tax benefits were recognized.

The amount of interest and penalties recognized

6 unchanged sentences

approved the 2015 Omnibus Incentive Plan, which authorized the issuance of an aggregate of 3.5 million shares to satisfy awards

of stock options, stock appreciation rights, unrestricted stock, restricted stock, restricted stock units, performance shares

and performance units to qualifying employees.

Under the Plan, the Board or its Audit and Corporate Governance Committee approves

stock awards to executive officers and certain senior executives, generally in the form of restricted stock or performance shares.

The number of performance shares that participants may earn depends on the extent to which the corresponding performance goals

have been achieved.

of stock options, stock appreciation rights, unrestricted stock, restricted stock, restricted stock units, performance shares and

performance units to qualifying employees.

Under the Plan, the Board or its Audit and Corporate Governance Committee approves stock

awards to executive officers and certain senior executives, generally in the form of restricted stock or performance shares.

number of performance shares that participants may earn depends on the extent to which the corresponding performance goals have

been achieved.

Stock awards generally vest over a three-year performance or service period.

3 unchanged sentences

annually, we may choose to suspend the issuance of new awards in the future and may grant additional awards at any time including

issuing special grants of restricted stock, restricted stock units, and stock options to attract and retain new and

existing executives.

issuing special grants of restricted stock, restricted stock units, and stock options to attract and retain new and existing executives.

Stock Options

7 unchanged sentences

Exercisable at December 31, 2020

For the years ended December 31, 2019 and

2018 total pre-tax stock-based compensation expense recognized in the consolidated statements of operations was $1 and $9, respectively.

For the years ended December 31, 2019 and 2018 tax-related benefits of $0 and $3 were also recognized.

As of December 31, 2019,

all outstanding options are vested and there is no remaining unearned compensation expense.

As of December 31, 2019, all outstanding

options were vested and there was no remaining unearned compensation expense.

For the year ended December 31, 2019 total stock-based compensation expense recognized in the consolidated statements of operations was $1.

For the year ended December 31,

2019, no tax-related benefits were recognized.

We measure the fair value of stock options

18 unchanged sentences

For the years

ended December 31, 2019 and 2018 total pre-tax stock-based compensation expense recognized in the consolidated statements of operations

ended December 31, 2020 and 2019 total stock-based compensation expense recognized in the consolidated statements of operations

was $83 and $109, respectively.

5 unchanged sentences

Lifeway established long-term incentive-based

compensation programs for fiscal year 2017 (the “2017 Plan”), fiscal year 2018 (the “2018 Plan”), and for

fiscal year 2019 (the “2019 Plan”) for certain senior executives and key employees (the “participants”).

Under both the 2017 Plan and the 2018 Plan, long-term incentive compensation is based on Lifeway’s achievement of certain

sales and adjusted EBITDA performance levels versus respective targets established by the Board for each fiscal year.

2019 Plan, long-term equity incentive compensation is based on Lifeway’s achievement of four strategic milestones over a

three-year period from Fiscal 2019 through Fiscal 2021.

compensation programs for fiscal year 2017 (the “2017 Plan”) and for fiscal year 2019 (the “2019 Plan”)

for certain senior executives and key employees (the “participants”).

Under both the 2017 Plan, long-term incentive

compensation is based on Lifeway’s achievement of certain sales and adjusted EBITDA performance levels versus respective

targets established by the Board for each fiscal year.

Under the 2019 Plan, long-term equity incentive compensation is based on

Lifeway’s achievement of four strategic milestones over a three-year period from Fiscal 2019 through Fiscal 2021.

Under the 2017 Plan, collectively the participants

3 unchanged sentences

from the 2017 grant dates.

For the year ended December 31, 2019 and 2018, $288 and $636 was expensed under the 2017 Plan as stock-based

compensation expense in the consolidated statements of operations, respectively.

As of December 31, 2019, the total remaining unearned

compensation related to the 2017 Plan was $49, which is expected to be recognized in 2020, subject to vesting.

For the years ended December 31, 2020 and 2019, $49 and $288 was expensed as stock-based compensation

expense in the consolidated statements of operations, respectively.

As of December 31, 2020, there was no remaining expense.

Under the 2019 Plan, collectively the participants

had the opportunity to earn cash and equity-based incentive compensation in amounts ranging from $0 to $11,200 depending on Lifeway’s

performance levels compared to the respective targets and the participants performance compared to their individual objectives.

The equity portion of the incentive compensation was payable in restricted stock that vests one-third in each of the three years

from the 2018 grant dates.

Due to the final fiscal 2018 financial results, there were no equity-based incentives awarded under

the 2018 Plan.

Under the 2019 Plan, collectively the

participants have the opportunity to earn equity-based incentive compensation in amounts ranging from $0 to $1,733 depending on

Lifeway’s performance levels compared to the respective targets.

The equity-based incentive compensation is payable in restricted

stock that vests 50% of unvested shares in year one, 50% of unvested shares in year two, and 100% of remaining unvested shares

in year three from the 2019 grant date.

For the year ended December 31, 2019, $51 was expensed under the 2019 Plan as stock-based

compensation expense in the consolidated statements of operations.

have the opportunity to earn equity-based incentive compensation in amounts ranging from $0 to $1,733 depending on Lifeway’s

performance levels compared to the respective targets.

The equity-based incentive compensation is payable in restricted stock that

vests 50% of unvested shares in year one, 50% of unvested shares in year two, and 100% of remaining unvested shares in year three

from the 2019 grant date.

For the years ended December 31, 2020 and 2019, $112 and $51 was expensed under the 2019 Plan as stock-based

compensation expense in the consolidated statements of operations, respectively.

2019 Retention Award

During Q1 2019, we awarded a special retention

During 2019, we awarded a special retention

grant (the “2019 Retention Award”) of restricted stock to senior executives and key employees (the “participants”).

1 unchanged sentence

and one-third in March 2021.

For the period ended December 31, 2019, $342 was expensed under the 2019 Retention Award as stock-based

compensation expense in the consolidated statements of operations.

For the years ended December 31, 2020 and 2019, $87 and $342 was expensed as stock-based compensation

expense in the consolidated statements of operations, respectively.

As of December 31, 2020, the total remaining unearned compensation

was $14, which will be recognized in 2021, subject to vesting.

2020 CEO Incentive Award

During the fourth quarter 2020, we awarded

a long-term equity-based incentive of $750 to our Chief Executive Officer (the “2020 CEO Award”) depending on Lifeways

2020 performance levels compared to the respective targets.

The equity-based incentive compensation is payable in restricted stock

that vests one-third in March 2022, one-third in March 2023, and one-third in March 2024.

The issuance of vested equity awards

is subject to approval under the Stock Purchase Agreement dated October 1, 1999.

For the year ended December 31, 2020, $50 was

expensed as stock-based compensation expense in the consolidated statements of operations.

As of December 31, 2020, the total remaining

unearned compensation was $700, of which $364 will be recognized in 2021, $221 in 2022, $98 in 2023, and $17 in 2024, respectively,

subject to vesting.

Retirement Benefits

14 unchanged sentences

We manufacture (directly or through co-packers)

our products under our own brand, as well as under private labels on behalf of certain customers.

As of December 31, 2019, Lifeway

offered approximately 20 varieties of our kefir products including more than 60 flavors.

In addition to our core drinkable kefir

products, we offer several lines of products developed through our innovation and development efforts.

These include Kefir Cups,

a strained, cupped version of our kefir;

and Organic Farmer Cheese Cups, a cupped version of our soft cheeses, both served in resealable

We also offer Skyr, a strained cupped Icelandic yogurt;

Plantiful, a plant-based probiotic beverage made from

organic and non-GMO pea protein with 10 vegan kefir cultures;

a line of probiotic supplements for adults and children;

serve kefir mix.

and market products under the Lifeway and Fresh Made brand names, as well as under private labels on behalf of certain customers.

Our product categories are:

1 unchanged sentence

kefir with additional probiotic cultures).

European-style soft cheeses, including farmer cheese in resealable cups.

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

Cream and other, which consists primarily of cream, a byproduct of making our kefir.

23 unchanged sentences

Two major customers accounted

for approximately 17% of accounts receivable as of December 31, 2019 and 2018.

Our ten largest customers as a group accounted for

approximately 57% and 59% of net sales for the years ended December 31, 2019 and 2018, respectively.

for approximately 22% and 17% of accounts receivable as of December 31, 2020 and 2019, respectively.

Note 13 –

17 unchanged sentences

During the year ended December 31, 2019, the Company repurchased 211 shares at a cost of $538 or approximately $2.55 per share.

Approximately $3,965 remained available under this program as of December 31, 2019.

During the year, the Company reached the amended threshold of 625 shares and therefore no shares of common stock remain available

to be purchased under the 2017 Repurchase Plan Amendment as of December 31, 2020.

Note 14 –

4 unchanged sentences

consolidated statements of operations and were $1,000 during the years ended December 31, 2020 and 2019.

On December 28, 2020, Lifeway entered into

an amended and restated consulting agreement (the “Agreement”), effective as of December 31, 2020, with the Chairperson.

Under the terms and conditions of the Agreement, the Chairperson will continue to provide consulting services with respect to,

among other things, our business strategy, international expansion and product management and expansion.

For the services, the

Company will pay an annual service fee of $500.

The Chairperson will also be eligible for an annual performance fee target of $500

based on the achievement of specified performance criteria.

The Chairpersons annual service fee and target bonus amounts are subject

to periodic change by the Compensation Committee of the Company’s Board of Directors on 30 days’

prior written notice

to the Chairperson.

The Agreement shall continue until either party provides at least a 10-day written notice of termination.

Lifeway is also a party to a royalty agreement

4 unchanged sentences

Note 15 –

Subsequent events

March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues

to spread throughout the United States.

On March 16, 2020, the food industry, including grocery stores and their suppliers,

and transportation were classified by the U.S.

federal government as critical infrastructure industry.

The Company is closely monitoring

the impact of the pandemic on all aspects of its business, including how it will impact its customers, team members, suppliers,

vendors, business partners and distribution channels.

While the Company has not incurred significant disruptions subsequent to

December 31, 2019 from COVID-19, it is unable to predict the impact that COVID-19 will have on its financial position and operating

results due to numerous uncertainties.

The ultimate impact that the COVID-19 pandemic or any future

pandemic or disease outbreak will have on our business and our consolidated results of operations is uncertain.

we have seen increased customer and consumer demand for our products as consumers initially began pantry loading and have increased

their at-home consumption as a result of social distancing and stay-at-home and work-from-home mandates and recommendations.

this increased customer and consumer demand may decrease in the coming months if and when the need for social distancing and stay-at-home

and work-from-home mandates and recommendations decrease, and we are unable to predict the nature and timing of when that impact

may occur, if at all.

to date we have not experienced supply chain constraints, and we have continued to be able to fully satisfy customer and

consumer demand for our products, the continued unprecedented demand for food and other consumer packaged goods products as a

result of the COVID-19 pandemic or any future pandemic may limit the availability of, or increase the cost of, ingredients,

packaging and other raw materials necessary to produce our products, and our operations may be negatively impacted.

Additionally, pandemics or disease outbreaks could result in a widespread health crisis that could adversely affect economies

and financial markets, consumer spending and confidence levels resulting in an economic downturn that could affect customer

and consumer demand for our products.

efforts to manage and mitigate these factors may be unsuccessful, and the effectiveness of these efforts depends on factors beyond

our control, including the duration and severity of any pandemic or disease outbreak, as well as third party actions taken to contain

its spread and mitigate public health effects.

ultimate impact of the COVID-19 pandemic on our business will depend on many factors, including, among others, the duration of

social distancing and stay-at-home and work-from-home mandates and recommendations and whether additional waves of COVID-19 or

different variants of COVID-19 will affect the United States and other markets, our ability and the ability of our suppliers to

continue to operate our and their manufacturing facilities and maintain the supply chain without material disruption and procure

ingredients, packaging and other raw materials when needed despite unprecedented demand in the food industry, and the extent to

which macroeconomic conditions resulting from the pandemic and the pace of the subsequent recovery may impact consumer eating and

shopping habits.

We cannot predict the duration or scope of the disruption.

Therefore, the financial impact cannot be reasonably

estimated at this time.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data