What changed in this filing

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Item 1. Financial Statements

2021-05-17 compared with 2020-11-16 · 629 added, 732 removed, 315 unchanged (81% of the section changed)

3 unchanged sentences

Consolidated Balance Sheets

September 30, 2020 and December 31, 2019

March 31, 2021 and December 31, 2020

(In thousands)

September 30,

Current assets

Cash and cash equivalents

Accounts receivable, net of allowance for doubtful accounts and discounts and allowances of $1,410 and $1,100 at September 30, 2020 and December 31, 2019, respectively

Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $1,100 and $1,350 at March 31, 2021 and December 31, 2020 respectively

Inventories, net

22 unchanged sentences

2,500 shares authorized;

no shares issued or outstanding at September 30, 2020 and December 31, 2019

no shares issued or outstanding at March 31, 2021 and December 31, 2020

Common stock, no par value;

1 unchanged sentence

17,274 shares issued;

15,605 and 15,710 outstanding at September 30, 2020 and December 31, 2019, respectively

15,604 outstanding at March 31, 2021 and December 31, 2020

Paid-in capital

7 unchanged sentences

Consolidated Statements of Operations

For the three and nine Months Ended September

30, 2020 and 2019

For the three months ended March 31, 2021 and

(In thousands, except per share data)

Three Months Ended

September 30,

Nine Months Ended

September 30,

Cost of goods sold

1 unchanged sentence

Total cost of goods sold

Selling expenses

General and administrative

Selling expense

General and administrative expense

Amortization expense

Total operating expenses

Income (loss) from operations

Income from operations

Other income (expense):

Interest expense

Gain on investments

(Loss) gain on sale of property and equipment

1 unchanged sentence

Total other income (expense)

Income (loss) before provision for income taxes

Provision (benefit) for income taxes

Net income (loss)

Earnings (loss) per common share:

Income before provision for income taxes

Provision for income taxes

Earnings per common share:

Weighted average common shares:

5 unchanged sentences

Balance, January 1, 2020

Cumulative impact of change

in accounting principles, net of tax

Issuance of common stock in

connection with stock-based compensation

Issuance of common stock in connection with stock-based compensation

Treasury stock purchased

1 unchanged sentence

Balance, March 31, 2020

Issuance of common stock in

connection with stock-based compensation

Treasury stock purchased

Stock-based compensation

Balance, June 30, 2019

Treasury stock purchased

Stock-based compensation

Balance, September 30, 2019

See accompanying notes to consolidated financial

LIFEWAY FOODS, INC.

AND SUBSIDIARIES

Consolidated Statements of Stockholders’

Equity (continued)

(In thousands)

Balance, January 1, 2021

Issuance of common stock in

connection with stock-based compensation

Treasury stock purchased

Stock-based compensation

Balance, March 31, 2021

Issuance of common stock in

connection with stock-based compensation

Stock-based compensation

Balance, June 30, 2020

Issuance of common stock in

connection with stock-based compensation

Stock-based compensation

Balance, September 30, 2020

See accompanying notes to consolidated financial

3 unchanged sentences

(In thousands)

Nine months ended September 30,

Three Months Ended March 31,

Cash flows from operating activities:

Net income (loss)

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

7 unchanged sentences

Loss (gain) on sale of property and equipment

Reserve for inventory obsolescence

(Increase) decrease in operating assets:

5 unchanged sentences

Accrued expenses

Operating lease asset amortization/liability

Accrued income taxes

Net cash provided by operating activities

Net cash provided by (used in) operating activities

Cash flows from investing activities:

1 unchanged sentence

Proceeds from sale of property and equipment

Purchase of investments

Net cash used in investing activities

1 unchanged sentence

Purchase of treasury stock

Repayment of line of credit

Net cash used in financing activities

Net increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at the beginning of the period

4 unchanged sentences

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 liabilities recognized after ASU 2016-02 transition

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

Non-cash financing activities

8 unchanged sentences

Basis of presentation

The accompanying unaudited consolidated

financial statements have been prepared in accordance with accounting principles generally accepted in the U.S.

for interim financial information, and do not include all of the information and disclosures required for complete, audited financial

In the opinion of management, these statements include all adjustments necessary for a fair presentation of the results

of all interim periods reported herein.

The consolidated financial statements and related notes should be read in conjunction with

the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December

Results of operations for interim periods are not necessarily indicative of the results to be expected for other interim

periods or the full year.

A detailed description of our significant

accounting policies can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

The accompanying unaudited consolidated financial

statements have been prepared in accordance with accounting principles generally accepted in the U.S.

GAAP”) for interim

financial information, and do not include all of the information and disclosures required for complete, audited financial statements.

In the opinion of management, these statements include all adjustments necessary for a fair presentation of the results of all interim

periods reported herein.

The consolidated financial statements and related notes should be read in conjunction with the consolidated financial

statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Results of operations

for interim periods are not necessarily indicative of the results to be expected for other interim periods or the full year.

A detailed description of our significant accounting

policies can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Principles of consolidation

5 unchanged sentences

Note 2 –

Significant Accounting

Significant Accounting Policies

Use of estimates

The preparation of consolidated financial

statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the reported amounts

of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements

and reported amounts of revenues and expenses during the reporting period.

The preparation of consolidated financial statements

in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities

and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues

and expenses during the reporting period.

Actual results could differ from those estimates.

estimates made in preparing the consolidated financial statements include the reserve for promotional allowances, the valuation

of goodwill and intangible assets, stock-based and incentive compensation, and deferred income taxes.

Significant estimates made in preparing the

consolidated financial statements include the reserve for promotional allowances, the valuation of goodwill and intangible assets, stock-based

and incentive compensation, and deferred income taxes.

Revenue recognition

We sell food and beverage products across

select product categories to customers predominantly within the United States (see Note 12, Segments, Products and Customers).

We also sell bulk cream, a byproduct of our fluid milk manufacturing process.

In accordance with ASC 606, Revenue from Contracts

with Customers, we recognize revenue when control over the products transfers to our customers, which generally occurs upon delivery

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.

We sell food and beverage products across select

product categories to customers predominantly within the United States (see Note 12, Segments, Products and Customers).

We also sell bulk

cream, a byproduct of our fluid milk manufacturing process.

In accordance with ASC 606, Revenue from Contracts with Customers, we recognize

revenue when control over the products transfers to our customers, which generally occurs upon delivery to our customers or their common

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

sales order, which may also be supplemented by other agreements that formalize various terms and conditions with customers.

Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors

including the customer’s historical payment experience or, in the case of a new customer, published credit and financial

information pertaining to the customer.

applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the

customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining

to the customer.

Performance obligations promised in a contract

are identified based on the goods or services that will be transferred to the customer, which is the delivery of food products

which provide immediate benefit to the customer.

We account for product shipping and handling

as fulfillment activities with revenues for these activities recorded within net revenue and costs recorded within cost of goods

Any taxes collected on behalf of government authorities are excluded from net revenues.

Variable consideration, which typically

includes volume-based rebates, known or expected pricing or revenue adjustments, such as trade discounts, allowances for non-saleable

products, product returns, trade incentives and coupon redemption, is estimated utilizing the most likely amount method.

are identified based on the goods or services that will be transferred to the customer, which is the delivery of food products which provide

immediate benefit to the customer.

We account for product shipping and handling as

fulfillment activities with revenues for these activities recorded within net revenue and costs recorded within cost of goods sold.

taxes collected on behalf of government authorities are excluded from net revenues.

Variable consideration, which typically includes

volume-based rebates, known or expected pricing or revenue adjustments, such as trade discounts, allowances for non-saleable products,

product returns, trade incentives and coupon redemption, is estimated utilizing the most likely amount method.

Key sales terms, such as pricing and quantities

ordered, are established on a frequent basis such that most customer arrangements and related incentives have a one year or shorter

As such, we do not capitalize contract inception costs and we capitalize product fulfillment costs in accordance with

GAAP and our inventory policies.

ordered, are established on a frequent basis such that most customer arrangements and related incentives have a one year or shorter duration.

As such, we do not capitalize contract inception costs and we capitalize product fulfillment costs in accordance with U.S.

inventory policies.

We do not have any significant deferred revenue or unbilled receivables at the end of a period.

We generally do not receive noncash consideration for the sale of goods, nor do we grant payment financing terms greater than one

We generally do not

receive noncash consideration for the sale of goods, nor do we grant payment financing terms greater than one year.

Advertising and promotional costs

Lifeway expenses advertising costs as incurred.

For the nine months ended September 30, 2020 and 2019 total advertising expenses were $1,700 and $2,650, respectively.

three months ended September 30, 2020 and 2019 total advertising expenses were $380 and $786, respectively.

For the three months ended March 31, 2021 and 2020 total advertising expenses were $1,393 and $536 respectively.

Recent accounting pronouncements

In December 2019, the FASB issued Accounting Standards

Update (“ASU”) No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.

The new guidance is intended

to enhance and simplify various aspects of the accounting for income taxes.

The new guidance eliminates certain exceptions to the general

approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes.

adopted this guidance on January 1, 2021.

The adoption of this standard did not have a material impact on our consolidated financial statements

and disclosures.

Issued but not yet effective

In March 2020, the FASB issued ASU No.

In March 2020, the FASB issued Accounting Standards

Update (“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

Facilitation of the Effects of Reference Rate Reform on Financial

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 is effective prospectively as of March 12, 2020 through December 31, 2022 and interim periods

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

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.

The new guidance is intended to enhance and simplify

various aspects of the accounting for income taxes.

The new guidance eliminates certain exceptions

to the general approach to the income tax accounting model, and adds new guidance to reduce the complexity in accounting for income

The guidance will be effective for fiscal years beginning after December 15, 2020 and interim periods within those

fiscal years.

Early adoption of the amendments is permitted, including adoption in any interim period for public business entities

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.

In June 2016, the FASB issued ASU

In June 2016, the FASB issued ASU No.

Financial Instruments –

Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, in

November 2018 issued an amendment, ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses,

and in November 2019 issued two amendments, ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and

Hedging (Topic 815), and Leases (Topic 842):

Effective Dates, and ASU 2019-11, Codification Improvements to Topic 326, Financial

Instruments—Credit Losses.

The series of new guidance amends the impairment model by requiring entities to use a forward-looking

approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments,

including trade receivables.

This may result in the earlier recognition of allowances for losses.

The guidance should be applied

on either a prospective transition or modified-retrospective approach depending on the subtopic.

The guidance will be effective

for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted.

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

Measurement of Credit Losses on Financial Instruments, in November 2018 issued

an amendment, ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, and in November 2019 issued

two amendments, ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic

Effective Dates, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses.

of new guidance amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than

incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables.

This may result in the

earlier recognition of allowances for losses.

The guidance should be applied on either a prospective transition or modified-retrospective

approach depending on the subtopic.

The guidance is effective for annual periods beginning after December 15, 2022, including interim

periods within those fiscal years, with early adoption permitted.

Management is currently evaluating the impact that the new guidance

will have on the consolidated financial statements.

Note 3 –

1 unchanged sentence

Inventories consisted of the following:

September 30,

Finished goods

3 unchanged sentences

Property, plant and equipment consisted of the following:

September 30,

Buildings and improvements

6 unchanged sentences

Goodwill and Intangible Assets

Goodwill and indefinite-lived intangible assets consisted of

the following:

September 30,

Goodwill and indefinite-lived intangible assets consisted of the following:

Gross goodwill

3 unchanged sentences

Other intangible assets, net consisted of the following:

September 30,

Customer lists and other customer related intangibles

5 unchanged sentences

Accrued expenses consisted of the following:

September 30,

Payroll and incentive compensation

4 unchanged sentences

Line of Credit

On May 7, 2018, Lifeway entered into an

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

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”

On May 7, 2018, Lifeway entered into an Amended

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

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”

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

On December 10, 2019, Lifeway entered into

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

with its existing lender.

The Second Modification amends the Amended and Restated Loan and Security Agreement, as amended, by redefining

the “Borrowing Base”

On December 10, 2019, Lifeway entered into the

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

its existing lender.

The Second Modification amends the Amended and Restated Loan and Security Agreement, as amended, by redefining the

“Borrowing Base”

and further clarifying the definitions of “Eligible Accounts”

and “Eligible

Inventory.”

and “Eligible Inventory.”

The “Borrowing Base”

under this amendment means, generally, an amount equal to the sum of (a) 85%

of the unpaid amount of all eligible accounts receivable, plus (b) 50% of the value of all eligible inventory.

The Second Modification

also addresses the calculation of interest after the potential discontinuance of LIBOR and its replacement with a replacement benchmark

interest rate.

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.

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 September 30, 2020, we had $2,763

net of $14 of unamortized deferred financing costs, outstanding under the Revolving Credit Facility.

We had $2,223 available for

future borrowings as of September 30, 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 September 30, 2020 was 2.41%.

We were in compliance with the fixed charge

coverage ratio covenant at September 30, 2020.

under this amendment means, generally, an amount equal to the sum of (a) 85% of the unpaid amount of

all eligible accounts receivable, plus (b) 50% of the value of all eligible inventory.

The Second Modification also addresses the calculation

of interest after the potential discontinuance of LIBOR and its replacement with a replacement benchmark interest rate.

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.

The Amended 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”

with the Revolving Loan, the “Loans”).

The Termination Date of the Revolving Loan was extended to June 30, 2025, unless earlier

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.

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 March 31, 2021, we had $2,774 net of $3

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

We had $2,223 available for future borrowings

as of March 31, 2021.

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 March 31, 2021 was 2.15%.

We were in compliance with the fixed charge coverage

ratio and minimum working capital covenants at March 31, 2021.

Note 8 –

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.

Lifeway has operating leases for two retail stores

for its Lifeway Kefir Shop subsidiary 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 leases 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 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.

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 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 record leases with an initial

term of 12 months or less on the balance sheet.

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

Total lease expense was $392 and $552 (including short term leases) for the nine months ended September 30, 2020 and

2019, respectively.

Total lease expense was $81 and $187 (including short term leases) for the three months ended September 30,

2020 and 2019, respectively.

Lifeway treats contracts as a lease when

the contract conveys the right to use a physically distinct asset for a period of time in exchange for consideration, we direct

the use of the asset and obtain substantially all the economic benefits of the asset.

Right-of-use assets and lease liabilities

are measured and recognized based on the present value of the future minimum lease payments over the lease term at the commencement

We have elected the practical expedient to combine lease and non-lease components into a single component for all of our

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.

Future maturities of lease liabilities

were as follows

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 term of

12 months or less on the balance sheet.

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

Total lease expense was $78 and $179 (including short term leases) for the three months ended March 31, 2021 and 2020, respectively.

Lifeway treats contracts as a lease when the contract

conveys the right to use a physically distinct asset for a period of time in exchange for consideration, we direct the use of the asset

and obtain substantially all the economic benefits of the asset.

Right-of-use assets and lease liabilities are

measured and recognized based on the present value of the future minimum lease payments over the lease term at the commencement date.

We have elected the practical expedient to combine lease and non-lease components into a single component for all of its leases.

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.

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

Operating Leases

Three months ended December 31, 2020

Nine months ended December 31, 2021

Total lease payments

Present value of lease liabilities

The weighted-average remaining lease term

for our operating leases was 2.02 years as of September 30, 2020.

The weighted average discount rate of our operating leases was

5.82% as of September 30, 2020.

Cash paid for amounts included in the measurement of lease liabilities was $328 and $437 the nine

months ended September 30, 2020 and 2019, respectively.

Cash paid for amounts included in the measurement of lease liabilities

was $56 and $145 for the three months ended September 30, 2020 and 2019, respectively.

The weighted-average remaining lease term for

our operating leases was 2.05 years as of March 31, 2021.

The weighted average discount rate of our operating leases was 7.85% as of March

Cash paid for amounts included in the measurement of lease liabilities was $55 and $142 for the three months ended March 31,

2021 and 2020, respectively.

Note 9 –

Commitments and contingencies

Lifeway is engaged in various legal actions,

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.

We record accruals for outstanding legal

matters when we believe it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated.

evaluate, on a periodic basis, developments in legal matters that could affect the amount of any accrual and developments that

would make a loss contingency both probable and reasonably estimable.

If a loss contingency is not both probable and estimable,

we do not establish an accrued liability.

Currently, none of our accruals for outstanding legal matters are material individually

or in the aggregate to our financial position and it is management’s opinion that the ultimate resolution of these outstanding

legal matters will not have a material adverse effect on our business, financial condition, results of operations, or cash flows.

However, if we ultimately are required to make payments in connection with an adverse outcome, it is possible that it could have

a material adverse effect on our business, financial condition, results of operations or cash flows.

Lifeway’s contingencies are subject

to substantial uncertainties, including for each such contingency the following, among other factors:

(i) the procedural status

(ii) whether the case has or may be certified as a class action suit;

Lifeway is engaged in various legal actions, 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.

We record accruals for outstanding legal matters

when we believe it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated.

We evaluate, on a

periodic basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency

both probable and reasonably estimable.

If a loss contingency is not both probable and estimable, we do not establish an accrued liability.

Currently, none of our accruals for outstanding legal matters are material individually or in the aggregate to our financial position

and it is management’s opinion that the ultimate resolution of these outstanding legal matters will not have a material adverse

effect on our business, financial condition, results of operations, or cash flows.

However, if we ultimately are required to make payments

in connection with an adverse outcome, it is possible that it could have a material adverse effect on our business, financial condition,

results of operations or cash flows.

Lifeway’s contingencies are subject to substantial

uncertainties, including for each such contingency the following, among other factors:

(i) the procedural status of the case;

the case has or may be certified as a class action suit;

(iii) the outcome of preliminary motions;

the impact of discovery;

(v) whether there are significant factual issues to be determined or resolved;

(vi) whether the proceedings

involve a large number of parties and/or parties and claims in multiple jurisdictions or jurisdictions in which the relevant laws

are complex or unclear;

(vii) the extent of potential damages, which are often unspecified or indeterminate;

and (viii) the status

of settlement discussions, if any, and the settlement posture of the parties.

Consequently, Lifeway cannot predict with any reasonable

certainty the timing or outcome of such contingencies, and we are unable to estimate a possible loss or range of loss.

(iv) the impact of discovery;

there are significant factual issues to be determined or resolved;

(vi) whether the proceedings involve a large number of parties and/or

parties and claims in multiple jurisdictions or jurisdictions in which the relevant laws are complex or unclear;

(vii) the extent of potential

damages, which are often unspecified or indeterminate;

and (viii) the status of settlement discussions, if any, and the settlement posture

of the parties.

Consequently, Lifeway cannot predict with any reasonable certainty the timing or outcome of such contingencies, and we

are unable to estimate a possible loss or range of loss.

Note 10 –

each interim period, Lifeway estimates the effective tax rate expected to be applicable for the full year and applies that rate

to income before provision for income taxes for the period.

The effective tax rate for the nine months ended September 30, 2020

was 29.3% compared to 8.8% for the nine months ended September 30, 2019.

The effective tax rate for the three months ended September

30, 2020 was 29.5% compared to 19.3% for the three months ended September 30, 2019.

The increase in effective tax rate for the

nine months ended is primarily the result of non-deductible compensation expense related to equity incentive awards and state

tax receivables reducing the benefit associated with a pre-tax book loss in 2019, partially offset by a benefit recognized in

2020 due to the enactment of the “Coronavirus Aid, Relief, and Economic Security Act”

(the CARES Act).

in effective tax rate for the three months ended is also primarily due to the non-deductible compensation expenses related to

equity incentive awards and state tax receivables associated with a pre-tax book loss in 2019, but further offset by the adjustment

to the valuation allowance recorded for the quarter ended September 30, 2019, which increased the tax benefit associated with

our pre-tax book loss for the quarter.

Our 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, settlement of tax audits, the impact of non-deductible items, changes

in valuation allowances, and the expiration of the statute of limitations in relation to unrecognized tax benefits.

discrete income tax items such as enacted tax rate changes and completed tax audits in the period in which they occur.

On March 27, 2020, the “Coronavirus

Aid, Relief, and Economic Security Act”

For each interim period, Lifeway estimates

the effective tax rate expected to be applicable for the full year and applies that rate to income before provision for income taxes

for the period.

The effective tax rate for the three months ended March 31, 2021 was 31.2% compared to 27.5% for the three months

ended March 31, 2020.

Our 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, and the expiration of

the statute of limitations in relation to unrecognized tax benefits.

We record discrete income tax items such as enacted tax rate

changes and completed tax audits in the period in which they occur.

On March 27, 2020, the “Coronavirus Aid,

Relief, and Economic Security Act”

(the CARES Act) was enacted.

The CARES act features several tax provisions and other

measures that assist businesses impacted by the economic effects of the COVID-19 pandemic.

The significant tax provisions include

an increase in the limitation of the tax deduction for interest expense from 30% to 50% of adjusted earnings in 2019 and 2020,

a five-year carryback allowance for net operating losses generated in tax years 2018-2020, increased charitable contribution limitations

to 25% of taxable income in 2020, and a retroactive technical correction to the 2017 Tax Cuts and Jobs Act that makes qualified

improvement property placed in service after December 31, 2017 eligible for bonus depreciation.

The Company has recorded a $245

income tax benefit related to the net operating loss carryback provisions of the CARES Act for the nine months ended September

The CARES act features several tax provisions and other measures

that assist businesses impacted by the economic effects of the COVID-19 pandemic.

The significant tax provisions include an increase in

the limitation of the tax deduction for interest expense from 30% to 50% of adjusted earnings in 2019 and 2020, a five-year carryback

allowance for net operating losses generated in tax years 2018-2020, increased charitable contribution limitations to 25% of taxable income

in 2020, and a retroactive technical correction to the 2017 Tax Cuts and Jobs Act that makes qualified improvement property placed in

service after December 31, 2017 eligible for bonus depreciation.

The Company has recorded a $245 income tax benefit related to the net

operating loss carryback provisions of the CARES Act for the three months ended March 31, 2020.

Unrecognized tax benefits were $96 and $90

$63 at September 30, 2020 and 2019, respectively.

The Company believes that an adequate provision has been made for any adjustments

that may result from tax examinations.

However, the outcome of tax audits cannot be predicted with certainty.

If a tax audit is

resolved in a manner inconsistent with its expectations, the Company could be required to adjust its provision for income taxes

in the period such resolution occurs.

at March 31, 2021 and 2020, respectively.

We do not expect material changes to our unrecognized tax benefits during the next twelve

The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations.

However, the outcome of tax audits cannot be predicted with certainty.

If a tax audit is resolved in a manner inconsistent with its

expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.

expect material changes to our unrecognized tax benefits during the next twelve months.

Note 11 –

Stock-based and Other Compensation

In December 2015, Lifeway stockholders

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.

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.

At September 30, 2020, 3.317 million

shares remain available under the Omnibus Incentive Plan.

While we plan to continue to issue awards pursuant to the Plan at least

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

In December 2015, Lifeway stockholders 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

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.

Stock awards generally vest over a three-year

performance or service period.

At March 31, 2021, 3.317 million shares remain available under the Omnibus Incentive Plan.

While we plan

to continue to issue awards pursuant to the Plan at least 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.

Stock Options

The following table summarizes stock option activity during

the nine months ended September 30, 2020:

The following table summarizes stock option activity during the three

months ended March 31, 2021:

exercise price

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Outstanding at December 31, 2020

Outstanding at September 30, 2020

Exercisable at September 30, 2020

As of December 31, 2019, all outstanding

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

For the nine months and three months ended September

30, 2019, total pre-tax stock-based compensation expense recognized in the consolidated statements of operations was $0.

nine months and three months ended September 30, 2019, no tax-related benefits were recognized.

Outstanding at March 31, 2021

Exercisable at March 31, 2021

As of December 31, 2019, all outstanding options

were vested and there was no remaining unearned compensation expense.

Restricted Stock Awards

A Restricted Stock Award (“RSA”)

represents the right to receive one share of common stock in the future.

A Restricted Stock Award (“RSA”) represents

the right to receive one share of common stock in the future.

RSAs have no exercise price.

The grant date fair value

of the awards is equal to our closing stock price on the grant date.

The following table summarizes RSA activity during the nine

months ended September 30, 2020.

The grant date fair value of the awards is

equal to our closing stock price on the grant date.

The following table summarizes RSA activity during the three months ended March 31,

Outstanding at December 31, 2020

Shares issued upon vesting

Outstanding at September 30, 2020

Outstanding at March 31, 2021

Weighted average grant date fair value per share outstanding

We expense RSA’s over the service

For the nine months ended September 30, 2020 and 2019 total pre-tax stock-based compensation expense recognized in the

consolidated statements of operations was $51 and $82, respectively.

For the nine months ended September 30, 2020 and 2019 tax-related

benefits of $14 and $22, respectively, were also recognized.

For the three months ended September 30, 2020 and 2019 total pre-tax

stock-based compensation expense recognized in the consolidated statements of operations was $28 and $30, respectively.

three months ended September 30, 2020 and 2019 tax-related benefits of $8 were also recognized.

As of September 30, 2020, the total

remaining unearned compensation related to non-vested RSA’s was $166, which is expected to be amortized over the weighted-average

remaining service period of 1.35 years.

We expense RSA’s over the service period.

For the three months ended March 31, 2021 and 2020 total pre-tax stock-based compensation expense recognized in the consolidated statements

of operations was $36 and $5, respectively.

For the three months ended March 31, 2021 and 2020 tax-related benefits of $11 and $1, respectively,

were also recognized.

As of March 31, 2021, the total remaining unearned compensation related to non-vested RSA’s was $108, which

is expected to be amortized over the weighted-average remaining service period of 1.22 years.

Long-Term Incentive Plan Compensation

Lifeway established long-term incentive-based

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 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 the 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.

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

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

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

from the 2017 grant dates.

For the nine months ended September 30, 2020 and 2019, $49 and $234 was expensed under the 2017 Plan

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

For the three months ended September

30, 2020 and 2019, $0 and $54 was expensed under the 2017 Plan as stock-based compensation expense in the consolidated statements

of operations, respectively.

As of March 31, 2020, there was no remaining expense under the 2017 plan.

portion of the incentive compensation is payable in restricted stock that vests one-third in each of the three years from the 2017 grant

For the three months ended March 31, 2021 and 2020, $0 and $49 was expensed as stock-based compensation expense in the consolidated

statements of operations, respectively.

As of March 31, 2021, there was no remaining expense.

Under the 2019 Plan, collectively the participants

can earn equity-based incentive compensation in amounts ranging from $0 to $1,776 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

For the nine months ended September 30, 2020 and 2019, $90 and $103 was expensed under the 2019 Plan as stock-based compensation

expense in the consolidated statements of operations, respectively.

For the three months ended September 30, 2020 and 2019, $1

and $35 was expensed under the 2019 Retention Award as stock-based compensation expense in the consolidated statements of operations,

can earn equity-based incentive compensation in amounts ranging from $0 to $1,776 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 three

months ended March 31, 2021 and 2020, $19 and $13 was expensed as stock-based compensation expense in the consolidated statements of operations,

respectively.

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

The equity-based incentive compensation is payable in restricted stock that vests one-third in March 2019, one-third in March 2020

and one-third in March 2021.

For the nine months ended September 30, 2020 and 2019, $73 and $265 was expensed under the 2020 Retention

Award as stock-based compensation expense in the consolidated statements of operations, respectively.

For the three months ended

September 30, 2020 and 2019, $15 and $54 was expensed under the 2019 Retention Award as stock-based compensation expense in the

consolidated statements of operations, respectively.

As of September 30, 2020, the total remaining

unearned compensation related to the 2019 Retention Award was $29, of which $15 and $14 is expected to be recognized in 2020 and

2021, respectively, subject to vesting.

The equity-based incentive compensation is payable in restricted stock that vests one-third in March 2019, one-third in March 2020 and

one-third in March 2021.

For the three months ended March 31, 2021 and 2020, $8 and $43 was expensed as stock-based compensation expense

in the consolidated statements of operations, respectively.

As of March 31, 2021, there was no remaining expense.

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 April 2022, one-third in April 2023, and one-third in April 2024.

The issuance of vested equity awards is subject to approval under

the Stock Purchase Agreement dated October 1, 1999.

For the three months ended March 31, 2021 and 2020, $90 and $0 was expensed as stock-based

compensation expense in the consolidated statements of operations, respectively.

As of March 31, 2021, the total remaining unearned compensation

was $610, of which $274 will be recognized in 2021, $221 in 2022, $98 in 2023, and $17 in 2024, respectively, subject to vesting.

Retirement Benefits

Lifeway has a defined contribution plan

which is available to substantially all full-time employees.

Under the terms of the plan, we match employee contributions under

a prescribed formula.

For the nine months ended September 30, 2020 and 2019 total contribution expense recognized in the consolidated

statements of operations was $307 and $269, respectively.

For the three months ended September 30, 2020 and 2019 total contribution

expense recognized in the consolidated statements of operations was $93 and $88, respectively.

Lifeway has a defined contribution plan which

is available to substantially all full-time employees.

Under the terms of the plan, we match employee contributions under a prescribed

For the three months ended March 31, 2021 and 2020 total contribution expense recognized in the consolidated statements of operations

was $113 and $118, respectively.

Note 12 –

Segments, Products and Customers

Lifeway’s primary product is drinkable

kefir, a cultured dairy product.

Lifeway’s primary product is drinkable kefir,

a cultured dairy product.

Lifeway Kefir is tart and tangy, high in protein, calcium and vitamin D.

Thanks to our exclusive

blend of kefir cultures, each cup of kefir contains 12 live and active cultures and 15 to 20 billion beneficial CFU (Colony Forming

Units) at the time of manufacture.

Thanks to our exclusive blend of kefir

cultures, each cup of kefir contains 12 live and active cultures and 25 to 30 billion beneficial CFU (Colony Forming Units) at the time

of manufacture.

We manufacture (directly or through co-packers)

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

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 5 oz.

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;

and a soft 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:

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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.

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Frozen Kefir, available in soft serve and pint-size containers.

Lifeway has determined that it has one

reportable segment based on how our chief operating decision maker manages the business and in a manner consistent with the internal

reporting provided to the chief operating decision maker.

The chief operating decision maker, who is responsible for allocating

resources and assessing our performance, has been identified collectively as the Chief Executive Officer, the Chief Operating Officer,

the Chief Financial Officer, and Chairperson of the board of directors.

Substantially all of our consolidated revenues relate to

the sale of cultured dairy products that we produce using the same processes and materials and are sold to consumers through a

common network of distributors and retailers in the United States.

Net sales of products by category were

as follows for the nine months ended September 30:

Drinkable Kefir other than ProBugs

Cream and other

ProBugs Kefir

Frozen Kefir (a)

Includes Lifeway Kefir Shop sales

Net sales of products by category were

as follows for the three months ended September 30:

Lifeway has determined that it has one reportable

segment based on how our chief operating decision maker manages the business and in a manner consistent with the internal reporting provided

to the chief operating decision maker.

The chief operating decision maker, who is responsible for allocating resources and assessing our

performance, has been identified collectively as the Chief Financial Officer, the Chief Operating Officer, the Chief Executive Officer,

and Chairperson of the board of directors.

Substantially all of our consolidated revenues relate to the sale of cultured dairy products

that we produce using the same processes and materials and are sold to consumers through a common network of distributors and retailers

in the United States.

Net sales of products by category were as follows

for the three months ended March 31:

Drinkable Kefir other than ProBugs

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Significant Customers –

Sales are predominately to companies in the retail food industry located within the United States.

Two major customers accounted

for approximately 21% and 22% of net sales for the nine months ended September 30, 2020 and 2019, respectively.

Two major customers

accounted for approximately 22% and 21% of net sales for the three months ended September 30, 2020 and 2019, respectively.

are predominately to companies in the retail food industry located within the United States.

Two major customers accounted for approximately

22% and 21% of net sales for the three months ended March 31, 2021 and 2020, respectively.

Note 13 –

Related Party Transactions

Lifeway obtains consulting services from

the Chairperson of its board of directors.

Fees earned by the Chairperson are included in general and administrative expenses in

the accompanying consolidated statements of operations and were $750 during each of the nine months ended September 30, 2020 and

Fees earned are included in general and administrative expenses in the accompanying consolidated statements of operations

and were $250 during each of the three months ended September 30, 2020 and 2019.

Lifeway obtains consulting services from the Chairperson

of its board of directors.

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

Service fees earned are included in general and

administrative expenses in the accompanying consolidated statements of operations and were $125 and $250 during each of the three months

ended March 31, 2021 and 2020, respectively.

During the three months ended March 31, 2021, the Company recorded $94 related to estimated

earnings under the fiscal year 2021 annual performance fee target.

This amount is included in general and administrative expenses in the

accompanying consolidated statements of operations.

Lifeway is also a party to a royalty agreement

with the Chairperson of its board of directors under which we pay the Chairperson a royalty based on the sale of certain Lifeway

products, not to exceed $50 in any fiscal month.

Royalties earned by the Chairperson are included in selling expenses in the accompanying

consolidated statements of operations and were $450 and $441 during the nine months ended September 30, 2020 and 2019, respectively.

Royalties earned are included in selling expenses in the accompanying consolidated statements of operations and were $150 and $143

during the three months ended September 30, 2020 and 2019.

with the Chairperson of its board of directors under which we pay the Chairperson a royalty based on the sale of certain Lifeway products,

not to exceed $50 in any fiscal month.

Royalties earned are included in selling expenses in the accompanying consolidated statements of

operations and were $150 during each of the three months ended March 31, 2021 and 2020.

Note 14 –

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.

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.

However, 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.

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.

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.

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.

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, 2019 (the “Form 10-K”).

Unless otherwise specified, any description of “our”, “we”, and “us”

in this MD&A refer

to Lifeway Foods, Inc.

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, 2019 (the “Form 10-K”).

Unless otherwise specified,

any description of “our”, “we”, and “us”

in this MD&A refer to Lifeway Foods, Inc.

and our subsidiaries.

Cautionary Statement Regarding Forward-Looking

In addition to historical information,

this quarterly report contains “forward-looking”

In addition to historical information, this quarterly

report contains “forward-looking”

statements within the meaning of the “safe harbor”

of the Private Securities Litigation Reform Act of 1995.

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,”

time to time,”

“intend,”

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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:

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;

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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:

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:

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

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of our Annual Report on Form 10-K for the year ended December 31, 2020 and that are described from time to time in our filings with the SEC.

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.

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.

We intend 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, we have no duty to update these statements, and we undertake no obligation

to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

We intend 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, we have no duty to update these statements, and we undertake no obligation to publicly update

or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Recent Developments

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In December 2019, a novel coronavirus disease

("COVID-19") was first reported and subsequently characterized by the World Health Organization ("WHO") as

a pandemic in March 2020.

In an effort to reduce the global transmission of COVID-19, various policies and initiatives have been

implemented by governments around the world, including orders to close businesses not deemed "essential", shelter-in-place

orders enacted by state and local governments, and the practice of social distancing measures when engaging in essential activities.

Lifeway has seen increased orders from retail customers in response to increased consumer demand for food at home in response to

government mandated social distancing and shelter in place orders in the United States and the immune boosting quality of our products.

Local, state, and national governments

continue to emphasize the importance of food supply during this pandemic and asked that food manufacturers and retailers remain

open to meet the needs of our communities.

The health and safety of our employees throughout this pandemic is paramount, and we

have taken numerous steps to keep our employees safe including enhanced sanitation protocols, implementation of social distancing

measures at our manufacturing operations, masks and personal protective equipment for employees across our facilities, preventative

temperature screenings across all manufacturing locations, the rollout of new benefits that help support our employees and their

families, and remote work arrangements for administrative support functions to comply with shelter-in-place orders.

a cross-functional task force has been established to monitor and coordinate the Company's response to COVID-19.

During the first quarter of 2020,

Management, anticipating the spread of COVID-19 and its effects, implemented a plan to mitigate effects of COVID-19 on supply and

transportation of materials used to make and package our products, staffing, and transportation of our products to customers.

Management’s

proactive planning allowed the Company to avoid disruption to its manufacturing facilities and production, transportation, and

sales and to meet the increased demand without delay.

The Company has full production capacity available at all locations at this

time and does not anticipate manufacturing or staffing disruptions in the near term.

("COVID-19") was first reported and subsequently characterized by the World Health Organization ("WHO") as a pandemic

in March 2020.

In an effort to reduce the global transmission of COVID-19, various policies and initiatives have been implemented by governments

around the world, including orders to close businesses not deemed "essential", shelter-in-place orders enacted by state and

local governments, and the practice of social distancing measures when engaging in essential activities.

Lifeway has seen increased orders

from retail customers in response to increased consumer demand for food at home in response to government mandated social distancing and

shelter in place orders in the United States and the immune boosting quality of our products.

Local, state, and national governments continue

to emphasize the importance of food supply during this pandemic and asked that food manufacturers and retailers remain open to meet the

needs of our communities.

The health and safety of our employees throughout this pandemic is paramount, and we have taken numerous steps

to keep our employees safe including enhanced sanitation protocols, implementation of social distancing measures at our manufacturing

operations, masks and personal protective equipment for employees across our facilities, preventative temperature screenings across all

manufacturing locations, the rollout of new benefits that help support our employees and their families, and remote work arrangements

for administrative support functions to comply with shelter-in-place orders.

In addition, a cross-functional task force has been established

to monitor and coordinate the Company's response to COVID-19.

During the first quarter of 2020, Management,

anticipating the spread of COVID-19 and its effects, implemented a plan to mitigate effects of COVID-19 on supply and transportation of

materials used to make and package our products, staffing, and transportation of our products to customers.

Management’s proactive

planning allowed the Company to avoid disruption to its manufacturing facilities and production, transportation, and sales and to meet

the increased demand without delay.

The Company has full production capacity available at all locations at this time and does not anticipate

manufacturing or staffing disruptions in the near term.

Results of Operations

Three Months Ended September 30, 2020 Compared to Three

Months Ended September 30, 2019

September 30,

Three Months Ended March 31, 2021 Compared to Three Months Ended

March 31, 2020

Cost of goods sold

9 unchanged sentences

Total operating expense % to net sales

Income (loss) from operations

Income (loss) from operations % to net sales

Income from operations

Income from operations % to net sales

Total other income (expense)

Total other income (expense) % to net sales

Income before provision for income taxes

Income before provision for income taxes % to net sales

Provision for income taxes

Provision for income taxes % to net sales

Net income % to net sales

Net sales finished at $29,376 for the three-month

period ended September 30, 2020, an increase of $3,310 or 14.6% versus prior year.

The net sales increase was primarily driven

by higher volumes of our branded drinkable kefir, partially offset by lower cream revenues associated with a decline in the market

price of butter fat.

Gross profit as a percentage of net sales

was 29.1% during the three-month period ended September 30, 2020.

period ended March 31, 2021, an increase of $3,988 or 15.7% versus prior year.

The net sales increase was primarily driven by higher volumes

of our branded drinkable kefir.

Approximately 30% of the increase results from the Farmers to Families Food Box program with the United

States Department of Agriculture (“USDA”) which began during the middle of the first quarter of 2021.

The program is scheduled

to end in May 2021.

Gross profit as a percentage of net sales was

27.4% during the three-month period ended March 31, 2021.

Gross profit percentage was 23.6% in the prior year.

versus the prior year was primarily due to the impact of favorable milk pricing, and to a lesser extent favorable freight costs.

Additionally, depreciation expense increased reflecting our continued investment in manufacturing improvements.

Selling Expenses

Selling expenses decreased by $563 or 21.0%

to $2,116 during the three-month period ended September 30, 2020 from $2,679 during the same period in 2019.

The decrease versus

prior year primarily reflects a reduction in advertising and marketing expense, such as trade shows and other marketing events

which were postponed due to COVID-19 and the lower planned spending on in-store demonstrations in 2020 compared to 2019.

expenses as a percentage of net sales were 8.1% during the three-month period ended September 30, 2020 compared to 11.8% for the

same period in 2019.

General and Administrative Expenses

General and administrative expenses increased

$95 or 3.5% to $2,805 during the three-month period ended September 30, 2020 from $2,710 during the same period in 2019.

Provision for Income Taxes

The provision for income taxes includes

federal, state and local income taxes.

The provision for income taxes was $764 during the three months ended September 30, 2020,

compared to a benefit for income taxes of $17 during the same period in 2019.

Our effective income tax rate for the three

months ended September 30, 2020 was 29.5% compared to 19.3% in the same period last year.

The increase in effective tax rate is

primarily due to non-deductible compensation expense related to equity incentive awards and adjustments to state income tax receivables

in the quarter ended September 30, 2019.

However, the increase in the effective tax rate for these two items was partially

offset by an adjustment to the valuation allowance recorded for the quarter ended September 30, 2019, which increased the tax benefit

associated with our pre-tax book loss for the quarter.

The valuation allowance was released in the quarter ended September 30,

2019 and a valuation allowance was not required for the three months ended September 30, 2020.

The Company consistently reflects

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 2019, the percentage effect is different due to the

difference in pre-tax income in 2020 compared to the pre-tax loss in 2019.

Our 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, settlement of tax audits,

the impact of non-deductible items, changes in valuation allowances, and the expiration of the statute of limitations in relation

to unrecognized tax benefits.

We record discrete income tax items such as enacted tax rate changes and completed tax audits 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.

Under the Tax Cuts and

Jobs Act (the “Act”) amendments to Section 162(m), no tax deduction in taxable years beginning after December 31, 2017

is allowed for compensation paid to any covered employee to the extent that the total compensation for that covered employee exceeds

$1,000,000 in any taxable year.

Although the Act eliminated the prior tax deduction under Section 162(m) for performance-based

executive compensation, it included a transition rule under which the changes to Section 162(m) will not apply to awards made to

our covered employees who had the right to participate in our 2015 Omnibus Incentive Plan pursuant to written binding contracts

in effect as of November 2, 2017, as long as those contracts have not subsequently been modified in any material respect.

subject to further guidance from the Treasury Department and the Internal Revenue Service (“IRS”), the performance-based

compensation paid to our executives under our Omnibus Plan remained eligible for the Section 162(m) exemption in 2019.

in 2020, compensation exceeding the threshold for covered employees is non-deductible for income tax purposes.

Income taxes are discussed in Note 10 in

the Notes to the Consolidated Financial Statements.

Nine months ended September 30, 2020 Compared to Nine

months ended September 30, 2019

September 30,

Cost of goods sold

Depreciation expense

Total cost of goods sold

Gross Profit % to net sales

Selling expenses

Selling expenses % to net sales

General & administrative expenses

General & administrative % to net sales

Amortization expense

Total operating expenses

Total operating expense % to net sales

Income (loss) from operations

Income (loss) income from operations % to net sales

Net sales finished at $76,441 for the nine-month

period ended September 30, 2020, an increase of $5,944 or 8.4% versus prior year.

The net sales increase was primarily driven by

higher volumes of our branded drinkable kefir, partially offset by lower cream revenues associated with a decline in the market

price of butter fat.

Gross profit as a percentage of net sales

increased to 26.8% during the nine-month period ended September 30, 2020 from 24.2% during the same period in 2019.

versus the prior year was primarily due to the impact of favorable milk pricing, and to a lesser extent favorable freight costs,

partially offset by an increase in salaries associated with hourly commitment award wage premiums incurred during 2020 due to COVID-19.

Additionally, depreciation expense increased reflecting our continued investment in manufacturing improvements.

The increase versus the

prior year was primarily due to the favorable impact of operating leverage that arises from higher net sales relative to fixed costs,

and to a lesser extent favorable milk pricing.

Additionally, depreciation expense increased reflecting our continued investment in manufacturing

improvements.

Selling Expenses

Selling expenses decreased by $1,098 or

12.9% to $7,411 during the nine-month period ended September 30, 2020 from $8,509 during the same period in 2019.

versus prior year primarily reflects a reduction in advertising and marketing expense, such as trade shows and other marketing

events which were postponed due to COVID-19 and the lower planned spending on in-store demonstrations in 2020 compared to 2019.

Selling expenses as a percentage of net sales were 9.7% during the nine-month period ended September 30, 2020 compared to 12.1%

for the same period in 2019.

Selling expenses increased by $647 or 25.1% to

$3,222 during the three-month period ended March 31, 2021 from $2,575 during the same period in 2020.

The increase versus prior year primarily

reflects an increase in advertising expense related to a television and digital advertising campaigns in the first quarter of 2021, partially

offset by lower compensation expense.

Selling expenses as a percentage of net sales were 11.0% during the three-month period ended March

31, 2021 compared to 10.1% for the same period in 2020.

General and Administrative Expenses

General and administrative expenses decreased

$419 or 4.6% to $8,681 during the nine-month period ended September 30, 2020 from $9,100 during the same period in 2019.

is primarily a result of lower compensation expense due to organizational changes made in 2019 and lower incentive compensation,

partially offset by increased professional fee expense.

254 or 8.1% to $2,891 during the three-month period ended March 31, 2021 from $3,145 during the same period in 2020.

The decrease is primarily

a result of lower compensation expense due to organizational changes made in 2020 and lower professional fees.

Provision for Income Taxes

The provision for income taxes includes

federal, state and local income taxes.

The provision for income taxes was $1,223 during the nine months ended September 30, 2020,

compared to a benefit for income taxes of $58 during the same period in 2019.

Our effective income tax rate for the nine

months ended September 30, 2020 was 29.3% compared to 8.8% in the same period last year.

The increase in effective tax rate is

primarily the result of non-deductible compensation expense related to equity incentive awards and state tax receivables reducing

the benefit associated with a pre-tax book loss in 2019, partially offset by a benefit recognized in 2020 due to the enactment

of the “Coronavirus Aid, Relief, and Economic Security Act”

(the CARES Act).

The Company consistently reflects 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 2019, the percentage effect is substantially different due to the difference

in pre-tax income in 2020 compared to the pre-tax loss in 2019.

Our 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, settlement of tax audits,

the impact of non-deductible items, changes in valuation allowances, and the expiration of the statute of limitations in relation

to unrecognized tax benefits.

We record discrete income tax items such as enacted tax rate changes and completed tax audits 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.

Under the Tax Cuts and

Jobs Act (the “Act”) amendments to Section 162(m), no tax deduction in taxable years beginning after December 31, 2017

is allowed for compensation paid to any covered employee to the extent that the total compensation for that covered employee exceeds

$1,000,000 in any taxable year.

Although the Act eliminated the prior tax deduction under Section 162(m) for performance-based

executive compensation, it included a transition rule under which the changes to Section 162(m) will not apply to awards made to

our covered employees who had the right to participate in our 2015 Omnibus Incentive Plan pursuant to written binding contracts

in effect as of November 2, 2017, as long as those contracts have not subsequently been modified in any material respect.

subject to further guidance from the Treasury Department and the Internal Revenue Service (“IRS”), the performance-based

compensation paid to our executives under our Omnibus Plan remained eligible for the Section 162(m) exemption in 2019.

in 2020, compensation exceeding the threshold for covered employees is non-deductible for income tax purposes.

Income taxes are discussed in Note 10 in

the Notes to the Consolidated Financial Statements.

The provision for income taxes includes federal,

state and local income taxes.

The provision for income taxes was $593 and $55 during the three months ended March 31, 2021 and 2020, respectively.

Our effective income tax rate for the three months

ended March 31, 2021 was 31.2% compared to 27.5% in the same period last year.

During the first quarter of 2020, the company’s effective

tax rate was reduced due to provisions of the CARES Act.

That law provided for the carryback of certain net operating losses to

years in which the tax rates were significantly higher.

The tax benefit was recorded as a discrete item in the first quarter of

The statutory Federal and state tax rates remained consistent from 2020 to 2021.

The Company has a number of items that are

nondeductible or are discrete adjustments to tax expense.

Although similar items were reflected in 2021, the percentage effect is lower

due to the increase in pre-tax income in 2021 compared to 2020.

Our 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, and the expiration of the statute of limitations in relation to unrecognized tax benefits.

We record discrete

income tax items such as enacted tax rate changes and completed tax audits 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.

Under the Tax Cuts and Jobs Act (the “Act”)

amendments to Section 162(m), no tax deduction in taxable years beginning after December 31, 2017 is allowed for compensation paid to

any covered employee to the extent that the total compensation for that covered employee exceeds $1,000,000 in any taxable year.

the Act eliminated the prior tax deduction under Section 162(m) for performance-based executive compensation, it included a transition

rule under which the changes to Section 162(m) will not apply to awards made to our covered employees who had the right to participate

in our 2015 Omnibus Incentive Plan pursuant to written binding contracts in effect as of November 2, 2017, as long as those contracts

have not subsequently been modified in any material respect.

Accordingly, subject to further guidance from the Treasury Department and

the Internal Revenue Service (“IRS”), the performance-based compensation paid to our executives under our Omnibus Plan remained

eligible for the Section 162(m) exemption through 2019.

Beginning in 2020, compensation exceeding the threshold for covered employees

is non-deductible for income tax purposes.

Income taxes are discussed in Note 10 in the Notes

to the Consolidated Financial Statements.

We reported net income of $1,306

or $ 0.08 per basic and diluted common share for the three months ended March 31, 2021 compared to net income of $146 or $0.01 per

basic and diluted common share in the same period in 2020.

Liquidity and Capital Resources

At this time, the COVID-19 pandemic has

not materially impacted on our operations.

We expect to meet our foreseeable liquidity and capital resource requirements through

anticipated cash flows from operations;

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.