What changed in this filing

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Item 1. Financial Statements

2021-08-16 compared with 2021-05-17 · 216 added, 486 removed, 458 unchanged (61% of the section changed)

3 unchanged sentences

Consolidated Balance Sheets

March 31, 2021 and December 31, 2020

June 30, 2021 and December 31, 2020

(In thousands)

1 unchanged sentence

Cash and cash equivalents

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

Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $ 1,190 and $ 1,350 at June 30, 2021 and December 31, 2020 respectively

Inventories, net

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2,500 shares authorized;

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

no shares issued or outstanding at June 30, 2021 and December 31, 2020

Common stock, no par value;

1 unchanged sentence

17,274 shares issued;

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

15,650 and 15,604 outstanding at June 30, 2021 and December 31, 2020, respectively

Paid-in capital

7 unchanged sentences

Consolidated Statements of Operations

For the three months ended March 31, 2021 and

For the three and six months ended June

30, 2021 and 2020

(In thousands, except per share data)

Three Months Ended

Six Months Ended

Cost of goods sold

1 unchanged sentence

Total cost of goods sold

Selling expense

General and administrative expense

Selling expenses

General and administrative

Amortization expense

3 unchanged sentences

Interest expense

(Loss) gain on sale of property and equipment

Other income, net

Gain on investments

Loss on sale of property and equipment

Other (expense) income, net

Total other income (expense)

1 unchanged sentence

Provision for income taxes

Earnings per common share:

Earnings (loss) per common share:

Weighted average common shares:

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AND SUBSIDIARIES

Consolidated Statements of Stockholders’

(In thousands)

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Balance, March 31, 2020

Issuance of common stock in connection with stock-based compensation

Stock-based compensation

Balance, June 30, 2020

LIFEWAY FOODS, INC.

AND SUBSIDIARIES

Consolidated Statements of Stockholders’

Equity (continued)

(In thousands)

Balance, January 1, 2021

1 unchanged sentence

Balance, March 31, 2021

Issuance of common stock in connection with stock-based compensation

Stock-based compensation

Balance, June 30, 2021

See accompanying notes to consolidated financial

3 unchanged sentences

(In thousands)

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows from operating activities:

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

Adjustments to reconcile net income to operating cash flow:

Depreciation and amortization

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Accrued expenses

Operating lease asset amortization/liability

Accrued income taxes

Net cash provided by (used in) operating activities

Net cash provided by operating activities

Cash flows from investing activities:

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Net cash used in financing activities

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents

Cash and cash equivalents at the beginning of the period

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(In thousands, except per share data)

Note 1 –

Basis of Presentation

Note 1 – Basis of Presentation

Basis of presentation

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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.

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the accounts of Lifeway Foods, Inc.

and all its wholly owned subsidiaries (collectively “Lifeway”

or the “Company”).

and all its wholly owned subsidiaries (collectively “Lifeway” or the “Company”).

All significant intercompany accounts and transactions have been eliminated.

Note 2 –

Significant Accounting Policies

Note 2 – Significant Accounting Policies

Use of estimates

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

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

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.

17 unchanged sentences

Lifeway expenses advertising costs as incurred.

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

For the six months ended June 30, 2021 and 2020 total advertising expenses were $ 2,166 and $ 1,320 respectively.

For the three months ended

June 30, 2021 and 2020 total advertising expenses were $ 773 and $ 784 , respectively.

Recent accounting pronouncements

In December 2019, the FASB issued Accounting Standards

Update (“ASU”) No.

2019-12, Income Taxes (Topic 740):

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In March 2020, the FASB issued Accounting Standards

Update (“ASU”) No.

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

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In June 2016, the FASB issued ASU No.

Financial Instruments –

Credit Losses (Topic 326):

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

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

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

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will have on the consolidated financial statements.

Note 3 –

Inventories, net

Note 3 – Inventories, net

Inventories consisted of the following:

Schedule Of Inventories

Finished goods

Total inventories

Note 4 –

Property, Plant and Equipment, net

Note 4 – Property, Plant and Equipment, net

Property, plant and equipment consisted of the following:

Schedule of property, plant and equipment

Buildings and improvements

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Total property, plant and equipment, net

Note 5 –

Goodwill and Intangible Assets

Note 5 – Goodwill and Intangible Assets

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

Goodwill & indefinite-lived intangible assets

Gross goodwill

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Other intangible assets, net consisted of the following:

Schedule of other intangible assets

Customer lists and other customer related intangibles

2 unchanged sentences

Other intangible assets, net

Note 6 –

Accrued Expenses

Note 6 – Accrued Expenses

Accrued expenses consisted of the following:

Schedule Of Accrued Expenses

Payroll and incentive compensation

2 unchanged sentences

Total accrued expenses

Note 7 –

Note 7 – Debt

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.

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.

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”).

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”

and further clarifying the definitions of “Eligible Accounts”

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

“Borrowing Base” and further clarifying the definitions of “Eligible Accounts” 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.

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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.

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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”).

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

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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 of June 30, 2021, we had $ 2,777 , outstanding

under the Revolving Credit Facility.

We had $ 2,223 available for future borrowings as of June 30, 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.

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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%.

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

Facility as of June 30, 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 –

ratio and minimum working capital covenants at June 30, 2021.

Note 8 – Leases

Lifeway has operating leases for two retail stores

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The Company terminated its office space leases in June 2020.

The Company also lease certain machinery

The Company also leases certain machinery

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

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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.

Total lease expense was $ 169 and $ 311 (including short term leases) for the six months ended June 30, 2021 and 2020, respectively.

lease expense was $ 91 and $ 132 (including short term leases) for the three months ended June 30, 2021 and 2020, respectively.

Lifeway treats contracts as a lease when the contract

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Future maturities of lease liabilities were as

Future maturities of lease liabilities

Operating Leases

Nine months ended December 31, 2021

Six months ended December 31, 2021

Total lease payments

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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,

our operating leases was 1.87 years as of June 30, 2021.

The weighted average discount rate of our operating leases was 7.84 % as of June

Cash paid for amounts included in the measurement of lease liabilities was $ 107 and $ 272 the six months ended June 30, 2021

and 2020, respectively.

Note 9 –

Commitments and contingencies

Cash paid for amounts included in the measurement of lease liabilities was $ 52 and $ 130 for the three months ended

June 30, 2021 and 2020, respectively.

Note 9 – Commitments and contingencies

Lifeway is engaged in various legal actions, claims,

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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.

2 unchanged sentences

results of operations or cash flows.

Lifeway’s contingencies are subject to substantial

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

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

Note 10 –

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.

Note 10 – Income taxes

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

The effective tax rate for the six months ended June 30, 2021 was 31.2 % compared to 29.0 % for the six months ended June 30, 2020.

The effective tax rate for the three months ended June 30, 2021 was 31.1 % compared to 29.8 % for the three months ended June 30, 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

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

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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

at March 31, 2021 and 2020, respectively.

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

operating loss carryback provisions of the CARES Act for the six months ended June 30, 2020.

Unrecognized tax benefits were $ 97 and $ 92 at

June 30, 2021 and 2020, respectively.

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

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

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.

We do not 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

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performance or service period.

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

At June 30, 2021, 3.281 million shares remain available under the Omnibus Incentive Plan.

While we plan

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Stock Options

The following table summarizes stock option activity during the three

months ended March 31, 2021:

The following table summarizes stock option activity during the six

months ended June 30, 2021:

Stock option activity table

exercise price

2 unchanged sentences

Outstanding at December 31, 2020

Outstanding at March 31, 2021

Exercisable at March 31, 2021

Outstanding at June 30, 2021

Exercisable at June 30, 2021

As of December 31, 2019, all outstanding options

1 unchanged sentence

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 three months ended March 31,

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

June 30, 2021.

RSA activity table

Outstanding at December 31, 2020

Shares issued upon vesting

Outstanding at March 31, 2021

Outstanding at June 30, 2021

Weighted average grant date fair value per share outstanding

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

We expense RSA’s over the service period.

For the six months ended June 30, 2021 and 2020 total pre-tax stock-based compensation expense recognized in the consolidated statements

of operations was $ 69 and $ 23 , respectively.

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

For the six months ended June 30, 2021 and 2020 tax-related benefits of $ 20 and $ 6 , 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.

For the three months ended June 30, 2021 and 2020 total pre-tax stock-based compensation expense recognized in the

consolidated statements of operations was $ 33 and $ 18 , respectively.

For the three months ended June 30, 2021 and 2020 tax-related benefits

of $ 9 and $ 5 , respectively, were also recognized.

As of June 30, 2021, the total remaining unearned compensation related to non-vested

RSA’s was $ 76 , which is expected to be amortized over the weighted-average remaining service period of 1.18 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 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

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 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

had the opportunity to earn cash and equity-based incentive compensation in amounts ranging from $0 to $11,025 depending on Lifeway’s

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

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.

For the six months ended June 30, 2021 and 2020, $ 0 and $ 49 was expensed under the 2017 Plan as stock-based compensation expense

in the consolidated statements of operations, respectively.

For the three months ended June 30, 2021 and 2020, $ 0 was expensed as stock-based

compensation expense in the consolidated statements of operations, respectively.

As of June 30, 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.

1 unchanged sentence

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.

months ended June 30, 2021 and 2020, $ 54 and $ 89 was expensed under the 2019 Plan as stock-based compensation expense in the consolidated

statements of operations, respectively.

For the three months ended June 30, 2021 and 2020, $ 35 and $ 76 was expensed as stock-based compensation

expense in the consolidated statements of operations, respectively.

2019 Retention Award

During Q1 2019, we awarded a special retention

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 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.

For the six months ended June 30, 2021 and 2020, $ 8 and $ 58 was expensed under the 2020 Retention Award as stock-based

compensation expense in the consolidated statements of operations, respectively.

For the three months ended June 30, 2021 and 2020, $ 0

and $ 15 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively.

As of June 30, 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.

3 unchanged sentences

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

For the six months ended June 30, 2021 and 2020, $ 170 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.

For the three months ended June 30, 2021 and 2020, $ 80

and $ 0 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively.

As of June 30, 2021,

the total remaining unearned compensation was $ 537 , of which $ 175 will be recognized in 2021, $ 232 in 2022, $ 106 in 2023, and $ 24 in 2024,

respectively, subject to vesting.

During Q2 2021, the number of shares awarded became fixed and determinable.

Therefore, the award liability was

reclassified from long-term liabilities to paid in capital.

Retirement Benefits

2 unchanged sentences

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

For the six months ended June 30, 2021 and 2020 total contribution expense recognized in the consolidated statements of operations

was $ 218 and $ 214 , respectively.

Note 12 –

Segments, Products and Customers

Lifeway’s primary product is drinkable kefir,

For the three months ended June 30, 2021 and 2020 total contribution expense recognized in the consolidated

statements of operations was $ 105 and $ 96 , respectively.

Note 12 – Segments, Products and Customers

Lifeway’s primary product is drinkable kefir,

a cultured dairy product.

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Net sales of products by category were as follows

for the three months ended March 31:

for the six months ended June 30:

Schedule of sales of products by category

Drinkable Kefir other than ProBugs

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Includes Lifeway Kefir Shop sales

Significant Customers –

Net sales of products by category were as follows

for the three months ended June 30:

Drinkable Kefir other than ProBugs

Cream and other

ProBugs Kefir

Frozen Kefir (a)

Includes Lifeway Kefir Shop sales

Significant Customers – Sales

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

22 % and 21 % of net sales for the six months ended June 30, 2021 and 2020, respectively.

Two major customers accounted for approximately

23 % and 21 % of net sales for the three months ended June 30, 2021 and 2020, respectively.

Note 13 – Related Party Transactions

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.

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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.

Service fees earned by the Chairperson are included

in general and administrative expenses in the accompanying consolidated statements of operations and were $ 250 and $ 500 during each of

the six months ended June 30, 2021 and 2020, respectively.

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 June 30, 2021 and

2020, respectively.

During the six months ended June 30, 2021, the Company recorded $ 188 related to estimated earnings under the fiscal

year 2021 annual performance fee target.

During the three months ended June 30, 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

1 unchanged sentence

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 –

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

statements of operations and were $ 300 during the six months ended June 30, 2021 and 2020.

Royalties earned are included in selling expenses

in the accompanying consolidated statements of operations and were $ 150 during each of the three months ended June 30, 2021 and 2020.

Note 14 – COVID-19

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

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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.

and our subsidiaries.

Cautionary Statement Regarding Forward-Looking

In addition to historical information, this quarterly

report contains “forward-looking”

statements within the meaning of the “safe harbor”

provisions of the Private

Securities Litigation Reform Act of 1995.

These statements may be identified by the use of words such as “anticipate,”

time to time,”

“intend,”

“plan,”

“ongoing,”

“realize,”

“should,”

“may,”

“could,"

"believe,"

"future,"

"depend,"

"expect,"

"will,"

"result,"

"can,"

"remain,"

"assurance,"

"subject to,"

"require,"

"limit,"

"impose,"

"guarantee,"

"restrict,"

"continue,"

"become,"

"predict,"

"likely,"

"opportunities,"

"effect,"

"change,"

"predict,"

and "estimate,”

and similar terms or terminology, or the negative

of such terms or other comparable terminology.

Examples of forward-looking statements include, among others, statements we make regarding:

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

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

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

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

Forward looking statements are based on management’s

beliefs, assumptions, estimates and observations of future events based on information available to our management at the time the statements

are made and include any statements that do not relate to any historical or current fact.

These statements are not guarantees of future

performance and they involve certain risks, uncertainties and assumptions that are difficult to predict.

Actual outcomes and results may

differ materially from what is expressed, implied or forecast by our forward-looking statements due in part to the risks, uncertainties,

and assumptions that include:

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

The decisions of customers or consumers;

Our ability to successfully implement our business strategy;

Changes in the pricing of commodities

The effects of government regulation;

The impact of the COVID-19 outbreak on our business, suppliers, consumers, customers, and employees;

Disruptions to our supply chain, or our manufacturing and distribution capabilities, including those due to cybersecurity threats and the COVD-19 outbreak;

Such other factors as discussed throughout Part I, Item 1 “Business”;

Part I, Item 1A “Risk Factors”;

and Part II, Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations”

of our Annual Report on Form 10-K for the year ended December 31, 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.

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.

Recent Developments

COVID-19 Pandemic Impact

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.

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 March 31, 2021 Compared to Three Months Ended

March 31, 2020

Cost of goods sold

Depreciation expense

Total cost of goods sold

Gross Profit % to net sales

Selling expenses

Selling expenses % to net sales

General and administrative expenses

General and administrative % to net sales

Amortization expense

Total operating expenses

Total operating expense % 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 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.

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 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

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 $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

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.

To date, our manufacturing facilities

have not been significantly impacted.

We have full production capacity available at all locations at this time.

On March 16, 2020, the

food industry, including grocery stores and their suppliers, and transportation were classified by the U.S.

federal government as critical

infrastructure industry.

As a result, our employees and facilities, as well as the retailers and distributors that sell our products,

will be able to remain in operation.

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.

While the situation is fluid, we have evaluated all manufacturing locations and do not

anticipate any staffing shortages or interruption of our production, transportation and sale of products in the near term.

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;

our revolving credit facility;

and cash and cash equivalents to ensure the continuation of the Company as a going concern.

The success of our business and financing strategies will continue to provide us with the financial flexibility to take advantage of various

opportunities as they arise.

Given the dynamic nature of COVID-19, we will continue to assess our liquidity needs while continuing to

manage our discretionary spending and investment strategies.

Sources and Uses of Cash

Lifeway had a net increase in cash and cash equivalents

of $692 during the three-month period ended March 31, 2021 compared to a net decrease in cash and cash equivalents of $1,858 in the same

period in 2020.

The drivers of the year over year change are as follows:

Net cash provided in operating activities was

$1,210 during the three-month period ended March 31, 2021 compared to net cash used by operating activities of $1,055 in the same period

The increase in cash provided by operating activities is primarily due to the increase in cash generated through higher revenues

and reduced expenses in 2021, and the change in working capital.

Working capital consumption was higher in 2020 due to increased revenue

in March 2020 as consumers anticipated the shelter in place directives that ultimately occurred as a result of the COVID-19 pandemic.

Net cash used in investing activities was $518

during the three-month period ended March 31, 2021 compared to net cash used in investing activities of $398 in the same period in 2020.

The increase in net cash used in investing activities in 2021 reflects higher capital spending.

Capital spending was $518 during the three-month

period ended March 31, 2021 compared to $403 in 2020.

Our capital spending is focused in three core areas:

growth, cost reduction, and

facility improvements.

Growth capital spending supports new product innovation and enhancements.

Cost reduction and facility improvements

support manufacturing efficiency, safety and productivity.

Net cash used in financing activities was $0 during

the three-month period ended March 31, 2021 compared to net cash used in financing activities of $405 in the same period in 2020.

On November 1, 2017, Lifeway’s Board approved

an increase in the aggregate amount under our previously announced 2015 stock repurchase program (the “2017 Repurchase Plan Amendment”),

by adding to (i.e., exclusive of the shares previously authorized under the 2015 stock repurchase program) the authorization the lesser

of $5,185 or 625 shares.

We repurchased approximately 178 shares of common stock at a cost of $405 during the three-month period ended

March 31, 2020 under the 2017 Repurchase Plan Amendment.

As of March 31, 2021, there were no shares of common stock that remained available

to be purchased under the 2017 Repurchase Plan Amendment.

We intend to hold repurchased shares in treasury for general corporate purposes,

including issuances under our 2015 Omnibus Incentive Plan.

Treasury shares are accounted for using the cost method.

Debt Obligations

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 ended 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, 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.

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 are in compliance with all applicable financial

debt covenants as of March 31, 2021.

See Note 7 to our Consolidated Financial Statements for additional information regarding our indebtedness

and related agreements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

Note 15 – Subsequent Event

On August 3, 2021, the

Company entered into an asset purchase agreement to acquire certain assets of Glenoaks Farms Inc., a California corporation.

is engaged in the business of the manufacture, development, and sale of probiotic drinkable yogurt.

Upon the closing of the transaction

contemplated by the Purchase Agreement, the Company will acquire all of Seller's right, title and interest in, to and under certain assets

and rights of Seller under certain of Seller’s agreements (collectively, the “Purchased Assets”), including the rights,

and contracts with a co-manufacturer, to produce the Seller’s probiotic drinkable yogurt products and intellectual property related

The purchase price to be paid by the Company as consideration for such assets is $5,800,000, subject to certain adjustments.

The Company is not assuming any liabilities of Seller.

The Purchase Agreement contains customary representations and warranties, covenants,

and indemnities of the parties thereto, including restrictive covenants of the Seller and its affiliates with respect to non-competition,

non-solicitation, and confidentiality obligations.

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

What changed 10-Q

Item 1. Financial Statements