What changed in this filing

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Item 1. Financial Statements

2021-11-15 compared with 2021-08-16 · 400 added, 286 removed, 388 unchanged (64% of the section changed)

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Consolidated Balance Sheets

June 30, 2021 and December 31, 2020

September 30, 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 & allowances of $ 1,190 and $ 1,350 at June 30, 2021 and December 31, 2020 respectively

Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $ 1,290 and $ 1,350 at September 30, 2021 and December 31, 2020 respectively

Inventories, net

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Current liabilities

Current portion of note payable

Accounts payable

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2,500 shares authorized;

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

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

Common stock, no par value;

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17,274 shares issued;

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

15,435 and 15,604 outstanding at September 30, 2021 and December 31, 2020, respectively

Paid-in capital

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Consolidated Statements of Operations

For the three and six months ended June

For the three and nine months ended September

30, 2021 and 2020

(In thousands, except per share data)

Three Months Ended

Six Months Ended

Cost of goods sold

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Balance, January 1, 2020

Issuance of common stock in connection with stock-based compensation

Issuance of common stock in connection

with stock-based compensation

Treasury stock purchased

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Balance, March 31, 2020

Issuance of common stock in connection with stock-based compensation

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

LIFEWAY FOODS, INC.

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Balance, March 31, 2021

Issuance of common stock in connection with stock-based compensation

Issuance of common stock in connection

with stock-based compensation

Stock-based compensation

Balance, June 30, 2021

Issuance of common stock

in connection with stock-based compensation

Treasury stock purchased

Stock-based compensation

Balance, September 30, 2021

See accompanying notes to consolidated financial

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(In thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities:

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Proceeds from sale of property and equipment

Acquisition, net of cash acquired

Net cash used in investing activities

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Purchase of treasury stock

Net cash used in financing activities

Payment of deferred financing cost

Proceeds from note payable

Repayment of note payable

Net cash provided by (used in) financing activities

Net increase in cash and cash equivalents

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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.

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.

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

A detailed description of our significant accounting

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and incentive compensation, and deferred income taxes.

Cash and cash equivalents

Lifeway considers cash and all highly liquid

investments purchased with an original maturity of three months or less to be cash equivalents.

Cash and cash equivalents are stated

at cost, which approximates or equals fair value due to their short-term nature.

Lifeway from time to time may have bank deposits

in excess of insurance limits of the Federal Deposit Insurance Corporation.

Lifeway has not experienced any losses in such accounts and

believes it is not exposed to any significant credit risk related to its cash and cash equivalents.

The Company has $ 580 of restricted cash which

is included in cash and cash equivalents as of September 30, 2021.

The restricted cash balance represents escrow funds deposited by Lifeway

in connection with the September 18, 2021 acquisition of certain assets of Glen Oaks Farms, Inc.

The funds are security for the liability

and indemnity obligations of seller as defined under the asset purchase agreement.

The funds will remain in escrow for twelve months

from the acquisition closing date, at which time the funds, less any amounts for outstanding seller obligations, will be remitted to

Revenue recognition

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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.

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 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

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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 sold.

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

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.

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

Variable consideration, which typically includes

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Lifeway expenses advertising costs as incurred.

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.

For the nine months ended September 30, 2021 and 2020 total advertising expenses were $ 2,892 and $ 1,700 respectively.

For the three months

ended September 30, 2021 and 2020 total advertising expenses were $ 726 and $ 380 , respectively.

Recent accounting pronouncements

In December 2019, the FASB issued Accounting Standards

Update (“ASU”) No.

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.

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.

The Company 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 Accounting Standards

Update (“ASU”) No.

In October 2021, the FASB issued ASU No.

Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.

The new guidance

provides a single comprehensive accounting model on revenue recognition for contracts with customers and requires that the acquirer in

a business combination recognize and measure contract assets and liabilities acquired in a business combination in accordance with Topic

606 (Revenue from Contracts with Customers).

The amendments in this ASU are effective for fiscal years beginning after December 15, 2022.

Early adoption is permitted, including adoption in an interim period.

With early adoption, the amendments are applied retrospectively

to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim

period of adoption and prospectively to all business combinations that occur on or after the date of initial application.

Management is

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

In March 2020, the FASB issued ASU No.

Reference Rate Reform (Topic 848):

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 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

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

The new guidance provides

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

other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.

will be effective prospectively as of March 12, 2020 through December 31, 2022 and interim periods within those fiscal years.

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

In June 2016, the FASB issued ASU No.

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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.

This may result in

the earlier recognition of allowances for losses.

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

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Schedule Of Inventories

September 30,

Finished goods

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Schedule of property, plant and equipment

September 30,

Buildings and improvements

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Goodwill & indefinite-lived intangible assets

Gross goodwill

Accumulated impairment losses

Goodwill and indefinite-lived intangible assets

Balance at December 31, 2020, before accumulated impairment loses

Accumulated impairment loses

Balance at December 31, 2020

Acquisition (1)

Balance at September 30, 2021

(1) Refer to Note 15 for additional information regarding acquisition-related adjustments to goodwill

Finite-lived Intangible Assets

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Schedule of other intangible assets

September 30, 2021

December 31, 2020

Customer lists and other customer related intangibles

Customer relationship

Accumulated amortization

Other intangible assets, net

Total finite lived intangible assets

Note 6 – Accrued Expenses

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Schedule Of Accrued Expenses

September 30,

Payroll and incentive compensation

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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.

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” 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.

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” and together

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 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.

Note payable consisted of the following:

Schedule of note payable

September 30,

Variable rate term loan due August 18, 2026.

Principal and interest (2.15% at September 30, 2021) payable monthly.

Unamortized deferred financing costs

Total note payable

Less current portion

Total long-term portion

Credit Agreement

On August 18, 2021, Lifeway entered into the Fourth Modification (the

“Fourth Modification”) to the Amended and Restated Loan and Security Agreement (as amended and modified from time to time,

the “Credit Agreement” and, as amended and modified by the Fourth Modification, the “Modified Credit Agreement”)

with its existing lender and certain of its subsidiaries.

The Fourth Modification amends the Credit Agreement to provide for, among other

things, a $ 5 million term loan by the existing lender to the borrowers to be repaid in quarterly installments of principal and interest

over a term of five years (the “Term Loan”).

The termination date of the Term Loan is August 18, 2026 , unless earlier

Except for the addition of the Term Loan, the Credit Agreement remains substantively unchanged and in full force and effect.

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 June 30, 2021 was 2.15 %.

revolving line of credit and term loan 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 revolving line of credit

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

Revolving Credit Facility

As of September 30, 2021, we had $ 2,777 outstanding

under the Revolving Credit Facility.

We had $ 2,223 available for future borrowings under the Revolving Credit Facility as of September

Lifeway’s interest rate on debt outstanding under the Revolving Credit Facility as of September 30, 2021 was 2.15 %.

Deferred Financing Costs

As of September 30, 2021, net unamortized deferred

financing costs of $ 24 related to the term loan were included as a direct deduction from outstanding long-term debt.

Except as described above, as amended, the Modified

Credit Agreement 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 Credit Agreement 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 Credit Agreement may be accelerated.

The loans and all other amounts due and owed

under the Credit Agreement and related documents are secured by substantially all of our assets.

We were in compliance with the fixed charge coverage

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

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

Note 8 – Leases

Lifeway has operating leases for two retail stores

Lifeway had 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.

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.

The Company terminated the operating lease of one of the Lifeway Kefir Shop retail stores during July

The Company terminated its office space leases in September 2020.

The Company also leases certain machinery and equipment with fixed

base rent payments and variable costs based on usage.

Remaining lease terms for these leases range from less than 1 year to 5 years.

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

Variable lease payments are those that vary because of changes in facts or circumstances occurring after the commencement date,

other than the passage of time.

There are no residual value guarantees.

We do not currently have leases which meet

the finance lease classification as defined under ASC 842.

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

as defined under ASC 842.

We do not record leases with an initial term of

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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 $ 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.

Total lease expense was $ 245 and $ 392 (including short term leases) for the nine months ended September 30, 2021 and 2020, respectively.

Total lease expense was $ 76 and $ 81 (including short term leases) for the three months ended September 30, 2021 and 2020, respectively.

Lifeway treats contracts as a lease when the contract

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Operating Leases

Six months ended December 31, 2021

Three months ended December 31, 2021

Total lease payments

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The weighted-average remaining lease term for

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.

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.

our operating leases was 2.5 years as of September 30, 2021.

The weighted average discount rate of our operating leases was 12.10 % as

of September 30, 2021.

Cash paid for amounts included in the measurement of lease liabilities was $ 153 and $ 328 the nine months ended

September 30, 2021 and 2020, respectively.

Cash paid for amounts included in the measurement of lease liabilities was $ 46 and $ 56 for

the three months ended September 30, 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.

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

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.

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results of operations or cash flows.

Lifeway’s contingencies are subject to substantial

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

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;

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

(iii) the outcome of preliminary motions;

(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.

(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;

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 – Income taxes

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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

The effective tax rate for the nine months ended September 30, 2021 was 35.2 % compared to 29.3 % for the nine months ended September

The effective tax rate for the three months ended September 30, 2021 was 52.3 % compared to 29.5 % for the three months ended

September 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 occur.

On March 27, 2020, the “Coronavirus Aid,

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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 six months ended June 30, 2020.

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 30, 2020.

Unrecognized tax benefits were $ 98 and $ 93 at

June 30, 2021 and 2020, respectively.

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

September 30, 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.

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.

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.

We do not expect material

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

Note 11 – Stock-based and Other Compensation

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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 June 30, 2021, 3.281 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 appreciation rights, unrestricted stock, restricted stock, restricted stock units, performance shares and performance units to

qualifying employees.

Under the Plan, the Board or its Audit and Corporate Governance Committee approves stock awards to executive officers

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

The number of performance shares that

participants may earn depends on the extent to which the corresponding performance goals have been achieved.

Stock awards generally vest

over a three-year performance or service period.

At September 30, 2021, 3.281 million shares remain available under the Omnibus Incentive

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 six

months ended June 30, 2021:

The following table summarizes stock option activity during the nine

months ended September 30, 2021:

Stock option activity table

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Outstanding at December 31, 2020

Outstanding at June 30, 2021

Exercisable at June 30, 2021

Outstanding at September 30, 2021

Exercisable at September 30, 2021

As of December 31, 2019, all outstanding options

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The following table summarizes RSA activity during the three months ended

June 30, 2021.

September 30, 2021.

RSA activity table

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Shares issued upon vesting

Outstanding at June 30, 2021

Outstanding at September 30, 2021

Weighted average grant date fair value per share outstanding

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

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

of operations was $ 106 and $ 51 , respectively.

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

were also recognized.

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.

For the nine months ended September 30, 2021 and 2020 tax-related benefits of $ 31 and $ 14 ,

respectively, were also recognized.

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

recognized in the consolidated statements of operations was $ 37 and $ 28 , respectively.

For the three months ended September 30, 2021 and

2020 tax-related benefits of $ 11 and $ 8 , respectively, were also recognized.

As of September 30, 2021, the total remaining unearned compensation

related to non-vested RSA’s was $ 159 , which is expected to be amortized over the weighted-average remaining service period of 1.38

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 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.

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

year 2021 (the “2021 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.

the 2021 Plan, long-term incentive compensation is based on Lifeway’s achievement of adjusted EBITDA performance versus the respective

target established by the Board for 2021.

Under the 2017 Plan, collectively the participants

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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 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.

For the nine months ended September 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 September 30, 2021 and 2020, $ 0 was expensed

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

As of September 30, 2021, there was no

remaining expense.

Under the 2019 Plan, collectively the participants

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year one, 50% of unvested shares in year two, and 100% of remaining unvested shares in year three from the 2019 grant date.

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

months ended September 30, 2021 and 2020, $ 89 and $ 90 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.

For the three months ended September 30, 2021 and 2020, $ 35 and $ 1 was expensed as stock-based

compensation expense in the consolidated statements of operations, respectively.

2019 Retention Award

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one-third in March 2021.

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.

For the nine months ended September 30, 2021 and 2020, $ 0 and $ 73 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,

2021 and 2020, $ 0 and $ 15 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively.

As of September 30, 2021, there was no remaining expense.

2020 CEO Incentive Award

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the Stock Purchase Agreement dated October 1, 1999.

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.

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.

For the nine months ended September 30, 2021 and 2020, $ 255 and $ 0 was expensed as

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

For the three months ended September 30,

2021 and 2020, $ 85 and $ 0 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively.

As of September 30, 2021, the total remaining unearned compensation was $ 445 , of which $ 87 will be recognized in 2021, $ 229 in 2022, $ 105

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.

Therefore, the award liability was reclassified from long-term liabilities to paid in capital.

2021 Equity Award

Under the 2021 Plan, collectively the participants

can earn equity-based incentive compensation in amounts ranging from $0 to $1,069 depending on Lifeway’s achievement of the respective

financial target.

The equity-based incentive compensation is payable in restricted stock that is expected to vest one-third in March

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

For the nine months ended September 30, 2021, $ 150

was expensed under the 2021 Plan as stock-based compensation expense in the consolidated statements of operations, respectively.

For the three months ended September 30, 2021, $ 150

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

As of September 30,

2021, the total remaining unearned compensation was $ 919 ,

of which $ 236

will be recognized in 2021, $ 474

in 2022, $ 181

in 2023, and $ 28

in 2024, respectively, subject to vesting.

As of September 30, 2021, the number of shares to be awarded is not fixed and determinable.

Therefore, the liability is classified in accrued expenses and other long-term liabilities as of September 30, 2021.

When the number

of shares awarded becomes fixed and determinable, the award liability will be reclassified from liabilities to paid in capital.

Retirement Benefits

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

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.

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.

For the nine months ended September 30, 2021 and 2020 total contribution expense recognized in the consolidated statements of

operations was $ 315 and $ 307 , respectively.

For the three months ended September 30, 2021 and 2020 total contribution expense recognized

in the consolidated statements of operations was $ 97 and $ 93 , 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 25 to 30 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)

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

and market products under the Lifeway, Fresh Made, and Glen Oaks Farms brand names, as well as under private labels on behalf of certain

Our product categories are:

Drinkable Kefir, sold in a variety of organic and non-organic sizes, flavors, and types, including low-fat, non-fat, whole milk, protein, and BioKefir (a 3.5 oz.

Drinkable Kefir, sold in

a variety of organic and non-organic sizes, flavors, and types, including low-fat, non-fat, whole milk, protein, and BioKefir (a

kefir with additional probiotic cultures).

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.

ProBugs, a line of kefir products designed for children.

Other Dairy, which includes Cupped Kefir and Icelandic Skyr, a line of strained kefir and yogurt products in resealable cups.

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

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.

ProBugs, a line of kefir

products designed for children.

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

Other Dairy, which includes

Cupped Kefir and Icelandic Skyr, a line of strained kefir and yogurt products in resealable cups.

Frozen Kefir, available

in soft serve and pint-size containers.

Lifeway has determined that it has one reportable

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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,

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.

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Net sales of products by category were as follows

for the six months ended June 30:

for the nine months ended September 30:

Schedule of sales of products by category

2 unchanged sentences

ProBugs Kefir

Drinkable yogurt

Frozen Kefir (a)

Includes Lifeway Kefir Shop sales

Includes Lifeway Kefir

Net sales of products by category were as follows

for the three months ended June 30:

for the three months ended September 30:

Drinkable Kefir other than ProBugs

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ProBugs Kefir

Drinkable yogurt

Frozen Kefir (a)

Includes Lifeway Kefir Shop sales

Includes Lifeway Kefir

Significant Customers – Sales

1 unchanged sentence

Two major customers accounted for approximately

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

23 % and 21 % of net sales for the nine months ended September 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.

23 % and 22 % of net sales for the three months ended September 30, 2021 and 2020, respectively.

Note 13 – Related Party Transactions

Lifeway obtains consulting services from the Chairperson

of its board of directors.

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”),

12 unchanged sentences

in general and administrative expenses in the accompanying consolidated statements of operations and were $ 375 and $ 750 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.

the nine months ended September 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 September 30, 2021

and 2020, respectively.

During the nine months ended September 30, 2021, the Company recorded $ 282 related to estimated earnings under

the fiscal year 2021 annual performance fee target.

During the three months ended September 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

2 unchanged sentences

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.

statements of operations and were $ 450 during the nine months ended September 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 September 30, 2021

Note 14 – COVID-19

3 unchanged sentences

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.

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.

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,

4 unchanged sentences

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.

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

Therefore, the financial impact cannot be reasonably estimated at this time.

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.

Note 15 – Business Acquisition

On August 18, 2021, the Company completed the acquisition of certain

assets of GlenOaks Farms Inc.

for a purchase price of $ 5,800 in cash.

Glen Oaks is engaged in the manufacture, development, and sale of

probiotic drinkable yogurt.

The acquisition of GlenOaks Farms initiates Lifeway’s expansion outside of kefir and into drinkable

The current distribution of GlenOaks Farms in western U.S.

retailers is strategically significant for Lifeway as the Company seeks

to further grow its presence in this region.

From a portfolio perspective, it complements the Company’s eastern U.S.

presence with

the Freshmade brand and national strength with Lifeway.

The acquisition was funded through the proceeds of a $ 5,000 note payable (see

Note 7) and the Company’s existing cash resources.

Management considers the purchase of

Glenoaks Farms Inc.

to consist of inputs, processes and outputs and has accounted for the purchase as a business combination.

acquisition was accounted for under the acquisition method of accounting and the results of operations were included in our

consolidated statement of operations from the date of acquisition.

Included in the Company’s consolidated statements of

operations are the acquisition’s net sales of $ 739

and income before income taxes of approximately $ 112

from the date of acquisition through September 30, 2021.

The Company incurred approximately $ 83

in acquisition-related costs which are expensed as incurred and included in general and administrative expense on the consolidated

statement of operations.

Pro-forma results of operation have not been presented as the effect would not be material to the

Company’s results of operations for any periods presented.

The following table

summarizes the preliminary purchase price allocation of the fair value of intangible assets acquired and liabilities assumed:

Schedule of purchase price allocation

Customer relationships

Assets acquired

Liabilities assumed

Total purchase price

The purchase price allocation

in the table above is preliminary and subject to the finalization of the Company’s valuation analysis.

The fair value for the customer

relationships at the acquisition date were determined using the excess earnings method under the income approach.

The brand name fair

value was determined using the relief from royalty method.

The customer relationship and brand name intangible assets have an estimated

life of 15 years and will be amortized over that period.

The fair value measurements of intangible assets are based on significant unobservable

inputs, and thus represent Level 3 inputs.

Significant assumptions used in assessing the fair values of intangible assets include discounted

future cash flows, customer attrition rates, and royalty rates.

Goodwill arises principally as a result of category expansion opportunities

to better serve its regional and national customers.

The goodwill resulting from the acquisition is tax deductible.

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