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Item 8. Financial Statements and Supplementary Data

2022-07-21 compared with 2021-03-25 · 1101 added, 687 removed, 265 unchanged (87% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Accounting Firm

of Independent Registered Accounting Firm (PCAOB ID 199 )

Consolidated Balance Sheets as of December 31, 2021 and 2020

Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019

Consolidated Statements of Stockholders’

Equity for the Years Ended December 31, 2020 and 2019

Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019

Notes to Consolidated Financial Statements

Consolidated Statements of Operations

for the Years Ended December 31, 2021 and 2020 (as restated)

Consolidated Statements of

Stockholders’ Equity for the Years Ended December 31, 2021 and 2020 (as restated)

Consolidated Statements of Cash Flows

for the Years Ended December 31, 2021 and 2020 (as restated)

Notes to Consolidated Financial

Statements (as restated)

Report of Independent Registered Public

2 unchanged sentences

Stockholders of Lifeway Foods, Inc.

Subsidiaries:

and Subsidiaries:

Opinion on the Financial Statements

1 unchanged sentence

balance sheets of Lifeway Foods, Inc.

and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related

consolidated statements of operations, stockholders’

equity, and cash flows for each of the years in the two-year period

ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”).

In our opinion,

the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020

and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020,

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

and Subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated

statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021,

and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present

fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations

and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally

accepted in the United States of America.

Restatement of the 2020 Financial Statements

As discussed in Note 1, the 2020 financial statements

have been restated to correct a misstatement.

Basis for Opinion

These financial statements are the responsibility

of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based

on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")

of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")

and are required to be independent with respect to the Company in accordance with the U.S.

1 unchanged sentence

rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with

the standards of the PCAOB.

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

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

The Company is not required to have,

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

As part of our audits we are required

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

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

We conducted our audits in accordance with the

standards of the PCAOB.

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

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

The Company is not required to have, nor were we engaged

to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding

of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s

internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures

to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures

that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures

in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made

by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a

reasonable basis for our opinion.

Our audits included performing procedures to assess

the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond

to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating

the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

Critical audit matters are matters arising

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

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

subjective, or complex judgments.

Critical audit matters are matters arising from the current period

audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to

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

We determined that there are no critical audit matters.

/s/ Mayer Hoffman McCann P.C.

We have served as the Company's auditor

We have served as the Company's auditor since

Chicago, Illinois

March 25 2021

July 21, 2022

LIFEWAY FOODS, INC.

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(In thousands)

(As Restated)

Current assets

12 unchanged sentences

Current liabilities

Current portion of note payable

Accounts payable

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Commitments and contingencies

Stockholders’

Stockholders’ equity

Preferred stock, no par value;

2,500 shares authorized;

no shares issued or outstanding at 2020 and 2019

Common stock, no par value;

5 unchanged sentences

Retained earnings

Total stockholders’

Total liabilities and stockholders’

See accompanying notes to consolidated

financial statements

Total stockholders’ equity

Total liabilities and stockholders’ equity

See accompanying notes to consolidated financial

LIFEWAY FOODS, INC.

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Consolidated Statements of Operations

For the Years Ended December 31, 2020

For the Years Ended December 31, 2021 and 2020

(In thousands, except per share data)

(As Restated)

Cost of goods sold

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Total operating expenses

Income (loss) from operations

Income from operations

Other income (expense):

Interest expense

Fair value gain on investments

Realized gain on investments, net

(Loss) gain on sale of property and equipment

Total other (expense) income

Loss on sale of property and equipment

Other (expense) income

Total other income (expense)

Income before provision for income taxes

4 unchanged sentences

Weighted average number of shares outstanding - Diluted

See accompanying notes to consolidated

financial statements

See accompanying notes to consolidated financial

LIFEWAY FOODS, INC.

AND SUBSIDIARIES

Consolidated Statements of Stockholders’

For the Years Ended December 31, 2020

Consolidated Statements of Stockholders’

For the Years Ended December 31, 2021 and 2020

(In thousands)

Balance, January 1, 2019

Cumulative impact of change

in accounting principles, net of tax

Balance, January 1, 2020 (As Restated)

Cumulative impact of change in accounting principles, net of tax

Treasury stock purchased

Issuance of common stock in

connection with stock-based compensation

Issuance of common stock in connection with stock-based compensation

Stock-based compensation

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Treasury stock purchased

Issuance of common stock in

connection with stock-based compensation

Issuance of common stock in connection with stock-based compensation

Stock-based compensation

December 31, 2020

See accompanying notes to consolidated

financial statements

Balance, December 31, 2021

See accompanying notes to consolidated financial

LIFEWAY FOODS, INC.

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Consolidated Statements of Cash Flows

For the Years Ended December 31, 2020

For the Years Ended December 31, 2021 and 2020

(In thousands)

(As Restated)

Cash flows from operating activities:

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Deferred Revenue

Reserve for inventory obsolescence

Stock-based compensation

Deferred income taxes

Fair value gain on investment

Net gain on sale of investment

(Loss) gain on sale of property and equipment

Loss on sale of property and equipment

(Increase) decrease in operating assets:

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Cash flows from investing activities:

Purchases of investments

Proceeds from sale of investments

Purchases of property and equipment

Proceeds from sale of property and equipment

Net cash (used in) provided by investing activities

Acquisition, net of cash acquired

Net cash used in investing activities

Cash flows from financing activities:

Purchase of treasury stock

Repayment of line of credit

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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Non-cash investing activities

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

Operating lease liability recognized at ASU 2016-02 transition

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

Business acquisition escrow payable

Non-cash financing activities

Issuance of common stock under equity incentive plans

See accompanying notes to consolidated

financial statements

See accompanying notes to consolidated financial

LIFEWAY FOODS, INC.

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(In thousands)

Note 1 –

Basis of presentation

The accompanying consolidated financial

statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United

States of America (“U.S.

GAAP”).

Our consolidated financial statements include all of the assets, liabilities and results

of operations of Lifeway’s wholly owned subsidiaries (collectively “Lifeway”

or the “Company”).

inter-company balances and transactions have been eliminated in the consolidated financial statements.

Note 2 –

Summary of significant

accounting policies

Note 1 – Basis of presentation

The consolidated financial statements and accompanying

notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

The consolidated financial statements include all of the assets, liabilities and results of operations of Lifeway’s wholly owned

subsidiaries (collectively “Lifeway” or the “Company”).

All inter-company balances and transactions have been

eliminated in the consolidated financial statements.

Restatement of Previously Issued Consolidated

Financial Statements

Lifeway has restated herein its consolidated financial

statements as of and for the year ended December 31, 2020.

In addition, the Company has restated its unaudited quarterly consolidated

financial statements for the first three quarters of the years ended December 31, 2020 and 2021, as presented in Note 17 – Correction

of previously issued unaudited consolidated financial statements.

Lifeway has also restated impacted amounts within the notes to the consolidated

financial statements, as applicable.

Restatement Background

During the preparation of the fiscal 2021 consolidated

financial statements, the Company identified an error in the accounting for its deferred income tax liabilities and goodwill.

Specifically,

in connection with its 2009 acquisition of Fresh Made, Inc., the Company did not record a deferred income tax liability and corresponding

increase to goodwill related to the difference in the book and income tax bases for the $3,700 Fresh Made indefinite-lived brand name

intangible asset acquired.

The error resulted in a $1,180 understatement- of both deferred income tax liabilities and goodwill of as of

January 1, 2020.

The Restatement had no impact on the Company’s Consolidated Statements of Operations, Consolidated Statements of

Cash Flows, or Consolidated Statements of Stockholders’ Equity during 2021 and 2020.

The impact of the Restatement on periods prior

to 2020 had no effect on opening retained earnings as of January 1, 2020.

The following table summarizes the impact of the

restatement adjustments on the Consolidated Balance Sheet for the year ended December 31, 2020.

Schedule of restatement adjustments

December 31, 2020

As Previously Reported

Restatement Adjustment

Current assets

Cash and cash equivalents

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

Inventories, net

Prepaid expenses and other current assets

Refundable income taxes

Total current assets

Property, plant and equipment, net

Operating lease right-of use asset

Intangible assets

Goodwill and indefinite-lived intangibles

Other intangible assets, net

Total intangible assets

Current liabilities

Accounts payable

Accrued expenses

Accrued income taxes

Total current liabilities

Line of credit

Operating lease liabilities

Deferred income taxes, net

Other long-term liabilities

Total liabilities

Commitments and contingencies

Stockholders’ equity

Preferred stock, no par value;

2,500 shares authorized;

Common stock, no par value;

40,000 shares authorized;

17,274 shares issued;

15,604 shares outstanding at 2020

Paid-in capital

Treasury stock, at cost

Retained earnings

Total stockholders’ equity

Total liabilities and stockholders’ equity

Note 2 – Summary of significant accounting

Use of estimates

The preparation of consolidated financial

statements in conformity with U.S.

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

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

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

The preparation of consolidated financial statements

in conformity with U.S.

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

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

reported amounts of net sales and expenses during the reporting period.

Actual results could differ from those estimates.

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

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

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

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

During the fourth quarter of 2021, the Company

completed an assessment of the useful life of its indefinite-lived brand name intangible asset and determined that it should adjust the

estimated useful life from an indefinite length to 15 years.

The change in accounting estimate will be effective January 1, 2022, at which

time the Company will begin amortizing the asset over 15 years.

The future amortization expense is included in the five-year intangible

asset amortization table in Note 5 – Goodwill and Intangible Assets.

Going Concern

The Company follows the guidance in Accounting

Standards Codification (“ASC”) 205-40, Presentation of Financial Statements - Going Concern which requires management

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

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

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

Standards Codification (“ASC”) 205-40, Presentation of Financial Statements - Going Concern which requires management to assess

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

There were no conditions

or events, when considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern

within one year after the date the financial statements are issued.

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.

The Company places its cash and cash equivalents with high

credit quality financial institutions.

Lifeway has not experienced any losses in such accounts and believes the financial risks associated

with these financial instruments are minimal.

The Company has $ 580 of restricted cash which

is included in cash and cash equivalents as of December 31, 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 the sellers.

Revenue Recognition

We sell food and beverage products across

Lifeway sells food and beverage products across

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

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

In accordance with ASC 606, Revenue from Contracts

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

to our customers or their common carriers.

The 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.

also sells bulk cream, a byproduct of its fluid milk manufacturing process.

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

Lifeway recognizes revenue when control over the products transfers to its customers, which generally occurs upon delivery to its 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

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

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

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

information pertaining to the customer.

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

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

to the customer.

Performance obligations promised in a contract

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

which provide immediate benefit to the customer.

We account for product shipping and handling

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

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.

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

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

Variable consideration, which typically includes

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

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

Key sales terms, such as pricing and quantities

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

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

GAAP and our inventory policies.

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

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

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

As such, the Company does not capitalize contract inception costs and it capitalizes product fulfillment costs in accordance with U.S.

GAAP and its inventory policies.

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

It generally does not receive noncash consideration for the sale of goods, nor does it grant payment financing terms greater than one

Accounts Receivable

We provide credit terms to customers in-line

Lifeway provides credit terms to customers in-line

with industry standards and maintain allowances for potential credit losses based on historical experience.

Customer balances are

written off after all collection efforts are exhausted.

Estimated product returns, which have not been material, are deducted from

sales at the time of revenue recognition.

Customer balances are written

off after all collection efforts are exhausted.

Estimated product returns, which have not been material, are deducted from sales at the

time of revenue recognition.

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

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.

Inventories are stated at the lower of

cost or net realizable value, valued on a first in, first out basis (“FIFO”).

The costs of finished goods inventories

include raw materials, direct labor, and overhead costs.

Inventories are stated at the lower of cost or

net realizable value, valued on a first in, first out basis (“FIFO”).

The costs of finished goods inventories include raw

materials, direct labor, and overhead costs.

Inventories are stated net of reserves for excess or obsolete inventory.

Property, plant and equipment

Property, plant and equipment are recorded

Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets

Property, plant and equipment are recorded at

Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets as follows:

Schedule Of Property And Equipment, Estimated Useful Lives

Buildings and improvements

31 and 39 years

10 – 39 years

Machinery and equipment

2 unchanged sentences

Shorter of expected useful life or lease term

We perform impairment tests when circumstances

The Company performs impairment tests when circumstances

indicate that the carrying value of an asset may not be recoverable.

Expenditures for repairs and maintenance, which do not improve

or extend the life of the assets, are expensed as incurred.

Expenditures for repairs and maintenance, which do not improve or

extend the life of the assets, are expensed as incurred.

Intangible Assets

Goodwill and indefinite-lived intangible

Goodwill represents the excess purchase

price over the fair value of the net tangible and other identifiable intangible assets acquired.

We estimate the fair value of

our one reporting unit annually (as of December 31), or more frequently if certain conditions exist, using a combination of the

fair values derived from both the income approach and the market approach.

Under the income approach, we calculate the fair value

of a reporting unit based on the present value of estimated future cash flows.

Cash flow projections are based on our estimates

of revenue growth rates and operating margins, taking into consideration industry and market conditions.

The discount rate used

to determine the present value of future cash flows is based on the weighted-average cost of capital adjusted for the relevant

risk associated with business-specific characteristics and the uncertainty related to the business's ability to execute on the

projected cash flows.

The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable

publicly traded companies with similar operating and investment characteristics.

The resulting fair value, based on the income

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

We assess whether indefinite-lived intangible

asset impairment exists using both qualitative and quantitative assessments annually in the fourth quarter or more frequently,

if certain conditions exist.

The qualitative assessment involves determining whether events or circumstances exist that indicate

it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount.

on this qualitative assessment, we determine it is more likely than not that the fair value of an indefinite-lived intangible asset

is less than its carrying amount or if we elect not to perform a qualitative assessment, a quantitative assessment is performed

to determine whether an indefinite-lived intangible asset impairment exists.

We test the indefinite-lived intangible assets for

impairment by comparing the carrying value to the fair value based on current revenue projections of the related operations, under

the relief from royalty method.

Any excess of the carrying value over the amount of fair value is recognized as an impairment.

Any such impairment would be recognized in full in the reporting period in which it has been identified.

Goodwill and indefinite-lived intangible assets

Goodwill represents the excess purchase price

over the fair value of the net tangible and other identifiable intangible assets acquired.

Lifeway estimates the fair value of its one

reporting unit annually (as of December 31), or more frequently if certain conditions exist, using a combination of the fair values derived

from both the income approach and the market approach.

Under the income approach, it calculates the fair value of a reporting unit based

on the present value of estimated future cash flows.

Cash flow projections are based on the Company’s estimates of revenue growth

rates and operating margins, taking into consideration industry and market conditions.

The discount rate used to determine the present

value of future cash flows is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific

characteristics and the uncertainty related to the business's ability to execute on the projected cash flows.

The market approach estimates

fair value based on market multiples of revenue and earnings derived from comparable publicly traded companies with similar operating

and investment characteristics.

The resulting fair value, based on the income and market approaches, is then compared to the carrying

value to determine if impairment is necessary.

Lifeway assesses whether indefinite-lived intangible

asset impairment exists using both qualitative and quantitative assessments annually in the fourth quarter or more frequently, if certain

conditions exist.

The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely

than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount.

If, based on this qualitative assessment,

the Company determines it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying

amount or if it elects not to perform a qualitative assessment, a quantitative assessment is performed to determine whether an indefinite-lived

intangible asset impairment exists.

Lifeway tests the indefinite-lived intangible assets for impairment by comparing the carrying value

to the fair value based on current revenue projections of the related operations, under the relief from royalty method.

Any excess of

the carrying value over the amount of fair value is recognized as an impairment.

Any such impairment would be recognized in full in the

reporting period in which it has been identified.

Definite lived intangible assets

Intangible assets acquired in a business

combination are recorded at their estimated fair values at the date of acquisition.

Identifiable intangible assets with finite

lives are amortized over their estimate useful lives as follows:

Intangible assets acquired in a business combination

are recorded at their estimated fair values at the date of acquisition.

Identifiable intangible assets with finite lives are amortized

over their estimate useful lives as follows:

Schedule Of Intangible Assets Useful Lives

Customer lists

Customer relationships

All amortization expense related to intangible assets is recorded

in Amortization expense in the consolidated statements of operations.

Amortizable intangible assets are evaluated

for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Lifeway conducts

more frequent impairment assessments if certain conditions exist, such as a change in the competitive landscape, any internal decisions

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

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

If an evaluation of the undiscounted

cash flows indicates impairment, the asset is written down to its estimated fair value, which is generally based on discounted

future cash flows.

If the estimated remaining useful life of an intangible asset is changed, the remaining carrying amount of the

intangible asset is amortized prospectively over the revised remaining useful life.

All amortization expense related to intangible assets is recorded in

Amortization expense in the consolidated statements of operations.

Amortizable intangible assets are evaluated for

impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Lifeway conducts more

frequent impairment assessments if certain conditions exist, such as a change in the competitive landscape, any internal decisions to

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

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

If an evaluation of the undiscounted cash flows

indicates impairment, the asset is written down to its estimated fair value, which is generally based on discounted future cash flows.

If the estimated remaining useful life of an intangible asset is changed, the remaining carrying amount of the intangible asset is amortized

prospectively over the revised remaining useful life.

Fair value measurements

Fair value is estimated by applying the

following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within

the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1 –

Quoted prices

in active markets for identical assets or liabilities.

Level 2 –

inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar

assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data

for substantially the full term of the assets or liabilities.

Inputs that are

generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing

the asset or liability.

Lifeway’s financial assets and liabilities

that are not carried at fair value on a recurring basis include cash and cash equivalents, accounts receivable, other receivables,

accounts payable, accrued expenses and revolving line of credit for which carrying value approximates fair value.

The Company records its investments in

equity securities without a readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from

observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

During October 2019,

the Company sold approximately 45.6% of one of its investments recorded under the cost method and recognized a $1,438 gain on sale

of investment, which is recorded in other income (expense) on the consolidated statements of operations.

The Company also recorded

an unrealized gain of $1,731 resulting from the observable price change of this transaction, which is recorded in other income

(expense) on the consolidated statements of operations.

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

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

The Provision for income taxes includes

federal, state, local and foreign income taxes currently payable, and those deferred because of temporary differences between the

financial statement and tax bases of assets and liabilities.

Deferred tax assets or liabilities are computed based on the difference

between the financial statement and income tax bases of assets and liabilities using enacted tax rates expected to apply to taxable

income in the year in which the deferred tax assets or liabilities are expected to be realized or settled.

The principal sources

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

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

and the allowance for doubtful accounts.

Valuation allowances are recorded to reduce

deferred tax assets when it is more likely not that a tax benefit will not be realized.

Deferred income tax expense or benefit

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

Lifeway has analyzed filing positions

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

jurisdictions.

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

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

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

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

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

of such change.

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

benefit has been recognized in the financial statements.

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

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

uncertainty in income taxes.

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

for income taxes in the consolidated statements of operations.

Fair value is estimated by applying the following

hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy

upon the lowest level of input that is available and significant to the fair value measurement:

Level 1 – Quoted prices in

active markets for identical assets or liabilities.

Level 2 – Observable inputs

other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities

in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term

of the assets or liabilities.

Inputs that are generally

unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset

or liability.

Lifeway’s financial assets and liabilities

that are not carried at fair value on a recurring basis include cash and cash equivalents, accounts receivable, other receivables, accounts

payable, accrued expenses and revolving line of credit for which carrying value approximates fair value.

The Company records its investments in equity

securities without a readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable

price changes in orderly transactions for the identical or a similar investment of the same issuer.

As of December 31, 2021, and 2020,

the Company has one investment without a readily determinable fair value which is recorded at $ 1,800 in other assets on the consolidated

balance sheet.

The investment cost of $ 1,800 includes a cumulative unrealized gain of $ 1,731 resulting from an observable price

change in 2019.

There were no upward or downward adjustments to the investment cost during 2021 or 2020.

The Provision for income taxes includes federal,

state, local and foreign income taxes currently payable, and those deferred because of temporary differences between the financial statement

and tax bases of assets and liabilities.

Deferred tax assets or liabilities are computed based on the difference between the financial

statement and income tax bases of assets and liabilities using enacted tax rates expected to apply to taxable income in the year in which

the deferred tax assets or liabilities are expected to be realized or settled.

The principal sources of temporary differences are different

depreciation and amortization methods for financial statement and tax purposes, incentive compensation, unrealized gain, capitalization

of indirect inventory costs for tax purposes, reserves for excess and obsolete inventory and the allowance for doubtful accounts.

allowances are recorded to reduce deferred tax assets when it is more likely not that a tax benefit will not be realized.

Deferred income

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

Lifeway analyzes filing positions in all the federal

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

recognizes the income tax benefit from an uncertain tax position when it is more likely than not that, based on technical merits, the

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

It applies a more likely

than not threshold to the recognition and derecognition of uncertain tax positions.

Accordingly, Lifeway recognizes the amount of tax

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

Future changes in judgment related to the

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

For those income tax positions

where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.

The total amount of unrecognized tax benefits can change due to audit settlements, tax examination activities, statute expirations and

the recognition and measurement criteria under accounting for uncertainty in income taxes.

Lifeway recognizes penalties and interest related

to unrecognized tax benefits in the provision (benefit) for income taxes in the consolidated statements of operations.

Share-based compensation

1 unchanged sentence

for equity awards over the vesting period based on their grant date fair value.

The fair value of restricted stock awards is equal

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

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

but rather account for forfeitures as they occur.

The fair value of restricted stock awards is equal to

the closing price of Lifeway’s stock on the date of grant.

The Company does not estimate forfeitures in measuring the grant date

fair value, but rather account for forfeitures as they occur.

The Company issues share based equity awards from treasury shares.

Treasury stock

Treasury stock is recorded using the cost

Treasury stock is recorded using the cost method.

Advertising costs

Lifeway expenses advertising costs as incurred

and reported in Selling expense in our consolidated statements of operations.

For the years ended December 31, 2020 and 2019 total

advertising expenses were $2,407 and $3,394, respectively.

Advertising costs are expensed as incurred and

reported in Selling expense in the Company’s consolidated statements of operations.

Expenditures totaled $ 3,267 and $ 2,407 for the

years ended December 31, 2021 and 2020, respectively.

Earnings (loss) per common share

Basic earnings (loss) per common share

is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares issued

and outstanding during the reporting period.

Diluted earnings (loss) per common share is computed by dividing net income (loss)

available to common stockholders by the weighted average number of common shares issued and outstanding and the effect of all dilutive

common stock equivalents related to the Company’s outstanding stock-based compensation awards outstanding during the reporting

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

Basic earnings (loss) per common share is computed

by dividing net income (loss) available to common stockholders by the weighted average number of common shares issued and outstanding

during the reporting period.

Diluted earnings (loss) per common share is computed by dividing net income (loss) available to common stockholders

by the weighted average number of common shares issued and outstanding and the effect of all dilutive common stock equivalents related

to the Company’s outstanding stock-based compensation awards outstanding during the reporting period.

For the years ended December

31, 2021 and 2020, there were 236 and 169 common stock equivalents outstanding, respectively.

Recent accounting pronouncements

Issued by 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 Reporting.

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

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

to be discontinued because of reference rate reform.

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

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

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

The new guidance provides

optional expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships, and other transactions that reference LIBOR

or another reference rate expected to be discontinued because of reference rate reform.

The guidance will be effective prospectively as

of March 12, 2020 through December 31, 2022 and interim periods within those fiscal years.

Management is currently evaluating the impact

that the new guidance will have on the consolidated financial statements.

In June 2016, the FASB issued ASU No.

Financial Instruments – Credit Losses (Topic 326):

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

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

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

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

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

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

This may result in the

earlier recognition of allowances for losses.

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

approach depending on the subtopic.

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

periods within those fiscal years, with early adoption permitted.

Management is currently evaluating the impact that the new guidance

will have on the consolidated financial statements.

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.

The new guidance is intended to enhance and simplify

various aspects of the accounting for income taxes.

The new guidance eliminates certain exceptions

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

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

fiscal years.

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

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

Management does not anticipate the adoption of this ASU will

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

In June 2016, the FASB issued ASU No.

Financial Instruments –

Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, in November 2018

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

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

815), and Leases (Topic 842):

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

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

expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade

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

The guidance should be applied on either a prospective

transition or modified-retrospective approach depending on the subtopic.

The guidance is effective for annual periods beginning

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

Management is currently

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

Note 3 –

Inventories, net

Inventories consisted of the following:

Note 3 – Inventories, net

Schedule of inventories

Finished goods

Total inventories, net

Note 4 –

Property, Plant and Equipment, net

Property, plant and equipment consisted

of the following:

Note 4 – Property, Plant and Equipment, net

Schedule of property, plant and equipment

Buildings and improvements

4 unchanged sentences

Total property, plant and equipment, net

Note 5 –

Goodwill and Intangible Assets

Goodwill and indefinite-lived intangible

assets consisted of the following:

Accumulated impairment losses

Goodwill and indefinite lived intangible assets

The Company performed the annual impairment

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

management judgment is necessary to evaluate goodwill for impairment.

We estimate fair value using widely accepted valuation techniques

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

These valuation approaches

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

income tax rates, and other variables.

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

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

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

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

Additionally, under the market

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

We base our fair

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

Changes in these

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

test for our one reporting unit.

Note 5 – Goodwill and Intangible Assets

Prior year amounts have been restated to reflect

the correction of errors discussed in Note 1 – Basis of presentation.

Changes in the carrying amount of goodwill and indefinite-lived

intangible assets for the years ended December 31, 2021 and 2020 are as follows:

Schedule of goodwill and indefinite-lived intangible assets

Balance at December 31, 2020, before accumulated impairment loses (As Restated)

Accumulated impairment loses

Balance at December 31, 2020 (As Restated)

Acquisition (1)

Balance at December 31, 2021

Refer to Note 16 for additional information regarding acquisition-related adjustments to goodwill

The Company performed the annual impairment assessment

of goodwill for its single reporting unit as of December 31, 2021 and 2020, noting no impairment loss.

Considerable management judgment

is necessary to evaluate goodwill for impairment.

Lifeway estimates fair value using widely accepted valuation techniques including discounted

cash flows and market multiples analysis with respect to its single reporting unit.

These valuation approaches are dependent upon a number

of factors, including estimates of future growth rates, its cost of capital, capital expenditures, income tax rates, and other variables.

Assumptions used in the Company’s valuations were consistent with its internal projections and operating plans.

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

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

paid for its products or changes in the size of the market for its products.

Additionally, under the market approach analysis, the Company

used significant other observable inputs including various guideline company comparisons.

Lifeway bases its fair value estimates on assumptions

it believes to be reasonable, but which are unpredictable and inherently uncertain.

Changes in these estimates or assumptions could materially

affect the determination of fair value and the conclusions of the quantitative goodwill test for the Company’s one reporting unit.

Indefinite-lived Intangible Assets

The Company performed the annual impairment

assessment on the indefinite-lived intangible asset as of December 31, 2020 and 2019, resulting in no impairment losses.

The Company performed the annual impairment assessment

on the indefinite-lived intangible asset as of December 31, 2021 and 2020, resulting in no impairment losses.

During the fourth quarter of 2021, the Company

completed an assessment of the useful life of its indefinite-lived brand name intangible asset and determined it should adjust the estimated

useful life from indefinite to 15 years.

The change in accounting estimate will be effective January 1, 2022, at which time the Company

will begin amortizing the asset over 15 years.

The future amortization expense is included in the five-year intangible asset amortization

table in the finite-lived intangible asset section below.

Finite-lived Intangible Assets

Other intangible assets, net consisted

of the following:

The gross carrying amounts and accumulated amortization

of finite-lived intangible assets consisted of the following:

Schedule of finite-lived intangible assets

December 31, 2021

December 31, 2020

Customer lists and other customer related intangibles

Customer relationships

Accumulated amortization

Intangible assets, net

Note 6 –

Accrued Expenses

Accrued expenses consisted of the following:

Customer relationship

Total finite lived intangible assets

Estimated amortization expense on intangible assets

for the next five years is as follows:

Schedule of amortization expense on intangible assets

Note 6 – Accrued Expenses

Accrued expenses consist of:

Schedule of accrued expenses

Payroll and incentive compensation

2 unchanged sentences

Total accrued expenses

Note 7 –

Line of Credit

On May 7, 2018, Lifeway entered into an

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

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

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

Under the amendment, the Modified Revolving Credit

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

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

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.

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

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

Facility”

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

The Termination Date of the Revolving Loan was

extended to June 30, 2025, unless earlier terminated.

Except as described above, as amended,

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

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

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

The Modified Revolving Credit

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

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

Credit Facility may be accelerated.

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

documents are secured by substantially all of our assets.

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

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

We had $2,223 available for

future borrowings as of December 31, 2020.

As amended, all outstanding amounts under

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

plus 1.95%, payable monthly in arrears.

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

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

Lifeway’s interest rate on debt outstanding

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

We were in compliance with the fixed charge

Note 7 – Debt

Schedule of debt

Term loan due August 2026.

Interest (2.15% at December 31, 2021) payable monthly.

Unamortized deferred financing costs

Total note payable

Less current portion

Total long-term portion

The scheduled maturities of the term loan, excluding deferred financing

costs, at December 31, 2021 are as follows:

Schedule of maturities of long-term debt

Total term loan

Credit Agreement

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

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

The termination date of the Term Loan is August

18, 2026, unless earlier terminated.

As amended, all outstanding amounts under the

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 %.

There were no letters of

credit issued or outstanding as of December 31, 2021.

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 the Company’s assets.

Lifeway was in compliance with the fixed charge

coverage ratio and minimum working capital covenants at December 31, 2021.

Note 8 –

Lifeway has operating leases for two retail

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

payments to reimburse the landlord for operating expenses and taxes.

The Company terminated its office space leases in June 2020.

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

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

Some of our leases include options to extend the leases for

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

Revolving Credit Facility

As of December 31, 2021, the Company had $ 2,777

outstanding under the Revolving Credit Facility.

Lifeway had $ 2,223 available for future borrowings under the Revolving Credit Facility

as of December 31, 2021.

Lifeway’s interest rate on debt outstanding under the Revolving Credit Facility as of December 31, 2021

Deferred Financing Costs

As of December 31, 2021, net unamortized deferred

financing costs of $ 30 related to the term loan were included as a direct deduction from outstanding long-term debt.

Note 8 – Leases

Lifeway had operating leases for two retail stores

for its Lifeway Kefir Shop subsidiary which included fixed base rent payments as well as variable rent payments to reimburse the landlord

for operating expenses and taxes.

The Company terminated the operating leases during 2021.

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 one year to five years.

Some of its leases include options to extend the leases

for up to five years and have been included in its calculation of the right-of-use asset and lease liabilities.

Lifeway includes only

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

Variable lease payments are

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

There are no residual value guarantees.

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

under ASC 842.

We do not record leases with an initial

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.

no residual value guarantees.

Lifeway does not currently have leases which meet the finance lease classification as defined under ASC

The Company does not record leases with an initial

term of 12 months or less on the balance sheet.

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

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

respectively.

Lifeway treats contracts as a lease when

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

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

Right-of-use assets and lease liabilities

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

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

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

therefore, we use our

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

payments for those leases.

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

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

Lease expense for minimum lease payments is

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

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

Total lease expense was $ 304 and $ 440 (including short term leases) for the years ended December 31, 2021 and 2020, respectively.

Lifeway treats contracts as a lease when the contract

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

and obtain substantially all the economic benefits of the asset.

Right-of-use assets and lease liabilities are

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

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

many of its leases such as real estate leases, the Company is unable to determine an implicit rate;

therefore, it uses its incremental

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

Lifeway includes options to extend or terminate the lease in the measurement of the right-of-use asset and lease liability when

it is reasonably certain that it will exercise such options.

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

basis over the lease term.

Future maturities of lease liabilities were as follows:

Future maturities of lease liabilities

Operating Leases

1 unchanged sentence

Present value of lease liabilities

The weighted-average remaining lease term

for our operating leases was 2.0 years as of December 31, 2020.

The weighted average discount rate of our operating leases was

7.75% as of December 31, 2020.

Cash paid for amounts included in the measurement of lease liabilities was $384 for the year ended

The weighted-average remaining lease term for

its operating leases was 2.4 years as of December 31, 2021.

The weighted average discount rate of its operating leases was 12.60 % as of

December 31, 2021.

Note 9 –

Commitments and Contingencies

Lifeway is engaged in various legal actions,

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

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

We record accruals for outstanding legal

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

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

would make a loss contingency both probable and reasonably estimable.

If a loss contingency is not both probable and estimable,

we do not establish an accrued liability.

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

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

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

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

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

Lifeway’s contingencies are subject

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

(i) the procedural status

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

Cash paid for amounts included in the measurement of lease liabilities was $ 198 for the year ended December 31, 2021.

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 its business activities.

Lifeway records accruals for outstanding legal

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

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

make a loss contingency both probable and reasonably estimable.

If a loss contingency is not both probable and estimable, it does not

establish an accrued liability.

Currently, none of its accruals for outstanding legal matters are material individually or in the aggregate

to its 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 its business, financial condition, results of operations, or cash flows.

However, if the Company is

ultimately required to make payments in connection with an adverse outcome, it is possible that such contingency could have a material

adverse effect on the Company’s business, financial condition, results of operations or cash flows.

Lifeway’s contingencies are subject to substantial

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

(i) the procedural status of the case;

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

(iii) the outcome of preliminary motions;

the impact of discovery;

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

(vi) whether the proceedings

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

are complex or unclear;

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

and (viii) the status

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

Consequently, Lifeway cannot predict with any reasonable

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

Note 10 –

The provision (benefit) for income taxes

consists of the following:

(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 it

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

Note 10 – Income taxes

The provision for income taxes consists of the

Provision for income taxes

For the Years Ended December 31,

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Provision for income taxes

A reconciliation of the U.S.

federal statutory rate to the effective

tax rate used in the provision for income taxes is as follows:

The following is a reconciliation of income tax expense computed at

federal statutory tax rate to income tax expense reported in the consolidated statement of operations:

Reconciliation to effective rate for income taxes

Federal income tax at statutory rate

4 unchanged sentences

Change in tax rates

Change in tax estimate

Provision for income taxes

Prior year amounts have been restated to reflect

the correction of errors discussed in Note 1 – Basis of presentation.

The tax effects of temporary differences giving rise to deferred

income tax assets and liabilities are as follows:

income tax assets and liabilities were:

Schedule of deferred tax assets and liabilities

(As Restated)

Deferred tax liabilities attributable to:

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Net deferred tax liabilities

The following table details the Company's

tax attributes related to net operating losses for which it has recorded deferred tax assets.

The following table details the Company's tax

attributes related to net operating losses for which it has recorded deferred tax assets.

Schedule of tax attributes related to net operating losses

Tax Attributes

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State net operating losses

A reconciliation of the beginning and ending

amount of unrecognized tax benefits is as follows:

During the year, the Company recorded adjustments

to its unrecognized tax benefits.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Reconciliation of amount of unrecognized tax benefits

Balance at January 1

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Lifeway is subject to U.S.

federal income

tax as well as income tax in multiple state and city jurisdictions.

With limited exceptions, our calendar year 2017 and subsequent

federal income tax

as well as income tax in multiple state and city jurisdictions.

With limited exceptions, Lifeway’s calendar year 2018 and subsequent

federal and state tax years remain open by statute.

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

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

The annual effective tax rate would have decreased

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

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

effective tax rate was not significant as of December 31, 2021.

The annual effective tax rate would have decreased by 3.9% as of December

31, 2021 if the unrecognized tax benefits were recognized.

The amount of interest and penalties recognized

in the consolidated statements of operations was $ 0 and $( 16 ) during 2021 and 2020, respectively.

The amount of accrued interest

and penalties recognized in the consolidated balance sheets was $44 and $60 at December 31, 2020 and 2019, respectively.

Note 11 –

Stock-based and Other Compensation

The amount of accrued interest and penalties

recognized in the consolidated balance sheets was $ 0 and $ 44 at December 31, 2021 and 2020, respectively.

Note 11 – Stock-based and Other Compensation

In December 2015, Lifeway stockholders

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

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

performance units to qualifying employees.

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

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

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

been achieved.

approved the 2015 Omnibus Incentive Plan, which authorized the issuance of an aggregate of 3.5

million shares to satisfy awards of stock options, stock appreciation rights, unrestricted stock, restricted stock, restricted stock

units, performance shares and performance units to qualifying employees.

Under the Plan, the Board or its Audit and Corporate

Governance Committee approves stock awards to executive officers and certain senior executives, generally in the form of restricted

stock or performance shares.

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

corresponding performance goals have been achieved.

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

At December 31, 2020, 3.317 million

shares remain available under the Omnibus Incentive Plan.

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

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

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

December 31, 2021, 3.281

million shares remain available under the 2015 Omnibus Incentive Plan.

While the Company plans to continue to issue awards pursuant

to the Plan at least annually, it 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 year ended December 31, 2020:

The following table summarizes stock option activity

during the year ended December 31, 2021:

Schedule of stock option activity

exercise price

remaining contractual life

contractual life

intrinsic value

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Exercisable at December 31, 2021

As of December 31, 2019, all outstanding

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

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

For the year ended December 31,

2019, no tax-related benefits were recognized.

We measure the fair value of stock options

As of December 31, 2019, all outstanding options

were vested and there was no remaining unearned compensation expense.

Lifeway measures the fair value of stock options

using the Black-Scholes option pricing model.

The expected term of options granted was based on the weighted average time of vesting

and the end of the contractual term.

We utilized this simplified method as we did not have sufficient historical exercise data

to provide a reasonable basis upon which to estimate the expected term.

The expected term of options granted was based on the weighted average time of vesting and

the end of the contractual term.

The Company utilized this simplified method as it did not have sufficient historical exercise data to

provide a reasonable basis upon which to estimate the expected term.

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 year

ended December 31, 2020.

The grant date fair value of the awards is

equal to the Company’s closing stock price on the grant date.

The following table summarizes RSA activity during the year ended

December 31, 2021.

Schedule of RSA activity

Outstanding at December 31, 2020

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Weighted average grant date fair value per share outstanding

We expense RSA’s over the service period.

For the years

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

Lifeway expenses RSAs over the service period.

For the years ended December 31, 2021 and 2020 total stock-based compensation expense recognized in the consolidated statements of operations

was $ 264 and $ 83 , respectively.

For the years ended December 31, 2020 and 2019 tax-related benefits of $22 and $30, respectively,

were also recognized.

As of December 31, 2020, the total remaining unearned compensation related to non-vested RSA’s was

$134, which is expected to be amortized over the weighted-average remaining service period of 1.36 years.

For the years ended December 31, 2021 and 2020 tax-related benefits of $ 76 and $ 22 , respectively, were

also recognized.

As of December 31, 2021, the total remaining unearned compensation related to non-vested RSAs was $ 198 , which is expected

to be amortized over the weighted-average remaining service period of 1.25 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 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

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

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.

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

from the 2017 grant dates.

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

expense in the consolidated statements of operations, respectively.

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 years ended December 31, 2021 and 2020, $ 0 and $ 49 was expensed as stock-based compensation expense in the consolidated

statements of operations, respectively.

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

Under the 2019 Plan, collectively the participants

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

performance levels compared to the respective targets.

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

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

from the 2019 grant date.

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

compensation expense in the consolidated statements of operations, respectively.

can earn equity-based incentive compensation in amounts ranging from $ 0 to $ 1,776 depending on Lifeway’s performance levels compared

to the respective targets.

The equity-based incentive compensation is payable in restricted stock that vests 50% of unvested shares in

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

For the years

ended December 31, 2021 and 2020, $ 145 and $ 112 was expensed under the 2019 Plan as stock-based compensation expense in the consolidated

statements of operations, respectively.

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

2019 Retention Award

During 2019, we awarded a special retention

grant (the “2019 Retention Award”) of restricted stock to 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 years ended December 31, 2020 and 2019, $87 and $342 was expensed as stock-based compensation

expense in the consolidated statements of operations, respectively.

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

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

During 2019, Lifeway awarded a special retention

grant (the “2019 Retention Award”) of restricted stock to 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 years ended December 31, 2021 and 2020, $ 8 and $ 87 was expensed as stock-based compensation expense in

the consolidated statements of operations, respectively.

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

2020 CEO Incentive Award

During the fourth quarter 2020, we awarded

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

During the fourth quarter 2020, Lifeway awarded

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

performance levels compared to the respective targets.

The equity-based incentive compensation is payable in restricted stock

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

The issuance of vested equity awards

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

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

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

As of December 31, 2020, the total remaining

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

subject to vesting.

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

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

The issuance of vested equity awards is subject to approval

under the Stock Purchase Agreement dated October 1, 1999.

For the years ended December 31, 2021 and 2020, $ 342 and $ 50 was expensed as

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

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

was $ 359 , of which $ 229 will be recognized in 2022, $ 106 in 2023, and $ 24 in 2024, respectively, subject to vesting.

During Q2 2021, the

number of shares became fixed and determinable.

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

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 year ended December 31, 2021, $ 386 was expensed under the 2021 Plan as stock-based

compensation expense in the consolidated statements of operations, respectively.

As of December 31, 2021, the total remaining unearned

compensation was $ 683 , of which $ 474 will be recognized in 2022, $ 181 in 2023, and $ 28 in 2024, respectively, subject to vesting.

December 31, 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 December 31, 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

Lifeway has a defined contribution plan

which is available to substantially all full-time employees.

Under the terms of the plan we match employee contributions under

a prescribed formula.

For the years ended December 31, 2020 and 2019 total contribution expense recognized in the consolidated

statements of operations was $420 and $367, respectively.

Note 12 –

Segments, Products and Customers

Lifeway’s primary product is drinkable

kefir, a cultured dairy product.

Lifeway has a defined contribution plan which

is available to substantially all full-time employees.

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

For the years ended December 31, 2021 and 2020 total contribution expense recognized in the consolidated statements of operations

was $ 432 and $ 420 , respectively.

Note 12 – Segments, Products and Customers

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.

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.

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.

kefir with additional probiotic cultures).

Thanks to its 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.

Lifeway manufactures (directly or through co-packers)

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

The Company’s product categories are:

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

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

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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.

Lifeway has determined that it has one

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

reporting provided to the chief operating decision maker.

The chief operating decision maker, who is responsible for allocating

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

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

Substantially all of our consolidated revenues relate to

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

common network of distributors and retailers in the United States.

Net sales of products by category were

as follows for the years ended December 31:

Drinkable Yogurt, solid in a variety of sizes and flavors

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

Lifeway has determined that it has one reportable

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

provided to the chief operating decision maker.

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

the Company’s performance, has been identified collectively as the Chief Executive Officer and Chief Financial Officer.

Substantially

all of Lifeway’s consolidated revenues relate to the sale of cultured dairy products that it produces using the same processes and

materials and are sold to consumers through a common network of distributors and retailers in the United States.

Net sales of products by category were as follows

for the years ended December 31:

Schedule of sales of products by category

Drinkable Kefir other than ProBugs

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ProBugs Kefir

Frozen Kefir (a)

Drinkable Yogurt

Other dairy (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 21% and 22% of net sales for the years ended December 31, 2020 and 2019, respectively.

Two major customers accounted

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

Note 13 –

Share repurchase program

On September 24, 2015, Lifeway’s

Board of Directors authorized a stock repurchase program (the “2015 stock repurchase program”) under which we may,

from time to time, repurchase shares of our common stock for an aggregate purchase price not to exceed the lesser of $3,500 or

On November 1, 2017, the Board amended the 2015 stock repurchase program (the “2017 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.

Under the amended authorization, share repurchases may be executed through various means, including without

limitation in the open market or in privately negotiated transactions, in accordance with all applicable securities laws and regulations,

including without limitation Rule 10b-18 of the Securities Exchange Act of 1934, as amended.

The extent to which Lifeway repurchases

its shares and the timing of such repurchases will depend upon a variety of factors, including market conditions, regulatory requirements

and other corporate considerations.

The repurchase program does not obligate us to purchase any shares, and the program may be

terminated, suspended, increased, or decreased by our Board in its discretion at any time.

Pursuant to the share repurchase program,

during the year ended December 31, 2020, the Company repurchased 179 shares at a cost of $405 or approximately $2.27 per share.

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

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

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

Note 14 –

Related party transactions

Lifeway obtains consulting services from

the Chairperson of its board of directors.

Fees earned are included in general and administrative expenses in the accompanying

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

On December 28, 2020, Lifeway entered into

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

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

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

For the services, the

Company will pay an annual service fee of $500.

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

based on the achievement of specified performance criteria.

The Chairpersons annual service fee and target bonus amounts are subject

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

prior written notice

to the Chairperson.

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

Significant Customers – Sales

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

Two major customers accounted for approximately

23 % and 21 % of net sales for the years ended December 31, 2021 and 2020, respectively.

Two major customers accounted for 32 % and 22 % of

accounts receivable as of December 31, 2021 and 2020, respectively.

Note 13 – Share repurchase program

On September 24, 2015, Lifeway’s Board of

Directors authorized a stock repurchase program (the “2015 stock repurchase program”) under which the Company may, from time

to time, repurchase shares of its common stock for an aggregate purchase price not to exceed the lesser of $ 3,500 or 250 shares.

1, 2017, the Board amended the 2015 stock repurchase program (the “2017 amendment”), by adding to (exclusive of the shares

previously authorized under the 2015 stock repurchase program) the authorization the lesser of $ 5,185 or 625 shares.

Under the amended

authorization, share repurchases may be executed through various means, including without limitation in the open market or in privately

negotiated transactions, in accordance with all applicable securities laws and regulations, including without limitation Rule 10b-18 of

the Securities Exchange Act of 1934, as amended.

The extent to which Lifeway repurchases its shares and the timing of such repurchases

will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations.

The repurchase

program does not obligate us to purchase any shares, and the program may be terminated, suspended, increased, or decreased by the Company’s

Board in its discretion at any time.

Pursuant to the share repurchase program, during

the year ended December 31, 2020, the Company repurchased 179 shares at a cost of $ 405 or approximately $ 2.27 per share.

the Company reached the amended threshold of 625 shares and therefore no shares of common stock remain available to be purchased under

the 2017 Repurchase Plan Amendment as of December 31, 2020.

On June 24, 2021, the Lifeway’s Board authorized

a plan to repurchase up to 250 shares of Common Stock in the open market within 24 months at no more than $10 per share (the “2021

Repurchase Plan”).

The Company repurchased all 250 shares of common stock at a cost of $ 1,583 during the three-month period ended

September 30, 2021.

Lifeway intends to hold repurchased shares in treasury for general corporate purposes, including issuances under its

2015 Omnibus Incentive Plan.

Treasury shares are accounted for using the cost method.

Note 14 – 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.

Under the terms and conditions of the Agreement, the Chairperson will continue

to provide consulting services with respect to, among other things, the Company’s business strategy, international expansion and

product management and expansion.

For the services, the Company will pay an annual service fee of $ 500 .

The Chairperson will also be eligible

for an annual performance fee target of $ 500 based on the achievement of specified performance criteria.

The Chairpersons annual service

fee and target bonus amounts are subject to periodic change by the Compensation Committee of the Company’s Board of Directors on

30 days’ prior written notice to the Chairperson.

The Agreement shall continue until either party provides at least a 10-day written

notice of termination.

Service fees earned by the Chairperson are included

in general and administrative expenses in the accompanying consolidated statements of operations and were $ 500 and $ 1,000 during the years

ended December 31, 2021, and 2020, respectively.

Lifeway is also a party to a royalty agreement

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

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

Royalties earned are included in selling expenses in the accompanying consolidated

statements of operations and were $600 and $588 during the years ended December 31, 2020 and 2019, respectively.

Note 15 –

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

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

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

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

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

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

may occur, if at all.

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

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

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

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

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

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

and consumer demand for our products.

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

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

its spread and mitigate public health effects.

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

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

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

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

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

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

shopping habits.

We cannot predict the duration or scope of the disruption.

with the Chairperson of its Board of Directors under which it pays the Chairperson a royalty based on the sale of certain Lifeway products,

not to exceed $ 50 in any fiscal month.

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

statements of operations and were $ 600 during the years ended December 31, 2021 and 2020, respectively.

Note 15 – COVID-19

The ultimate impact that the COVID-19

pandemic or any future pandemic or disease outbreak will have on Lifeway’s business and its consolidated results of operations is

To date, the Company has seen increased

customer and consumer demand for its products.

Lifeway has not experienced significant supply chain disruptions or labor supply shortages

and it has continued to be able to satisfy customer and consumer demand for its products.

However, COVID-19 pandemic, or any future pandemic,

may limit the availability of, or increase the cost of, employees, ingredients, packaging and other inputs necessary to produce Lifeway’s

products, and its operations may be negatively impacted.

In 2021, the Company’s costs increased primarily due to inflationary price

increases of milk, other ingredients, packaging materials, and freight.

However, because of market conditions or for competitive reasons,

the Company’s pricing actions may sometimes lag input cost changes, or it may not be able to pass along the full effect of increases

in raw materials and other input costs as it incurs them.

In 2022, social distancing, shelter-in-place

and work-from-home mandates and recommendations have begun to be ease.

The increased customer demand the Company has realized over the

past two years as consumers increased their at-home consumption and e-commerce purchasing during the COVID-19 pandemic may change or decrease

due to the decrease in social distancing and stay-at-home and work-from-home mandates and recommendations.

Lifeway is unable to predict

the nature and timing of when such change may occur, if at all.

The ultimate impact of the COVID-19

pandemic on the Company’s business will depend on many factors, including, among others, whether additional waves of COVID-19 or

different variants of COVID-19 will affect the United States and other markets and the duration of any social distancing and stay home

and work from home mandates or recommendations that may occur as a result of such COVID-19 wave or variant;

the Company’s ability

and the ability of its suppliers to continue to maintain production despite unprecedented demand in the food industry, supply chain disruptions,

tight labor markets and increased raw material and packaging costs;

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.

The Company cannot predict the duration

or scope of the disruption or the impact of any recovery from the impacts of COVID-19.

Therefore, the financial impact cannot be reasonably

estimated at this time.

Note 16 – Business Acquisition

On August 18, 2021, the Company completed the

acquisition of certain assets of Glen Oaks 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 Glen Oaks Farms initiates Lifeway’s expansion outside of

kefir and into drinkable yogurt.

The current distribution of Glen Oaks 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

presence with the Fresh Made 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 Glen Oaks

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

The acquisition was

accounted for under the acquisition method of accounting and the results of operations were included in the Company’s 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 $ 2,223 and income before income taxes of approximately $ 384 from the date of acquisition through December 31, 2021.

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 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 from category expansion opportunities to better serve

its regional and national customers.

The goodwill resulting from the acquisition is tax deductible.

Note 17 – Restatement of Previously Issued

Unaudited Consolidated Financial Statements

As described in Note 1 – Basis of presentation,

in lieu of filing quarterly reports on Form 10-Q for 2021, quarterly financial data for 2021 and 2020 (as restated) is included in this

Annual Report on Form 10-K in the tables that follow.

For a description of the referenced adjustments, please refer to Note 1.

Schedule Of Condensed Balance Sheet

March 31, 2020

As Previously Reported

Restatement Adjustment

Current assets

Cash and cash equivalents

Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $ 1,467 at March 31, 2020

Inventories, net

Prepaid expenses and other current assets

Refundable income taxes

Total current assets

Property, plant and equipment, net

Operating lease right-of use asset

Intangible assets

Goodwill and indefinite-lived intangibles

Other intangible assets, net

Total intangible assets

Current liabilities

Accounts payable

Accrued expenses

Accrued income taxes

Total current liabilities

Line of credit

Operating lease liabilities

Deferred income taxes, net

Other long-term liabilities

Total liabilities

Commitments and contingencies

Stockholders’ equity

Preferred stock, no par value;

2,500 shares authorized;

Common stock, no par value;

40,000 shares authorized;

17,274 shares issued;

15,558 shares outstanding

Paid-in capital

Treasury stock, at cost

Retained earnings

Total stockholders’ equity

Total liabilities and stockholders’ equity

June 30, 2020

As Previously Reported

Restatement Adjustment

Current assets

Cash and cash equivalents

Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $ 1,300 at June 30, 2020

Inventories, net

Prepaid expenses and other current assets

Refundable income taxes

Total current assets

Property, plant and equipment, net

Operating lease right-of use asset

Intangible assets

Goodwill and indefinite-lived intangibles

Other intangible assets, net

Total intangible assets

Current liabilities

Accounts payable

Accrued expenses

Line of credit- current

Accrued income taxes

Total current liabilities

Operating lease liabilities

Deferred income taxes, net

Other long-term liabilities

Total liabilities

Commitments and contingencies

Stockholders’ equity

Preferred stock, no par value;

2,500 shares authorized;

Common stock, no par value;

40,000 shares authorized;

17,274 shares issued;

15,592 shares outstanding

Paid-in capital

Treasury stock, at cost

Retained earnings

Total stockholders’ equity

Total liabilities and stockholders’ equity

September 30, 2020

As Previously Reported

Restatement Adjustment

Current assets

Cash and cash equivalents

Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $ 1,410 at September 30, 2020

Inventories, net

Prepaid expenses and other current assets

Refundable income taxes

Total current assets

Property, plant and equipment, net

Operating lease right-of use asset

Intangible assets

Goodwill and indefinite-lived intangibles

Other intangible assets, net

Total intangible assets

Current liabilities

Accounts payable

Accrued expenses

Accrued income taxes

Total current liabilities

Line of credit

Operating lease liabilities

Deferred income taxes, net

Other long-term liabilities

Total liabilities

Commitments and contingencies

Stockholders’ equity

Preferred stock, no par value;

2,500 shares authorized;

Common stock, no par value;

40,000 shares authorized;

17,274 shares issued;

15,605 shares outstanding

Paid-in capital

Treasury stock, at cost

Retained earnings

Total stockholders’ equity

Total liabilities and stockholders’ equity

March 31, 2021

As Previously Reported

Restatement Adjustment

Current assets

Cash and cash equivalents

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

Inventories, net

Prepaid expenses and other current assets

Refundable income taxes

Total current assets

Property, plant and equipment, net

Operating lease right-of use asset

Intangible assets

Goodwill and indefinite-lived intangibles

Other intangible assets, net

Total intangible assets

Current liabilities

Accounts payable

Accrued expenses

Accrued income taxes

Total current liabilities

Line of credit

Operating lease liabilities

Deferred income taxes, net

Other long-term liabilities

Total liabilities

Commitments and contingencies

Stockholders’ equity

Preferred stock, no par value;

2,500 shares authorized;

Common stock, no par value;

40,000 shares authorized;

17,274 shares issued;

15,604 shares outstanding

Paid-in capital

Treasury stock, at cost

Retained earnings

Total stockholders’ equity

Total liabilities and stockholders’ equity

June 30, 2021

As Previously Reported

Restatement Adjustment

Current assets

Cash and cash equivalents

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

Inventories, net

Prepaid expenses and other current assets

Refundable income taxes

Total current assets

Property, plant and equipment, net

Operating lease right-of use asset

Intangible assets

Goodwill and indefinite-lived intangibles

Other intangible assets, net

Total intangible assets

Current liabilities

Accounts payable

Accrued expenses

Accrued income taxes

Total current liabilities

Line of credit

Operating lease liabilities

Deferred income taxes, net

Other long-term liabilities

Total liabilities

Commitments and contingencies

Stockholders’ equity

Preferred stock, no par value;

2,500 shares authorized;

Common stock, no par value;

40,000 shares authorized;

17,274 shares issued;

15,650 shares outstanding

Paid-in capital

Treasury stock, at cost

Retained earnings

Total stockholders’ equity

Total liabilities and stockholders’ equity

September 30, 2021

As Previously Reported

Restatement Adjustment

Current assets

Cash and cash equivalents

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

Inventories, net

Prepaid expenses and other current assets

Refundable income taxes

Total current assets

Property, plant and equipment, net

Operating lease right-of use asset

Intangible assets

Goodwill and indefinite-lived intangibles

Other intangible assets, net

Total intangible assets

Current liabilities

Current maturities of notes payable

Accounts payable

Accrued expenses

Accrued income taxes

Total current liabilities

Line of credit

Notes Payable

Operating lease liabilities

Deferred income taxes, net

Other long-term liabilities

Total liabilities

Commitments and contingencies

Stockholders’ equity

Preferred stock, no par value;

2,500 shares authorized;

Common stock, no par value;

40,000 shares authorized;

17,274 shares issued;

15,435 shares outstanding

Paid-in capital

Treasury stock, at cost

Retained earnings

Total stockholders’ equity

Total liabilities and stockholders’ equity

Note 18 – Subsequent Events

On of January 4, 2022, the Company notified Ludmila

Smolyansky, consultant to the Company and Chairperson of the Company’s Board of Directors, that it was terminating the Amended and

Restated Consulting Agreement, dated as of December 28, 2020, effective as of January 17, 2022.

See Note 14 for details on the consulting

Smolyansky continues as Chairperson of the Board of Directors.

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

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data