Lifeway Foods, Inc. 10-K

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Accounting Firm (PCAOB ID 199 ) F-1 Consolidated Balance Sheets as of December 31, 2021 and 2020 F-2 Consolidated Statements of Operations for the Years Ended December 31, 2021 and 2020 (as restated) F-3 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2021 and 2020 (as restated) F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020 (as restated) F-5 Notes to Consolidated Financial Statements (as restated) F-6 27 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Lifeway Foods, Inc. and Subsidiaries: Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Lifeway Foods, Inc. 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") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the 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. 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. 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 and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ Mayer Hoffman McCann P.C. We have served as the Company's auditor since 2015 Chicago, Illinois July 21, 2022 F- 1 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2021 and 2020 (In thousands) December 31, 2021 2020 (As Restated) Current assets Cash and cash equivalents $ 9,233 $ 7,926 Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $ 1,170 and $ 1,350 at December 31, 2021 and 2020, respectively 9,930 8,002 Inventories, net 8,285 6,930 Prepaid expenses and other current assets 1,254 1,163 Refundable income taxes 344 31 Total current assets 29,046 24,052 Property, plant and equipment, net 20,130 21,048 Operating lease right-of use asset 216 345 Intangible assets Goodwill and indefinite-lived intangibles 15,404 14,004 Other intangible assets, net 4,278 – Total intangible assets 19,682 14,004 Other Assets 1,800 1,800 Total assets $ 70,874 $ 61,249 Current liabilities Current portion of note payable $ 1,000 $ – Accounts payable 6,614 5,592 Accrued expenses 3,724 2,196 Accrued income taxes 725 653 Total current liabilities 12,063 8,441 Line of credit 2,777 2,768 Note Payable 3,470 – Operating lease liabilities 85 165 Deferred income taxes, net 3,201 2,944 Other long-term liabilities 147 77 Total liabilities 21,743 14,395 Commitments and contingencies – – Stockholders’ equity Preferred stock, no par value; 2,500 shares authorized; none issued – – Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,435 and 15,604 shares outstanding at 2021 and 2020 6,509 6,509 Paid-in capital 2,552 2,600 Treasury stock, at cost ( 13,436 ) ( 12,450 ) Retained earnings 53,506 50,195 Total stockholders’ equity 49,131 46,854 Total liabilities and stockholders’ equity $ 70,874 $ 61,249 See accompanying notes to consolidated financial statements F- 2 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the Years Ended December 31, 2021 and 2020 (In thousands, except per share data) 2021 2020 (As Restated) Net sales $ 119,065 $ 102,026 Cost of goods sold 87,604 72,006 Depreciation expense 2,751 3,087 Total cost of goods sold 90,355 75,093 Gross profit 28,710 26,933 Selling expenses 11,097 10,197 General and administrative 11,611 11,661 Amortization expense 122 152 Total operating expenses 22,830 22,010 Income from operations 5,880 4,923 Other income (expense): Interest expense ( 116 ) ( 118 ) Realized gain on investments, net 2 4 Loss on sale of property and equipment ( 88 ) ( 28 ) Other (expense) income ( 62 ) 47 Total other income (expense) ( 264 ) ( 95 ) Income before provision for income taxes 5,616 4,828 Provision for income taxes 2,305 1,596 Net income $ 3,311 $ 3,232 Basic earnings per common share $ 0.21 $ 0.21 Diluted earnings per common share $ 0.21 $ 0.21 Weighted average number of shares outstanding - Basic 15,537 15,597 Weighted average number of shares outstanding - Diluted 15,773 15,766 See accompanying notes to consolidated financial statements F- 3 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity For the Years Ended December 31, 2021 and 2020 (In thousands) Common Stock Issued In treasury Paid-In Retained Total Shares $ Shares $ Capital Earnings Equity Balance, January 1, 2020 (As Restated) 17,274 $ 6,509 ( 1,564 ) $ ( 12,601 ) $ 2,380 $ 46,963 $ 43,251 Cumulative impact of change in accounting principles, net of tax – – – – – – – Treasury stock purchased – – ( 179 ) ( 405 ) – – ( 405 ) Issuance of common stock in connection with stock-based compensation – – 74 556 ( 62 ) – 494 Stock-based compensation – – – – 282 – 282 Net income – – – – – 3,232 3,232 Balance, December 31, 2020 17,274 $ 6,509 ( 1,669 ) $ ( 12,450 ) $ 2,600 $ 50,195 $ 46,854 Treasury stock purchased – – ( 250 ) ( 1,583 ) – – ( 1,583 ) Issuance of common stock in connection with stock-based compensation – – 80 597 ( 721 ) – ( 124 ) Stock-based compensation – – – – 673 – 673 Net Income – – – – – 3,311 3,311 Balance, December 31, 2021 17,274 $ 6,509 ( 1,839 ) $ ( 13,436 ) $ 2,552 $ 53,506 $ 49,131 See accompanying notes to consolidated financial statements F- 4 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended December 31, 2021 and 2020 (In thousands) 2021 2020 (As Restated) Cash flows from operating activities: Net income $ 3,311 $ 3,232 Adjustments to reconcile net income to operating cash flow: Depreciation and amortization 2,873 3,239 Non-cash interest expense 11 23 Non-cash rent expense 1 ( 37 ) Bad debt expense 2 ( 6 ) Deferred Revenue ( 30 ) ( 91 ) Stock-based compensation 1,144 393 Deferred income taxes 257 841 Loss on sale of property and equipment 88 28 (Increase) decrease in operating assets: Accounts receivable ( 1,931 ) ( 1,304 ) Inventories ( 1,356 ) ( 538 ) Refundable income taxes ( 313 ) 649 Prepaid expenses and other current assets ( 91 ) 423 Increase (decrease) in operating liabilities: Accounts payable 1,022 311 Accrued expenses 504 ( 1,278 ) Operating lease asset amortization/liability – – Accrued income taxes 72 500 Net cash provided by operating activities 5,564 6,385 Cash flows from investing activities: Purchases of property and equipment ( 1,922 ) ( 1,895 ) Proceeds from sale of property and equipment – 5 Acquisition, net of cash acquired ( 5,220 ) – Net cash used in investing activities ( 7,142 ) ( 1,890 ) Cash flows from financing activities: Purchase of treasury stock ( 1,583 ) ( 405 ) Payment of deferred financing cost ( 32 ) – Proceeds from note payable 5,000 – Repayment of note payable ( 500 ) – Net cash provided by (used in) financing activities 2,885 ( 405 ) Net increase in cash and cash equivalents 1,307 4,090 Cash and cash equivalents at the beginning of the period 7,926 3,836 Cash and cash equivalents at the end of the period $ 9,233 $ 7,926 Supplemental cash flow information: Cash paid for income taxes, net of (refunds) $ 2,288 $ ( 426 ) Cash paid for interest $ 102 $ 99 Non-cash investing activities Increase (decrease) in right-of-use assets and operating lease obligations $ 45 $ ( 44 ) Business acquisition escrow payable $ 580 $ – Non-cash financing activities Issuance of common stock under equity incentive plans $ – $ 522 See accompanying notes to consolidated financial statements F- 5 LIFEWAY FOODS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2021 and 2020 (In thousands) 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. GAAP”). 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. F- 6 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 As Restated Current assets Cash and cash equivalents $ 7,926 $ – $ 7,926 Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $ 1,350 at December 31, 2020 8,002 – 8,002 Inventories, net 6,930 – 6,930 Prepaid expenses and other current assets 1,163 – 1,163 Refundable income taxes 31 – 31 Total current assets 24,052 – 24,052 Property, plant and equipment, net 21,048 – 21,048 Operating lease right-of use asset 345 – 345 Intangible assets Goodwill and indefinite-lived intangibles 12,824 1,180 14,004 Other intangible assets, net – – – Total intangible assets 12,824 1,180 14,004 Other Assets 1,800 – 1,800 Total assets $ 60,069 $ 1,180 $ 61,249 Current liabilities Accounts payable $ 5,592 – $ 5,592 Accrued expenses 2,196 – 2,196 Accrued income taxes 653 – 653 Total current liabilities 8,441 – 8,441 Line of credit 2,768 – 2,768 Operating lease liabilities 165 – 165 Deferred income taxes, net 1,764 1,180 2,944 Other long-term liabilities 77 – 77 Total liabilities 13,215 1,180 14,395 Commitments and contingencies – – – Stockholders’ equity Preferred stock, no par value; 2,500 shares authorized; none issued – – – Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,604 shares outstanding at 2020 6,509 – 6,509 Paid-in capital 2,600 – 2,600 Treasury stock, at cost ( 12,450 ) – ( 12,450 ) Retained earnings 50,195 – 50,195 Total stockholders’ equity 46,854 – 46,854 Total liabilities and stockholders’ equity $ 60,069 $ 1,180 $ 61,249 F- 7 Note 2 – Summary of significant accounting policies Use of estimates 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. Significant estimates made in preparing the consolidated financial statements include the reserve for promotional allowances, the valuation of goodwill and intangible assets, stock-based and incentive compensation, and deferred income taxes. 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. 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 Lifeway sells food and beverage products across select product categories to customers predominantly within the United States (see Note 12 - Segments, Products and Customers). The Company 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. The 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. F- 8 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. 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. 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 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 year. Accounts Receivable 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. The Company does not charge interest on past due accounts receivable. Inventories 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 at cost. 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 Asset Useful Life Buildings and improvements 10 – 39 years Machinery and equipment 5 – 12 years Office equipment 3 – 7 years Vehicles 5 years Leasehold improvements Shorter of expected useful life or lease term 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. F- 9 Intangible Assets 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: Schedule Of Intangible Assets Useful Lives Asset Useful Life Recipes 4 years Brand names 8 - 15 years Formula 10 years Customer lists 5 - 10 years Customer relationships 15 years 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. F- 10 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 – 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. Level 3. 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. Income taxes 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 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. The Company 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. F- 11 Share-based compensation Share-based compensation expense is recognized 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 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 method. Advertising costs 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 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 October 2021, the FASB issued ASU No. 2021-08, 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. 2020-04, 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 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. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, in November 2018 issued an amendment, ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, and in November 2019 issued two amendments, ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The series of new guidance amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. The guidance should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. The guidance 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. F- 12 Note 3 – Inventories, net Schedule of inventories December 31, 2021 2020 Ingredients $ 2,279 $ 1,725 Packaging 2,723 2,234 Finished goods 3,283 2,971 Total inventories, net $ 8,285 $ 6,930 Note 4 – Property, Plant and Equipment, net Schedule of property, plant and equipment December 31, 2021 2020 Land $ 1,565 $ 1,565 Buildings and improvements 17,920 17,834 Machinery and equipment 32,073 31,707 Vehicles 640 778 Office equipment 900 857 Construction in process 417 228 53,515 52,969 Less accumulated depreciation ( 33,385 ) ( 31,921 ) Total property, plant and equipment, net $ 20,130 $ 21,048 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 Goodwill Brand Names Total Balance at December 31, 2020, before accumulated impairment loses (As Restated) $ 11,548 $ 3,700 $ 15,248 Accumulated impairment loses ( 1,244 ) – ( 1,244 ) Balance at December 31, 2020 (As Restated) 10,304 3,700 14,004 Acquisition (1) 1,400 – 1,400 Balance at December 31, 2021 $ 11,704 $ 3,700 $ 15,404 ____________ (1) Refer to Note 16 for additional information regarding acquisition-related adjustments to goodwill 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. Lifeway’s 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. F- 13 Indefinite-lived Intangible Assets 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 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 Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount Recipes $ 44 $ ( 44 ) $ – $ 44 $ ( 44 ) $ – Customer lists and other customer related intangibles 4,529 ( 4,529 ) – 4,529 ( 4,529 ) – Customer relationship 3,385 ( 1,052 ) 2,333 985 ( 985 ) – Brand names 4,248 ( 2,303 ) 1,945 2,248 ( 2,248 ) – Formula 438 ( 438 ) – 438 ( 438 ) – Total finite lived intangible assets $ 12,644 $ ( 8,366 ) $ 4,278 $ 8,244 $ ( 8,244 ) $ – Estimated amortization expense on intangible assets for the next five years is as follows: Schedule of amortization expense on intangible assets Year Amortization 2022 $ 540 2023 $ 540 2024 $ 540 2025 $ 540 2026 $ 540 Note 6 – Accrued Expenses Accrued expenses consist of: Schedule of accrued expenses December 31, 2021 2020 Payroll and incentive compensation $ 2,951 $ 1,366 Real estate taxes 359 341 Current portion of operating lease liabilities 131 179 Other 283 310 Total accrued expenses $ 3,724 $ 2,196 F- 14 Note 7 – Debt Schedule of debt December 31, 2021 2020 Term loan due August 2026. Interest (2.15% at December 31, 2021) payable monthly. $ 4,500 $ – Unamortized deferred financing costs ( 30 ) – Total note payable 4,470 – Less current portion ( 1,000 ) – Total long-term portion $ 3,470 $ – 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 2022 $ 1,000 2023 1,000 2024 1,000 2025 1,000 2026 500 Total term loan $ 4,500 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 terminated. 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. F- 15 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 was 2.15 %. 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. Lifeway does not currently have leases which meet the finance lease classification as defined under ASC 842. 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 lease term. 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. For 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 leases. 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 Year Operating Leases 2022 $ 149 2023 47 2024 30 2025 18 Thereafter 6 Total lease payments 250 Less: Interest ( 34 ) Present value of lease liabilities $ 216 F- 16 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. 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 Litigation 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. The Company 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; (ii) whether the case has or may be certified as a class action suit; (iii) the outcome of preliminary motions; (iv) the impact of discovery; (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 it is unable to estimate a possible loss or range of loss. Note 10 – Income taxes The provision for income taxes consists of the following: Provision for income taxes For the Years Ended December 31, 2021 2020 Current: Federal $ 1,097 $ 398 State and local 951 357 Total current 2,048 755 Deferred 257 841 Provision for income taxes $ 2,305 $ 1,596 F- 17 The following is a reconciliation of income tax expense computed at the U.S. federal statutory tax rate to income tax expense reported in the consolidated statement of operations: Reconciliation to effective rate for income taxes 2021 2020 Amount Percentage Amount Percentage Federal income tax at statutory rate $ 1,179 21.0 % $ 1,015 21.0 % State and local tax, net 440 7.8 % 428 8.9 % Other permanent differences 6 0.1 % 12 0.3 % Section 162m 206 3.7 % 296 6.1 % Stock based compensation 100 1.8 % 157 3.2 % Uncertain tax positions 218 3.9 % ( 43 ) ( 0.9 %) Change in tax rates 198 3.4 % ( 245 ) ( 5.0 %) Other ( 42 ) ( 0.7 %) ( 24 ) ( 0.5 %) Provision for income taxes $ 2,305 41.0 % $ 1,596 33.1 % 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 were: Schedule of deferred tax assets and liabilities December 31, 2021 2020 (As Restated) Deferred tax liabilities attributable to: Accumulated depreciation and amortization $ ( 3,401 ) $ ( 3,281 ) Unrealized gains ( 473 ) ( 467 ) Total deferred tax liabilities ( 3,874 ) ( 3,748 ) Deferred tax assets attributable to: Net operating losses 6 6 Accrued compensation 170 149 Incentive compensation 164 168 Inventory 324 323 Allowances for doubtful accounts and discounts 5 109 Deferred revenue 10 15 Other ( 6 ) 34 Total net deferred tax assets 673 804 Net deferred tax liabilities $ ( 3,201 ) $ ( 2,944 ) 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 Gross Amount Net Amount Expiration Years State net operating losses $ 116 $ 6 2035 $ 6 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 2021 2020 Balance at January 1 $ 95 $ 142 Additions based on tax positions of prior years 301 – Reduction for tax positions of prior years – ( 47 ) Balance at December 31 $ 396 $ 95 F- 18 Lifeway is subject to U.S. 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, 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 $ 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. 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. On 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, 2021: Schedule of stock option activity Options Weighted average exercise price Weighted average remaining contractual life Aggregate intrinsic value Outstanding at December 31, 2020 41 $ 10.42 5.22 $ – Granted – – – Exercised – – – – Forfeited – – – – Outstanding at December 31, 2021 41 $ 10.42 4.22 $ – Exercisable at December 31, 2021 41 $ 10.42 4.22 $ – 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. 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. F- 19 Restricted Stock Awards 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 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 RSA’s Outstanding at December 31, 2020 78 Granted 60 Shares issued upon vesting ( 44 ) Forfeited – Outstanding at December 31, 2021 94 Weighted average grant date fair value per share outstanding $ 4.50 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, 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”), 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. Under 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. 2017 Plan Under the 2017 Plan, collectively the participants had the opportunity to earn cash and equity-based incentive compensation in amounts ranging from $ 0 to $ 11,025 depending on Lifeway’s performance levels compared to the respective targets and the participants performance compared to their individual objectives. 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, 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. 2019 Plan Under the 2019 Plan, collectively the participants can earn equity-based incentive compensation in amounts ranging from $ 0 to $ 1,776 depending on Lifeway’s performance levels compared to the respective targets. The equity-based incentive compensation is payable in restricted stock that vests 50% of unvested shares in year one, 50% of unvested shares in year two, and 100% of remaining unvested shares in year three from the 2019 grant 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, 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. F- 20 2020 CEO Incentive Award 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 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 capital. 2021 Equity Award Under the 2021 Plan, collectively the participants can earn equity-based incentive compensation in amounts ranging from $ 0 to $ 1,069 depending on Lifeway’s achievement of the respective financial target. The equity-based incentive compensation is payable in restricted stock that is expected to vest one-third in March 2022, one-third in March 2023, and one-third in March 2024. For the 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. As of 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, 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 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 customers. 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. · Cream and other, which consists primarily of cream, a byproduct of making our kefir. · ProBugs, a line of kefir products designed for children. · Drinkable Yogurt, 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. F- 21 Net sales of products by category were as follows for the years ended December 31: Schedule of sales of products by category 2021 2020 In thousands $ % $ % Drinkable Kefir other than ProBugs $ 95,850 80 % $ 81,437 80 % Cheese 12,612 11 % 12,905 13 % Cream and other 3,582 3 % 2,872 3 % ProBugs Kefir 3,178 3 % 2,733 2 % Drinkable Yogurt 2,223 2 % – 0 % Other dairy (a) 1,620 1 % 2,079 2 % Net Sales $ 119,065 100 % $ 102,026 100 % __________________ (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 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. On November 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. During 2020, 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. F- 22 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 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 uncertain. 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 eastern U.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 Farms Inc. 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. The Company incurred approximately $ 83 in acquisition-related costs which are expensed as incurred and included in general and administrative expense on the consolidated statement of operations. Pro-forma results of operation have not been presented as the effect would not be material to the Company’s results of operations for any periods presented. F- 23 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 2,400 Brand name 2,000 Goodwill 1,400 Assets acquired 5,800 Liabilities assumed – Total purchase price 5,800 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. F- 24 Schedule Of Condensed Balance Sheet March 31, 2020 As Previously Reported Restatement Adjustment As Restated Current assets Cash and cash equivalents $ 1,978 $ – $ 1,978 Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $ 1,467 at March 31, 2020 8,430 – 8,430 Inventories, net 6,883 – 6,883 Prepaid expenses and other current assets 1,279 – 1,279 Refundable income taxes 1,027 – 1,027 Total current assets 19,597 – 19,597 Property, plant and equipment, net 21,910 – 21,910 Operating lease right-of use asset 707 – 707 Intangible assets Goodwill and indefinite-lived intangibles 12,824 1,180 14,004 Other intangible assets, net 113 – 113 Total intangible assets 12,937 1,180 14,117 Other Assets 1,800 – 1,800 Total assets $ 56,951 $ 1,180 $ 58,131 Current liabilities Accounts payable $ 6,113 – $ 6,113 Accrued expenses 2,632 – 2,632 Accrued income taxes 116 – 116 Total current liabilities 8,861 – 8,861 Line of credit 2,751 – 2,751 Operating lease liabilities 427 – 427 Deferred income taxes, net 1,292 1,180 2,472 Other long-term liabilities 50 – 50 Total liabilities 13,381 1,180 14,561 Commitments and contingencies Stockholders’ equity Preferred stock, no par value; 2,500 shares authorized; none issued – – – Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,558 shares outstanding 6,509 – 6,509 Paid-in capital 2,748 – 2,748 Treasury stock, at cost ( 12,796 ) – ( 12,796 ) Retained earnings 47,109 – 47,109 Total stockholders’ equity 43,570 – 43,570 Total liabilities and stockholders’ equity $ 56,951 $ 1,180 $ 58,131 F- 25 June 30, 2020 As Previously Reported Restatement Adjustment As Restated Current assets Cash and cash equivalents $ 4,619 $ – $ 4,619 Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $ 1,300 at June 30, 2020 7,737 – 7,737 Inventories, net 6,653 – 6,653 Prepaid expenses and other current assets 1,086 – 1,086 Refundable income taxes 615 – 615 Total current assets 20,710 – 20,710 Property, plant and equipment, net 21,394 – 21,394 Operating lease right-of use asset 431 – 431 Intangible assets Goodwill and indefinite-lived intangibles 12,824 1,180 14,004 Other intangible assets, net 74 – 74 Total intangible assets 12,898 1,180 14,078 Other Assets 1,800 – 1,800 Total assets $ 57,233 $ 1,180 $ 58,413 Current liabilities Accounts payable $ 5,108 – $ 5,108 Accrued expenses 3,066 – 3,066 Line of credit- current 2,757 – 2,757 Accrued income taxes 92 – 92 Total current liabilities 11,023 – 11,023 Operating lease liabilities 239 – 239 Deferred income taxes, net 1,292 1,180 2,472 Other long-term liabilities 42 – 42 Total liabilities 12,596 1,180 13,776 Commitments and contingencies Stockholders’ equity Preferred stock, no par value; 2,500 shares authorized; none issued – – – Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,592 shares outstanding 6,509 – 6,509 Paid-in capital 2,587 – 2,587 Treasury stock, at cost ( 12,548 ) – ( 12,548 ) Retained earnings 48,089 – 48,089 Total stockholders’ equity 44,637 – 44,637 Total liabilities and stockholders’ equity $ 57,233 $ 1,180 $ 58,413 F- 26 September 30, 2020 As Previously Reported Restatement Adjustment As Restated Current assets Cash and cash equivalents $ 7,616 $ – $ 7,616 Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $ 1,410 at September 30, 2020 8,159 – 8,159 Inventories, net 6,472 – 6,472 Prepaid expenses and other current assets 1,339 – 1,339 Refundable income taxes 189 – 189 Total current assets 23,775 – 23,775 Property, plant and equipment, net 21,082 – 21,082 Operating lease right-of use asset 380 – 380 Intangible assets Goodwill and indefinite-lived intangibles 12,824 1,180 14,004 Other intangible assets, net 35 – 35 Total intangible assets 12,859 1,180 14,039 Other Assets 1,800 – 1,800 Total assets $ 59,896 $ 1,180 $ 61,076 Current liabilities Accounts payable $ 6,036 – $ 6,036 Accrued expenses 2,890 – 2,890 Accrued income taxes 176 – 176 Total current liabilities 9,102 – 9,102 Line of credit 2,763 – 2,763 Operating lease liabilities 198 – 198 Deferred income taxes, net 1,292 1,180 2,472 Other long-term liabilities 35 – 35 Total liabilities 13,390 1,180 14,570 Commitments and contingencies – – – Stockholders’ equity Preferred stock, no par value; 2,500 shares authorized; none issued – – – Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,605 shares outstanding 6,509 – 6,509 Paid-in capital 2,532 – 2,532 Treasury stock, at cost ( 12,450 ) – ( 12,450 ) Retained earnings 49,915 – 49,915 Total stockholders’ equity 46,506 – 46,506 Total liabilities and stockholders’ equity $ 59,896 $ 1,180 $ 61,076 F- 27 March 31, 2021 As Previously Reported Restatement Adjustment As Restated Current assets Cash and cash equivalents $ 8,618 $ – $ 8,618 Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $ 1,100 at March 31, 2021 9,961 – 9,961 Inventories, net 6,736 – 6,736 Prepaid expenses and other current assets 1,110 – 1,110 Refundable income taxes 46 – 46 Total current assets 26,471 – 26,471 Property, plant and equipment, net 20,744 – 20,744 Operating lease right-of use asset 317 – 317 Intangible assets Goodwill and indefinite-lived intangibles 12,824 1,180 14,004 Other intangible assets, net – – – Total intangible assets 12,824 1,180 14,004 Other Assets 1,800 – 1,800 Total assets $ 62,156 $ 1,180 $ 63,336 Current liabilities Accounts payable $ 5,289 – $ 5,289 Accrued expenses 2,587 – 2,587 Accrued income taxes 1,215 – 1,215 Total current liabilities 9,091 – 9,091 Line of credit 2,774 – 2,774 Operating lease liabilities 143 – 143 Deferred income taxes, net 1,764 1,180 2,944 Other long-term liabilities 160 – 160 Total liabilities 13,932 1,180 15,112 Commitments and contingencies Stockholders’ equity Preferred stock, no par value; 2,500 shares authorized; none issued – – – Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,604 shares outstanding 6,509 – 6,509 Paid-in capital 2,664 – 2,664 Treasury stock, at cost ( 12,450 ) – ( 12,450 ) Retained earnings 51,501 – 51,501 Total stockholders’ equity 48,224 – 48,224 Total liabilities and stockholders’ equity $ 62,156 $ 1,180 $ 63,336 F- 28 June 30, 2021 As Previously Reported Restatement Adjustment As Restated Current assets Cash and cash equivalents $ 10,412 $ – $ 10,412 Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $ 1,190 at June 30, 2021 9,157 – 9,157 Inventories, net 7,291 – 7,291 Prepaid expenses and other current assets 908 – 908 Refundable income taxes 354 – 354 Total current assets 28,122 – 28,122 Property, plant and equipment, net 20,671 – 20,671 Operating lease right-of use asset 226 – 226 Intangible assets Goodwill and indefinite-lived intangibles 12,824 1,180 14,004 Other intangible assets, net – – – Total intangible assets 12,824 1,180 14,004 Other Assets 1,800 – 1,800 Total assets $ 63,643 $ 1,180 $ 64,823 Current liabilities Accounts payable $ 5,285 – $ 5,285 Accrued expenses 3,587 – 3,587 Accrued income taxes 106 – 106 Total current liabilities 8,978 – 8,978 Line of credit 2,777 – 2,777 Operating lease liabilities 107 – 107 Deferred income taxes, net 1,764 1,180 2,944 Other long-term liabilities 12 – 12 Total liabilities 13,638 1,180 14,818 Commitments and contingencies Stockholders’ equity Preferred stock, no par value; 2,500 shares authorized; none issued – – – Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,650 shares outstanding 6,509 – 6,509 Paid-in capital 2,488 – 2,488 Treasury stock, at cost ( 12,111 ) – ( 12,111 ) Retained earnings 53,119 – 53,119 Total stockholders’ equity 50,005 – 50,005 Total liabilities and stockholders’ equity $ 63,643 $ 1,180 $ 64,823 F- 29 September 30, 2021 As Previously Reported Restatement Adjustment As Restated Current assets Cash and cash equivalents $ 10,018 $ – $ 10,018 Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $ 1,290 at September 30, 2021 9,828 – 9,828 Inventories, net 7,572 – 7,572 Prepaid expenses and other current assets 1,315 – 1,315 Refundable income taxes 415 – 415 Total current assets 29,148 – 29,148 Property, plant and equipment, net 20,546 – 20,546 Operating lease right-of use asset 255 – 255 Intangible assets Goodwill and indefinite-lived intangibles 14,224 1,180 15,404 Other intangible assets, net 4,367 – 4,367 Total intangible assets 18,591 1,180 19,771 Other Assets 1,800 – 1,800 Total assets $ 70,340 $ 1,180 $ 71,520 Current liabilities Current maturities of notes payable $ 1,000 – $ 1,000 Accounts payable 7,867 – 7,867 Accrued expenses 3,872 – 3,872 Accrued income taxes 100 – 100 Total current liabilities 12,839 – 12,839 Line of credit 2,777 – 2,777 Notes Payable 3,726 – 3,726 Operating lease liabilities 113 – 113 Deferred income taxes, net 1,764 1,180 2,944 Other long-term liabilities 62 – 62 Total liabilities 21,281 1,180 22,461 Commitments and contingencies Stockholders’ equity Preferred stock, no par value; 2,500 shares authorized; none issued – – – Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,435 shares outstanding 6,509 – 6,509 Paid-in capital 2,387 – 2,387 Treasury stock, at cost ( 13,436 ) – ( 13,436 ) Retained earnings 53,599 – 53,599 Total stockholders’ equity 49,059 – 49,059 Total liabilities and stockholders’ equity $ 70,340 $ 1,180 $ 71,520 F- 30 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 arrangement. Ms. Smolyansky continues as Chairperson of the Board of Directors. F- 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.