What changed in this filing

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Item 1. Financial Statements

2022-11-14 compared with 2022-09-26 · 317 added, 185 removed, 416 unchanged (55% of the section changed)

3 unchanged sentences

Consolidated Balance Sheets

June 30, 2022 and December 31, 2021

September 30, 2022 and December 31, 2021

(In thousands)

September 30,

Current assets

Cash and cash equivalents

Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $ 1,220 and $ 1,170 at June 30, 2022 and December 31, 2021 respectively

Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $ 1,400 and $ 1,170 at September 30, 2022 and December 31, 2021 respectively

Inventories, net

20 unchanged sentences

2,500 shares authorized;

no shares issued or outstanding at June 30, 2022 and December 31, 2021

no shares issued or outstanding at September 30, 2022 and December 31, 2021

Common stock, no par value;

1 unchanged sentence

17,274 shares issued;

15,473 and 15,435 outstanding at June 30, 2022 and December 31, 2021, respectively

15,495 and 15,435 outstanding at September 30, 2022 and December 31, 2021, respectively

Paid-in capital

7 unchanged sentences

Consolidated Statements of Operations

For the three and six months ended June 30,

For the three and nine months ended September

30, 2022 and 2021

1 unchanged sentence

Three Months Ended

Six Months Ended

September 30,

Nine months Ended

September 30,

Cost of goods sold

12 unchanged sentences

Total other income (expense)

Income before provision for income taxes

Provision for income taxes

Income before provision (benefit) for income taxes

Provision (benefit) for income taxes

Earnings (loss) per common share:

11 unchanged sentences

Balance, June 30, 2021

Issuance of common stock in connection with stock-based compensation

Treasury stock purchased

Stock-based compensation

Balance, September 30, 2021

LIFEWAY FOODS, INC.

AND SUBSIDIARIES

Consolidated Statements of Stockholders’

(In thousands)

Balance, January 1, 2022

4 unchanged sentences

Balance, June 30, 2022

Issuance of common stock in connection with stock-based compensation

Treasury stock purchased

Stock-based compensation

Balance, September 30, 2022

See accompanying notes to consolidated financial

3 unchanged sentences

(In thousands)

Six months ended June 30,

Nine months ended September 30,

Cash flows from operating activities:

Net (loss) income

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

Adjustments to reconcile net income to operating cash

Depreciation and amortization

13 unchanged sentences

Accrued income taxes

Net cash (used in) provided by operating activities

Net cash provided by operating activities

Cash flows from investing activities:

Purchases of property and equipment

Acquisition, net of cash acquired

Net cash used in investing activities

Cash flows from financing activities:

Purchase of treasury stock

Payment of deferred financing cost

Proceeds from note payable

Repayment of note payable

30 unchanged sentences

Financial Statements

As previously disclosed in Note 1 to the Company’s consolidated

financial statements included in the 2021 Form 10-K, the Company identified past errors in the accounting for deferred income tax liabilities

and goodwill that resulted from a 2009 acquisition when preparing the 2021 consolidated financial statements.

In the 2021 Form 10-K, the

Company restated its historical consolidated financial statements to properly reflect the impact of the 2009 acquisition, which resulted

in adjustments to goodwill and deferred income tax liabilities in the affected periods.

The consolidated financial statements for the

three and six months ended June 30, 2021 included in this Quarterly Report on Form 10-Q have been similarly restated to reflect the correction

of these errors and should be read in conjunction with Notes 1 and 17 to the Company’s consolidated financial statements included

in the 2021 Form 10-K.

As previously disclosed in Note 1 to the Company’s

consolidated financial statements included in the 2021 Form 10-K, the Company identified past errors in the accounting for deferred income

tax liabilities and goodwill that resulted from a 2009 acquisition when preparing the 2021 consolidated financial statements.

Form 10-K, the Company restated its historical consolidated financial statements to properly reflect the impact of the 2009 acquisition,

which resulted in adjustments to goodwill and deferred income tax liabilities in the affected periods.

The consolidated financial statements

for the three and nine months ended September 30, 2021 included in this Quarterly Report on Form 10-Q have been similarly restated to

reflect the correction of these errors and should be read in conjunction with Notes 1 and 17 to the Company’s consolidated financial

statements included in the 2021 Form 10-K.

Reclassification

Certain amounts have been reclassified from cash flows from investing

to cash flows from operations on the consolidated statement of cash flows for the nine months ended September 31, 2021.

This reclassification

had no impact on the consolidated statements of operations, consolidated balance sheets, or consolidated statements of stockholders’

The Company determined the reclassification to be immaterial to the previously filed consolidated financial statements.

Note 2 – Summary of Significant Accounting

12 unchanged sentences

Cash and cash equivalents

The Company has $ 580 of restricted cash which

is included in cash and cash equivalents as of June 30, 2022.

The restricted cash balance represents escrow funds deposited by Lifeway

in connection with the August 18, 2021 acquisition of certain assets of GlenOaks 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.

The Company has $ 0

of restricted cash which is included in cash and cash equivalents as of September 30, 2022.

The restricted cash escrow funds of

were deposited by Lifeway in connection with the August 18, 2021 acquisition of certain assets of GlenOaks Farms, Inc.

were security for the liability and indemnity obligations of seller as defined under the asset purchase agreement.

The escrow funds of

were remitted to the sellers in August 2022.

Advertising and promotional costs

2 unchanged sentences

Total advertising expense was $ 2,585 and

$ 2,166 for the six months ended June 30, 2022 and 2021, respectively.

For the three months ended June 30, 2022 and 2021 total advertising

expenses were $ 533 and $ 773 , respectively.

$ 2,892 for the nine months ended September 30, 2022 and 2021, respectively.

For the three months ended September 30, 2022 and 2021 total

advertising expenses were $ 848 and $ 726 , respectively.

The Company is managed as a single reportable

35 unchanged sentences

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

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

and does not currently expect the adoption of this ASU to have a material impact on its consolidated financial statements.

Measurement of Credit Losses on Financial Instruments, in November

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

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

(Topic 815), and Leases (Topic 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.

guidance should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic.

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 and does not currently expect the

adoption of this ASU to have a material impact on its consolidated financial statements.

Note 3 – Inventories, net

1 unchanged sentence

Schedule of inventories

September 30,

Finished goods

3 unchanged sentences

Schedule of property, plant and equipment

September 30,

Buildings and improvements

10 unchanged sentences

Balance at December 31, 2021

Balance at June 30, 2022

Balance at September 30, 2022

Intangible Assets

1 unchanged sentence

Schedule of finite-lived intangible assets

June 30, 2022

September 30, 2022

December 31, 2021

9 unchanged sentences

The cost and accumulated amortization is included in Brand Names in the intangible assets with finite lives in the table above as of January 1, 2022.

The Company has reclassified the $3,700 net book value as of December 31, 2021 from goodwill to finite lived intangible assets to conform the presentation as of June 30, 2022.

The Company has reclassified the $3,700 net book value as of December 31, 2021 from goodwill to finite lived intangible assets to conform the presentation as of September 30, 2022.

Estimated amortization expense on intangible

1 unchanged sentence

Schedule of amortization expense on intangible assets

Six months ended December 31, 2022

Three months ended December 31, 2022

Note 6 – Accrued Expenses

1 unchanged sentence

Schedule of accrued expenses

September 30,

Payroll and incentive compensation

5 unchanged sentences

Schedule of debt

September 30,

Term loan due August 18, 2026.

Interest (3.55% at June 30, 2022) payable monthly.

Interest (4.94% at September 30, 2022) payable monthly.

Unamortized deferred financing costs

3 unchanged sentences

The scheduled maturities of the term loan, excluding deferred financing

costs, at June 30, 2022 are as follows:

costs, at September 30, 2022 are as follows:

Schedule of maturities of long-term debt

Six months ended December 31, 2022

Three months ended December 31, 2022

Total term loan

29 unchanged sentences

Lifeway was in compliance with the fixed charge

coverage ratio and minimum working capital covenants at June 30, 2022.

coverage ratio and minimum working capital covenants at September 30, 2022.

Revolving Credit Facility

As of June 30, 2022, the Company had $ 2,777 outstanding

under the Revolving Credit Facility.

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

June 30, 2022.

Lifeway’s interest rate on debt outstanding under the Revolving Credit Facility as of June 30, 2022 was 3.07 %.

As of September 30, 2022, the Company had $ 2,777

outstanding under the Revolving Credit Facility.

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

as of September 30, 2022.

Lifeway’s interest rate on debt outstanding under the Revolving Credit Facility as of September 30, 2022

Note 8 – Leases

18 unchanged sentences

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

Total lease expense was $ 147 and $ 169 (including short term leases) for the six months ended June 30, 2022 and 2021, respectively.

Total lease expense was $ 82 and $ 91 (including short term leases) for the three months ended June 30, 2022 and 2021, respectively.

Total lease expense was $ 191 and $ 245 (including short term leases) for the nine months ended September 30, 2022 and 2021, respectively.

Total lease expense was $ 44 and $ 76 (including short term leases) for the three months ended September 30, 2022 and 2021, respectively.

Right-of-use assets and lease liabilities are

9 unchanged sentences

Operating Leases

Six months ended June 30, 2022

Three months ended December 31, 2022

Total lease payments

1 unchanged sentence

The weighted-average remaining lease term for

its operating leases was 2.39 years as of June 30, 2022.

The weighted average discount rate of its operating leases was 13.33 % as of June

Cash paid for amounts included in the measurement of lease liabilities was $ 85 and $ 107 for the six months ended June 30, 2022

and 2021, respectively.

Cash paid for amounts included in the measurement of lease liabilities was $ 42 and $ 52 for the three months ended

June 30, 2022 and 2021, respectively.

its operating leases was 2.51 years as of September 30, 2022.

The weighted average discount rate of its operating leases was 14.20 % as

of September 30, 2022.

Cash paid for amounts included in the measurement of lease liabilities was $ 121 and $ 153 for the nine months ended

September 30, 2022 and 2021, respectively.

Cash paid for amounts included in the measurement of lease liabilities was $ 35 and $ 46 for

the three months ended September 30, 2022 and 2021, respectively.

Note 9 – Commitments and contingencies

17 unchanged sentences

Income taxes were recognized at effective rates

of 14.5 % and 31.2 % for the six months ended June 30, 2022 and 2021, respectively.

The effective tax rate for the three months ended June

30, 2022 was 35.3 % compared to 31.1 % for the three months ended June 30, 2022.

of ( 0.8 ) % and 35.2 % for the nine months ended September 30, 2022 and 2021, respectively.

The effective tax rate for the three months ended

September 30, 2022 was 11.7 % compared to 52.3 % for the three months ended September 30, 2021.

The Company has historically calculated the provision

2 unchanged sentences

In accordance with the authoritative guidance, the

Company used a discrete effective tax rate method to calculate income taxes for the quarter and year to date periods ended June 30, 2022

because small changes in the estimated level and mix of annual income or loss by jurisdiction would result in significant changes in the

estimated annual effective tax rate making the historical method unreliable.

Company used a discrete effective tax rate method to calculate income taxes for the quarter and year to date periods ended March 31, 2022

and June 30, 2022 because small changes in the estimated level and mix of annual income or loss by jurisdiction would result in significant

changes in the estimated annual effective tax rate making the historical method unreliable.

During the quarter and year to date period

ended September 30, 2022, the Company utilized an estimate of the annual effective tax rate for the full fiscal year income, excluding

unusual or infrequently occurring discrete items, as small changes in the estimated level and mix of annual income or loss by jurisdiction

would not result in significant changes in the estimated annual effective tax rate.

The Company’s effective tax rate may change

4 unchanged sentences

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

Unrecognized tax benefits were $ 0 and $ 97 at June

The Company consistently

reflects non-deductible officer compensation expense, non-deductible compensation expense related to equity incentive awards and separate

state tax rates from period to period.

Although similar items were reflected in 2022, the percentage effect is different due to the difference

in pre-tax (loss) income in 2022 compared to 2021.

Unrecognized tax benefits were $ 0 and $ 98 at September

30, 2022 and 2021, respectively.

6 unchanged sentences

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

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

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

The number of performance shares that participants

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

Stock awards generally vest over a three-year

performance or service period.

At June 30, 2022, 3.248 million shares remain available under the 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.

Omnibus Incentive Plan

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.

At September 30,

2022, no shares remain available for award under the 2015 Omnibus Incentive Plan as it was terminated on August 31, 2022.

any outstanding awards under the 2015 Omnibus Incentive Plan are unaffected by the termination of the 2015 Omnibus Incentive Plan or

by the approval of the 2022 Omnibus Incentive Plan (the “2022 Plan”) as described below.

On August 31, 2022,

Lifeway stockholders approved the 2022 Plan.

Under the 2022 Plan, the Compensation Committee of the Board of Directors may grant

awards of various types of compensation, including, nonqualified stock options, incentive stock options, stock appreciation rights,

restricted stock, restricted stock units, performance shares, performance units, cash-based awards and other stock-based awards.

maximum number of shares authorized to be awarded under the 2022 Plan is 3.25 million

shares of common stock, which includes shares that remained available under the now terminated 2015 Omnibus Incentive Plan.

Awards granted

under the 2022 Plan are generally subject to a minimum vesting period of at least one year.

Awards may be subject to cliff-vesting

or graded-vesting conditions, with graded vesting starting no earlier than one year after the grant date.

The Plan Administrator may

provide for shorter vesting periods in an award agreement for no more than five percent of the maximum number of shares authorized

for issuance under the 2022 Plan.

As of September 30, 2022, 3.00

million shares remain available to award under the 2022 Plan.

Stock Options

The following table summarizes stock option activity during the six

months ended June 30, 2022:

The following table summarizes stock option activity during the nine

months ended September 30, 2022:

Schedule of stock option activity

3 unchanged sentences

Outstanding at December 31, 2021

Outstanding at June 30, 2022

Exercisable at June 30, 2022

Outstanding at September 30, 2022

Exercisable at September 30, 2022

As of December 31, 2019, all outstanding options

4 unchanged sentences

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.

Lifeway expenses RSAs over the service period.

Board members

may elect to defer receipt of their awards until their departure from the Board of Directors, subject to shareholder ratification at

the 2022 annual shareholders meeting.

The following table summarizes RSA activity during the six months ended June 30, 2022.

The grant date fair value of

the awards is determined by the Company’s closing stock price on the grant date.

Lifeway expenses RSAs over the vesting

The following

table summarizes RSA activity during the nine months ended September 30, 2022.

Schedule of RSA Activity

3 unchanged sentences

Shares issued upon vesting

Outstanding at June 30, 2022

Vested and deferred at June 30, 2022

For the six months ended June 30,2022 and 2021

total pre-tax stock-based compensation expense recognized in the consolidated statements of operations was $ 127 and $ 69 , respectively.

For the six months ended June 30,2022 and 2021 tax-related benefits of $ 35 and $ 20 , respectively, were also recognized.

For the three

months ended June 30, 2022 and 2021 total pre-tax stock-based compensation expense recognized in the consolidated statements of operations

was $ 64 and $ 33 , respectively.

For the three months ended June 30, 2022 and 2021 tax-related benefits of $ 17 and $ 9 , respectively, were

also recognized.

Future compensation expense related to restricted stock awards was $ 72 as of June 30, 2022 and will be recognized on

a weighted average basis over the next 1.20 years.

Outstanding at September 30, 2022

Vested and deferred at September 30, 2022

For the nine months ended September 30, 2022

and 2021 total pre-tax stock-based compensation expense recognized in the consolidated statements of operations was $ 175

respectively.

For the nine months ended September 30, 2022 and 2021 tax-related benefits of $ 49

respectively, were also recognized.

For the three months ended September 30, 2022 and 2021 total pre-tax stock-based compensation

expense recognized in the consolidated statements of operations was $ 48

respectively.

For the three months ended September 30, 2022 and 2021 tax-related benefits of $ 14

respectively, were also recognized.

Future compensation expense related to restricted stock awards was $ 624

as of September 30, 2022 and will be recognized on a weighted average basis over the next 1.57

Long-Term Incentive Plan Compensation

Lifeway established long-term incentive-based

compensation programs for fiscal year 2019 (the “2019 Plan”) and for fiscal year 2021 (the “2021 Plan”) for certain

senior executives and key employees (the “participants”).

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.

Lifeway has established long-term

incentive-based compensation programs for certain senior executives and key employees pursuant to the terms of its incentive plans.

2020 CEO Incentive Award

6 unchanged sentences

under the Stock Purchase Agreement dated October 1, 1999.

For the six months ended June 30, 2022 and 2021, $ 142 and $ 170 was expensed

For the nine months ended September 30, 2022 and 2021, $ 186 and $ 255 was expensed

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

For the three months ended June 30, 2022

For the three months ended September 30,

2022 and 2021, $ 44 and $ 85 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively.

of June 30, 2022, the total remaining unearned compensation was $ 217 , of which $ 87 will be recognized in 2022, $ 106 in 2023, $ 24 in 2024,

respectively, subject to vesting.

As of September 30, 2022, the total remaining unearned compensation was $ 173 , of which $ 44 will be recognized in 2022, $ 105 in 2023, $ 24

in 2024, respectively, subject to vesting.

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

Therefore, the award liability

was reclassified from long-term liabilities to paid in capital.

Therefore, the

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

2021 Equity Award

Under the 2021 Plan, collectively the participants

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

financial target.

The equity-based incentive compensation is payable in restricted stock that is expected to vest one-third in March 2022,

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

For the six months ended June 30, 2022 and 2021, $ 278 and $ 0 was expensed as stock-based

compensation expense in the consolidated statements of operations, respectively.

For the three months ended June 30, 2022 and 2021, $ 112

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

As of June 30, 2022,

the total remaining unearned compensation was $ 404 , of which $ 171 will be recognized in 2022, $ 194 in 2023, $ 39 in 2024, respectively,

subject to vesting.

The 2021 long-term equity incentive plan

compensation is based on Lifeway’s achievement of adjusted EBITDA performance versus the respective target established by the

Board for 2021.

Under the 2021 plan, collectively the participants earned equity-based incentive compensation of $ 1,069 based on Lifeway’s achievement of the respective financial target.

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.

nine months ended September 30, 2022 and 2021, $ 364 and

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

For the three months ended

September 30, 2022 and 2021, $ 85 and

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

As of September 30, 2022,

the total remaining unearned compensation was $ 319 ,

of which $ 85 will

be recognized in 2022, $ 194 in

2023, $ 40 in

2024, respectively, subject to vesting.

During Q2 2022, the number of shares awarded became fixed and determinable.

Therefore, the award liability was reclassified

from long-term liabilities to paid in capital.

Therefore, the

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

2022 Equity Award

Under the 2022 long-term incentive plan,

participants can earn a specified number of target level Performance Share Units (“PSUs”) contingent upon the

achievement of strategic milestones during the three-year Measurement Period, which is fiscal year 2022 to 2024.

The strategic

milestones are 1) 3-year cumulative net revenue, and 2) 3-year cumulative adjusted EBITDA.

The target number of PSU awards are

weighted 50% on net revenue and 50% on adjusted EBITDA.

Collectively, the participants can earn 125,066 PSUs at the target level.

Participants may earn more or less than the target number of shares based on actual results, however the minimum and maximum number

of shares that can be earned are bound by minimum and maximum thresholds of net revenue and adjusted EBITDA.

The PSU awards will be

earned and will vest, if at all, after the end of the three-year measurement period based on achievement of the milestones.

awards do not vest during the three-year measurement period.

The PSUs have a grant date fair value of $6.25 dollars per share.

the nine months ended September 30, 2022 and 2021, $ 31 and

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

For the three months ended

September 30, 2022 and 2021, $ 31 and

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

The 2022 long-term incentive plan also granted

restricted stock unit awards that contain only a service condition and vest on the passage of time in three equal installments on each

of the first three anniversaries of the August 31, 2022 grant date.

The stock based compensation expense for these awards is included

in the Restricted Stock Award section above.

Non-Employee Director Plan

On August 31, 2022, Lifeway

stockholders approved the 2022 Non-Employee Director Equity and Deferred Compensation Plan (the

“ 2022 Director Plan”), which authorizes the grant of restricted stock units (“RSUs”), which will vest on

such schedule as the Company, in its sole discretion, shall determine.

Each non-employee director of the Company is eligible to be a participant

in the 2022 Director Plan until they no longer serve as a non-employee director.

As of the date of each annual shareholder meeting, the

Company may grant each director a number of RSUs for such year and set the vesting schedule for the RSUs granted.

Whether and how many

RSUs the Company will grant to directors in any year is subject to the sole discretion of the Company and shall in any event be subject

to the 2022 Director Plan’s overall share limits.

The maximum aggregate number of shares of common stock that may be issued under

the 2022 Directors Plan is 500 thousand shares.

As of September 30, 2022, 466 thousand shares remain available to award under the 2022

Director Plan.

The aggregate fair market value of shares underlying RSU compensation that may be issued as RSU compensation to a director

in any year shall not exceed $170.

In addition to the grant of RSUs, the 2022 Director Plan also provides for the deferral by electing

participants of all or part of their cash compensation (in 10% increments) into a deferred cash account, and they may defer all or part

of their cash and/or RSU compensation (in 10% increments) into a deferred RSU account.

Deferred benefits are paid in a lump sum upon the

applicable director’s departure from the Board of Directors.

Retirement Benefits

3 unchanged sentences

prescribed formula.

For the six months ended June 30, 2022 and 2021 total contribution expense recognized in the consolidated statements

For the nine months ended September 30, 2022 and 2021 total contribution expense recognized in the consolidated statements

of operations was $ 328 and $ 315 , respectively.

For the three months ended June 30, 2022 and 2021 total contribution expense recognized

in the consolidated statements of operations was $ 102 and $ 105 , respectively.

For the three months ended September 30, 2022 and 2021, total contribution expense recognized

in the consolidated statements of operations was $ 97 .

Note 12 – Products and Customers

10 unchanged sentences

Net sales by product category were as follows

for the six months ended June 30:

for the nine months ended September 30:

Schedule of sales of products by category

4 unchanged sentences

Net sales of products by category were as follows

for the three months ended June 30:

for the three months ended September 30:

Drinkable Kefir other than ProBugs

5 unchanged sentences

Two major customers accounted for approximately

22 % of net sales for the six months ended June 30, 2022 and 2021.

Two major customers accounted for approximately 22 % and 23 % of net sales

for the three months ended June 30, 2022 and 2021, respectively.

22 % and 23 % of net sales for the nine months ended September 30, 2022 and 2021, respectively.

Two major customers accounted for approximately

23 % of net sales for the three months ended September 30, 2022 and 2021.

Note 13 – Related Party Transactions

Lifeway obtains consulting services from the Chairperson

of its Board of Directors.

On December 28, 2020, Lifeway entered into an amended and restated consulting agreement (the “Agreement”),

effective as of December 31, 2020, with the Chairperson.

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.

On January 4, 2022, the Company notified the Chairperson

Lifeway obtains consulting services from Ludmila

Smolyansky, a member of the Company’s Board of Directors and former 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

Under the terms and conditions of the Agreement, Ms.

Smolyansky 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, and Ms.

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

based on the achievement of specified performance criteria.

The 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.

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

On January 4, 2022, the Company notified Ms.

that it was terminating the Agreement effective January 17, 2022.

The Chairperson will continue as Chairperson of the Board of Directors.

Service fees earned are included in general and

administrative expenses in the accompanying consolidated statements of operations and were $ 22 and $ 250 during each of the six months

ended June 30, 2022 and 2021, respectively.

Service fees earned are included in general and administrative expenses in the accompanying

consolidated statements of operations and were $ 0 and $ 125 during each of the three months ended June 30, 2022 and 2021, respectively.

Lifeway is also a party to an endorsement agreement, dated as March

14, 2016, by and between the Company and Ludmila Smolyansky, a member of the Company’s Board of Directors and former Chairperson

of its Board of Directors (the “Endorsement Agreement”) 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 are included in selling expenses in the accompanying consolidated statements of

operations and were $ 300 during each of the six months ended June 30, 2022 and 2021.

Royalties earned were $ 150 during each of the three

months ended June 30, 2022 and 2021.

Note 14 – Subsequent Events

On September 6, 2022, the Company entered into

an agreement (the “Termination Agreement”) with Ludmila Smolyansky to terminate the Endorsement Agreement.

Service fees earned are included in general and administrative expenses

in the accompanying consolidated statements of operations and were $ 22 and $ 375 during each of the nine months ended September 30, 2022

and 2021, respectively.

Service fees earned are included in general and administrative expenses in the accompanying consolidated statements

of operations and were $ 0 and $ 125 during each of the three months ended September 30, 2022 and 2021, respectively.

Lifeway is also a party to an endorsement agreement,

dated as March 14, 2016, by and between the Company and Ludmila Smolyansky, a member of the Company’s Board of Directors and former

Chairperson of its Board of Directors (the “Endorsement Agreement”) under which it pays the Chairperson a royalty based on

the sale of certain Lifeway products, not to exceed $50 in any fiscal month.

On September 6, 2022, the Company entered

into an agreement (the “Termination Agreement”) with Ms.

Smolyansky that terminated the Endorsement Agreement as

of September 6, 2022.

Pursuant to the Termination

4 unchanged sentences

Smolyansky will no longer have any further claims against the Company

under the Endorsement Agreement, and (iii) the Endorsement Agreement was terminated as of September 6, 200 and of no further force or

effect except for the provisions thereof that expressly survive termination.

under the Endorsement Agreement, and (iii) the Endorsement Agreement was terminated and of no further force or effect except for the provisions

thereof that expressly survive termination.

Royalties earned are included in selling expenses

in the accompanying consolidated statements of operations and were $ 400

during each of the nine months ended September 30, 2022 and 2021, respectively.

Royalties earned were $ 100

during each of the three months ended September 30, 2022 and 2021, respectively.

Note 14 – Subsequent Events

On November 7, 2022, the Company entered into a Stock

Purchase Agreement with Ludmila Smolyansky (“Ms.

Smolyansky”), to purchase 850,340 shares of Lifeway common stock from Ms.

Pursuant to the Stock Purchase Agreement, the

Company and Ms.

Smolyansky have agreed, among other things, that (i) Ms.

Smolyansky will sell the shares at a purchase price of $4.70

per share, which represents a twenty percent (20.0%) discount to the average closing price of the common stock on Nasdaq over the five

(5) trading day period ended on the trading day immediately preceding the date of the Stock Purchase Agreement and (ii) Ms.

will use a portion of the proceeds to satisfy in full certain obligations of Ms.

Smolyansky, which are secured by previously disclosed

pledges of common stock, causing all such pledges to be released.

The purchased shares will be held in treasury by the Company.

As a closing condition to the Stock Purchase Agreement,

Smolyansky and Mr.

Smolyansky will deliver an executed amendment (the “Amendment”) to that certain Settlement Agreement

dated as of July 27, 2022 (the “Settlement Agreement”), between the Company and Ms.

Smolyansky and Mr.

to the Amendment, Ms.

Smolyansky and Mr.

Smolyansky each agree, among other things, to (i) grant the Company a right of first refusal,

subject to Danone North America Public Benefit Corporation’s (“Danone”) right of first refusal, on substantially similar

terms as Danone (ii) extend the standstill and all related terms under the Proxy Settlement Agreement through the date of the 2024 annual

meeting of the Company’s shareholders (the “Standstill”);

and (iii) to appear in person or by proxy and vote their respective

remaining shares of common stock beneficially owned, individually or otherwise, and controlled by either of them and over which they have

power and authority to vote during the Standstill (a) in accordance with the recommendations of the Board at any special meeting or annual

meeting of the shareholders with respect to any proposal(s) not related to the sale of the Company or all or substantially all of the

assets of the Company;

and (b) in proportion to the vote of the other shareholders with respect to any proposal relating to any vote on

the sale of the Company or all or substantially all of the assets of the Company.

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

What changed 10-Q

Item 1. Financial Statements