What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-27 compared with 2022-07-21 · 128 added, 145 removed, 177 unchanged (61% of the section changed)

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or other events occur in the future.

Restatement of Previously Issued Consolidated

Financial Statements

During the preparation of our fiscal 2021 consolidated

financial statements, we identified a material error in the accounting for our deferred income tax liabilities and goodwill.

Specifically,

in connection with our 2009 acquisition of Fresh Made, Inc., we 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 $3.7 million Fresh Made indefinite-lived brand name intangible

asset acquired.

The error resulted in a $1.18 million understatement of both deferred income tax liabilities and goodwill of as of January

The Restatement had no impact on our Consolidated Statements of Operations, Consolidated Statements of Cash Flows, or Consolidated

Statements of Stockholders’ Equity during 2021 and 2020.

The impact of the Restatement on periods prior to 2020 had no effect on

opening retained earnings as of January 1, 2020.

The accounting adjustments required to correct

the error in the consolidated financial statements for the year ended December 31, 2020 as a result of completing the restatement

process are described in Note 1 – Basis of presentation - Restatement of Previously Issued Consolidated Financial Statements included

in “Part II – Item 8 – Financial Statements and Supplementary Data.” Note 17 – Restatement of previously

issued unaudited consolidated financial statements presents the accounting adjustments to correct the error in the quarterly consolidated

financial statements for the fiscal quarters in 2020 and 2021.

The accompanying Management’s Discussion

and Analysis of Financial Condition and Results for Operation gives effect to the Restatement adjustments made to the previously reported

Consolidated Financial Statements for the year ended December 31, 2020.

Recent Developments

COVID-19 Pandemic Impact

In December 2019, COVID-19 was first reported

and subsequently characterized by the World Health Organization ("WHO") as a pandemic in March 2020.

In an effort to reduce

the global transmission of COVID-19, various policies and initiatives have been implemented by governments around the world, including

orders to close businesses not deemed "essential", shelter-in-place orders enacted by state and local governments, and the practice

of social distancing measures when engaging in essential activities.

During the first quarter of 2020, Management,

anticipating the spread of COVID-19 and its effects, implemented a plan to mitigate effects of COVID-19 on supply and transportation of

materials used to make and package our products, staffing, and transportation of our products to customers.

Management’s proactive

planning allowed the Company to avoid disruption to its manufacturing facilities and production, transportation, and sales and to meet

the increased demand without delay.

The Company has maintained full production capacity available at all locations and does not anticipate

manufacturing or staffing disruptions in the near term.

have seen increased customer and consumer demand for our products.

We have not experienced significant supply chain disruptions or labor

supply shortages and we have continued to be able to satisfy customer and consumer demand for our products.

However, the 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 our products, and our operations may be negatively impacted.

In 2021, our 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,

our pricing actions may sometimes lag input cost changes, or we may not be able to pass along the full effect of increases in raw materials

and other input costs as we incur them.

Recently, in 2022, social distancing,

shelter-in-place and work-from-home mandates and recommendations have begun to be reduced or eliminated.

The increased customer demand

for our products 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.

We are unable to predict

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

We have seen increased customer and consumer demand

for our products during the pandemic as consumers increased their food purchases for in-home consumption.

We have not experienced significant

supply chain disruptions or labor supply shortages and have continued to satisfy customer and consumer demand for our products.

continues to proactively manage the supply and transportation of materials used to make and package our products, staffing, and transportation

of our products to customers.

This proactive planning has allowed the Company to avoid disruption to its manufacturing facilities and

production, transportation, and sales and to meet the increased demand.

The Company has maintained full production capacity available

at all locations and does not anticipate manufacturing or staffing disruptions in the near term.

However, the 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 our products, and our operations may be negatively impacted.

In 2022, our costs increased primarily due to

inflationary price increases of milk, other ingredients, packaging materials, and transportation to our customers.

However, because of

market conditions or for competitive reasons, our pricing actions may sometimes lag input cost changes, or we may not be able to pass

along the full effect of increases in raw materials and other input costs as we incur them.

During 2022, social distancing, shelter-in-place

and work-from-home mandates and recommendations have continued to be reduced or eliminated.

The increased customer demand for our products

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.

We are unable to predict the nature

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

Results of Operations

Comparison of Year Ended December 31, 2021

to Year Ended December 31, 2020 (in 000’s)

Comparison of Year Ended December 31, 2022 to Year

Ended December 31, 2021 (in 000’s)

Cost of goods sold

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Gain on investments

Loss on sales or property and equipment

Loss on sale of property and equipment

Other Income, net

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The net sales increase was primarily driven by higher volumes of our branded

drinkable kefir and, to a lesser extent, the favorable impact of our acquisition of Glen Oaks Farms during the third quarter of 2021.

Approximately 11% of the net sales increase results from our acquisition of Glen Oaks Farms during the third quarter of 2021.

Approximately

20% of the net sales increase results from the Farmers to Families Food Box program with the USDA, which began during the middle of the

first quarter of 2021 and ended during May 2021.

drinkable kefir and the impact of price increases implemented during the year, and to a lesser extent, the favorable impact of our acquisition

of Glen Oaks Farms during the third quarter of 2021.

Approximately 18% of the net sales increase results from the full year 2022 impact

of our acquisition of Glen Oaks Farms during the third quarter of 2021.

Gross profit as a percentage of net sales decreased

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We took favorable pricing

actions beginning in December 2021 to recover input and freight cost inflation.

actions during 2022 to recover a portion of the input and freight cost inflation.

However, for market conditions or competitive reasons,

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The increase versus prior year is primarily due to

increased investment in advertising and marketing programs, partially offset by lower compensation and broker expense.

increased investment in advertising and marketing programs, increased broker expense, partially offset by lower compensation expense.

General and Administrative Expenses

General and administrative expenses decreased

$50 to $11,611 during the year ended December 31, 2021 from $11,661 during the same period in 2020.

The decrease is primarily a result

of lower compensation, related party consulting, and office rent expense, partially offset by higher employee incentive compensation expense.

General and administrative expenses

increased $982 to $12,593 during the year ended December 31, 2022 from $11,611 during the same period in 2021.

The increase is

primarily a result of increased legal and professional fees, which include expense related to non-routine stockholder action, the

fiscal year 2020 Form 10-K restatement, and incentive compensation, partially offset by lower consulting expense to our former

Chairperson of the Board of Directors.

Provision for Income Taxes

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Section 162(m) of the Internal Revenue Code (the

“Code”) limits the deductibility of compensation paid to certain of our executives.

Under Section 162(m), no tax deduction

in taxable years beginning after December 31, 2017 is allowed for compensation paid to any covered employee to the extent that the total

compensation for that covered employee exceeds $1,000,000 in any taxable year.

“Code”) limits the deductibility of compensation paid to certain of our executives to the extent their total compensation

exceeds $1 million in any taxable year.

Income taxes are discussed

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Net Income (Loss)

We reported net income of $3,311 or $0.21 per

basic and diluted common share for the year ended December 31, 2021 compared to net income of $3,232 or $0.21 per basic and diluted common

share in the same period in 2020.

We reported net income of $924 or $0.06 per basic

and diluted common share for the year ended December 31, 2022 compared to net income of $3,311 or $0.21 per basic and diluted common share

in the same period in 2021.

Liquidity and Capital Resources

At this time, the COVID-19 pandemic has not materially

impacted our operations.

We expect to meet our foreseeable liquidity and capital resource requirements, and to ensure the continuation

of the Company as a going concern, through anticipated cash flows from operations, our revolving credit facility and cash and cash equivalents.

If additional borrowings are needed, approximately $2,223 was available under the Revolving Credit Facility as of December 31, 2021.

Note 7 to our Consolidated Financial Statements for additional information regarding our Revolving Credit Facility.

We are in compliance

with the terms of the Credit Agreement and expect to meet foreseeable financial requirements.

The success of our business and financing

strategies will continue to provide us with the financial flexibility to take advantage of various opportunities as they arise.

the dynamic nature of COVID-19, we will continue to assess our liquidity needs while continuing to manage our discretionary spending and

investment strategies.

impact that the COVID-19 pandemic or any future pandemic or disease outbreak will have on our business and our consolidated results of

operations is uncertain.

Sources and Uses of Cash

Lifeway had a net increase in cash and cash equivalents

of $1,307 and $4,090 during the years ended December 31, 2021 and 2020, respectively.

The drivers of the year over year change are as

assesses the Company's liquidity in terms of its ability to generate cash to fund its operating, investing, and financing activities.

The Company remains in a strong financial position, and while it has been impacted by the macroeconomic challenges with commodity inflation

and other input cost increases, the Company believes that its cash flow from operations, revolving credit and term loan facility, and

cash and cash equivalents will continue to provide sufficient liquidity for its working capital needs, capital resource requirements,

and growth initiatives and to ensure the continuation of the Company as a going concern.

If additional

borrowings are needed, $2,223 was available under the Revolving Credit Facility as of December 31, 2022 (see Note 7, Debt).

compliance with the terms of the Credit Agreement and expect to meet foreseeable financial requirements.

The success of our business and

financing strategies will continue to provide us with the financial flexibility to take advantage of various opportunities as they arise.

To date, we have been successful in generating cash and obtaining financing as needed.

However, if a serious economic or credit market

crisis ensues, it could have a negative effect on our liquidity, results of operations and financial condition.

most significant ongoing short-term cash requirements relate primarily to funding operations (including expenditures for raw materials,

labor, manufacturing and distribution, trade and promotions, advertising and marketing, and income tax liabilities) as well as expenditures

for property, plant, and equipment.

Long-term cash

requirements primarily relate to funding long-term debt repayments (see Note 7, Debt) and deferred income taxes (see Note 10, Income Taxes).

The following table is derived from our Consolidated

Statement of Cash Flows:

Net Cash Flows Provided By (Used In):

Operating activities

Investing activities

Financing activities

Operating Activities

Net cash provided by operating activities was

$6,144 in 2021 compared to $6,385 in 2020, a decrease in cash provided of $241.

The decrease is primarily due to the change in working

Net cash used in investing activities was $7,722

in 2021 compared to $1,890 in 2020, an increase in cash used of $5,832.

The increase reflects the August 2021 acquisition of Glen Oak

The $5,800 acquisition purchase price was funded through proceeds from our new $5,000 term loan and existing cash.

spending was $1,922 in 2021 compared to $1,895 in 2020.

$3,987 in 2022 compared to $5,564 in 2021.

The decrease was primarily due to lower cash earnings, which reflect the impact of input and

freight cost inflation in 2022, and the change in working capital.

Investing Activities

Net cash used in investing activities was $4,029 in

2022 compared to $7,142 in 2021.

The decrease in cash used reflects the August 2021 acquisition of GlenOaks Farms, Inc., partially offset

by increased capital spending in 2022.

Our capital spending is focused in three core areas:

growth, cost reduction, and

facility improvements.

growth, cost reduction, and facility improvements.

Growth capital spending supports new product innovation and enhancements.

Cost reduction and facility improvements

support manufacturing efficiency, safety and productivity.

Net cash provided by financing activities was

$2,885 during the year ended December 31, 2021 compared to net cash used in financing activities of $405 in the same period in 2020.

The increase in net cash provided by financing activities relates to the term loan entered into during August 2021 in connection with

the acquisition of Glen Oaks Farms, Inc.

See the Debt Obligations section below for further detail.

Cost reduction and facility improvements support manufacturing

efficiency, safety, and productivity.

Financing Activities

Net cash used in financing activities was $4,747

during 2022 compared to net cash provided by financing activities of $2,885 in 2021.

The decrease in cash used relates to the term loan

entered into during August 2021 in connection with the acquisition of GlenOaks Farms, Inc., partially offset by the quarterly principal

payments under the term loan.

On June 24, 2021, Lifeway’s Board authorized

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for using the cost method.

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

Smolyansky, Board of Director member.

The shares were repurchased during the fourth quarter of 2022.

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.

Debt Obligations

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

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”) with its existing lender and certain of its subsidiaries.

The Fourth Modification

amends the Credit Agreement to provide for, among other things, a $5 million term loan by the existing lender to the borrowers to be

repaid in quarterly installments of principal and interest over a term of five years (the “Term Loan”).

The termination

date of the Term Loan is August 18, 2026, unless earlier terminated.

amends the Credit Agreement to provide for, among other things, a $5 million term loan by the existing lender to the borrowers to be repaid

in quarterly installments of principal and interest over a term of five years (the “Term Loan”).

The termination date

of the Term Loan is August 18, 2026, unless earlier terminated.

Except for the addition of the Term Loan, the Credit Agreement remains

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

The interest rate on debt outstanding

under the Loans as of December 31, 2021 was 2.15%.

The Company’s interest rate on debt outstanding

under the revolving line of credit and note payable as of December 31, 2022 was 6.17% and 6.29%, respectively.

We are in compliance with all applicable financial

debt covenants as of December 31, 2022.

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

indebtedness and related agreements.

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

and related agreements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing

arrangements as defined in Item 303(a)(4) of Regulation S-K.

We do not have any off-balance sheet financing arrangements

as defined in Item 303(a)(4) of Regulation S-K.

Contractual Obligations

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described below as our critical accounting policies.

Goodwill and intangible asset valuation

Goodwill impairment

Goodwill totaled $11,704 as of December 31, 2022.

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to the carrying value to determine if impairment is necessary.

We reviewed our indefinite lived intangible assets,

which consist of brand names totaling $3,700 as of December 31, 2021, using the relief from royalty method.

Significant assumptions include

the royalty rate, revenue growth rates, and discount rates.

Our assumptions were based on historical performance and management estimates

of future performance.

Our assessment did not result in an impairment in 2021.

Sales discounts & allowance

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Share-based compensation

Certain employees and non-employee directors

receive various forms of share-based payment awards and we recognize compensation expense for these awards based on their grant date

The fair values of stock option awards are estimated on the grant date using the Black-Scholes option pricing model, which

incorporates certain assumptions regarding the expected term of an award and expected stock price volatility.

The expected term is determined

under the simplified method, using an average of the contractual term and vesting period of the stock options.

The expected volatility

is based on the historic volatility of our common stock.

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

account for forfeitures as they occur.

Key assumptions are described in further detail in Note 11 to our consolidated financial statements.

No stock options were issued during 2021 or 2020.

Income taxes .

Certain employees and non-employee directors receive

various forms of share-based payment awards, and we recognize compensation expense for these awards based on their grant date fair values.

The grant fair value of Restricted Stock Units (“RSUs”) and Performance Share Unit (“PSUs”) awards is equal to

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

The Company granted RSU and PSU awards during 2022 to employees under the 2022

long-term incentive-based plan, and RSU awards to non-employee Directors under the 2022 Non-Employee Director Equity and Deferred Compensation

We do not estimate forfeitures in measuring the grant date fair value, but rather account for forfeitures as they occur.

11 to our consolidated financial statements for further detail.

We pay income taxes based on tax statutes, regulations,

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the years in which the differences are expected to reverse.

The assumptions about future taxable income require the use of significant judgment and are consistent with the

plans and estimates we are using to manage our underlying businesses.

We recognize an income tax benefit from an uncertain

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Recent Accounting Pronouncements .

See Note 2, Summary of Significant Accounting

Policies, in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for information

regarding recent accounting pronouncements.

See Note 2, Summary of Significant Accounting Policies,

in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for information regarding

recent accounting pronouncements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

What changed 10-K

Item 7. Management’s Discussion and Analysis