Lifeway Foods, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Accounting Firm (PCAOB ID 199) F-1 Report of Independent Registered Accounting Firm (PCAOB ID 248 ) F-2 Consolidated Balance Sheets as of December 31, 2022 and 2021 F-3 Consolidated Statements of Operations for the Years Ended December 31, 2022 and 2021 F-4 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022 and 2021 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021 F-6 Notes to Consolidated Financial Statements F-7 24 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 sheet of Lifeway Foods, Inc. and Subsidiaries (the “Company”) as of December 31, 2021, the related consolidated statement of operations, stockholders’ equity, and cash flows for the year 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 the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. 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 audit 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 audit 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 audit provide a reasonable basis for our opinion. /s/ Mayer Hoffman McCann P.C. We have served as the Company's auditor since 2015, which ended in 2022 Chicago, Illinois July 21, 2022 F- 1 Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders Lifeway Foods, Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheet of Lifeway Foods, Inc. and subsidiaries (the “Company”) as of December 31, 2022, the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2022, 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, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. 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 audit. 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 audit 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 audit 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 audit 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 audit 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 audit provides 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/ GRANT THORNTON LLP We have served as the Company’s auditor since 2022. Chicago, Illinois March 27, 2023 F- 2 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2022 and 2021 (In thousands) December 31, 2022 2021 Current assets Cash and cash equivalents $ 4,444 $ 9,233 Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $ 1,820 and $ 1,170 at December 31, 2022 and 2021, respectively 11,414 9,930 Inventories, net 9,631 8,285 Prepaid expenses and other current assets 1,445 1,254 Refundable income taxes 44 344 Total current assets 26,978 29,046 Property, plant and equipment, net 20,905 20,130 Operating lease right-of use asset 174 216 Goodwill 11,704 11,704 Intangible assets, net 7,438 7,978 Other assets 1,800 1,800 Total assets $ 68,999 $ 70,874 Current liabilities Current portion of note payable $ 1,250 $ 1,000 Accounts payable 7,979 6,614 Accrued expenses 3,813 3,724 Accrued income taxes – 725 Total current liabilities 13,042 12,063 Line of credit 2,777 2,777 Note payable 2,477 3,470 Operating lease liabilities 104 85 Deferred income taxes, net 3,029 3,201 Other long-term liabilities – 147 Total liabilities 21,429 21,743 Commitments and contingencies (Note 9) – – 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; 14,645 and 15,435 shares outstanding at 2022 and 2021 6,509 6,509 Paid-in capital 3,624 2,552 Treasury stock, at cost ( 16,993 ) ( 13,436 ) Retained earnings 54,430 53,506 Total stockholders’ equity 47,570 49,131 Total liabilities and stockholders’ equity $ 68,999 $ 70,874 See accompanying notes to consolidated financial statements F- 3 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the Years Ended December 31, 2022 and 2021 (In thousands, except per share data) 2022 2021 Net sales $ 141,568 $ 119,065 Cost of goods sold 112,350 87,604 Depreciation expense 2,432 2,751 Total cost of goods sold 114,782 90,355 Gross profit 26,786 28,710 Selling expenses 11,304 11,097 General and administrative 12,593 11,611 Amortization expense 540 122 Total operating expenses 24,437 22,830 Income from operations 2,349 5,880 Other income (expense): Interest expense ( 267 ) ( 116 ) Realized gain on investments, net – 2 Loss on sale of property and equipment ( 241 ) ( 88 ) Other (expense) income – ( 62 ) Total other income (expense) ( 508 ) ( 264 ) Income before provision for income taxes 1,841 5,616 Provision for income taxes 917 2,305 Net income $ 924 $ 3,311 Basic earnings per common share $ 0.06 $ 0.21 Diluted earnings per common share $ 0.06 $ 0.21 Weighted average number of shares outstanding - Basic 15,396 15,537 Weighted average number of shares outstanding - Diluted 15,718 15,773 See accompanying notes to consolidated financial statements F- 4 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity For the Years Ended December 31, 2022 and 2021 (In thousands) Common Stock Issued In treasury Paid-In Retained Total Shares $ Shares $ Capital Earnings Equity Balance, January 1, 2021 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 Treasury stock purchased – – ( 850 ) ( 3,997 ) – – ( 3,997 ) Issuance of common stock in connection with stock-based compensation – – 60 440 ( 558 ) – ( 118 ) Stock-based compensation – – – – 1,630 – 1,630 Net Income – – – – – 924 924 Balance, December 31, 2022 17,274 $ 6,509 ( 2,629 ) $ ( 16,993 ) $ 3,624 $ 54,430 $ 47,570 See accompanying notes to consolidated financial statements F- 5 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended December 31, 2022 and 2021 (In thousands) 2022 2021 Cash flows from operating activities: Net income $ 924 $ 3,311 Adjustments to reconcile net income to operating cash flow: Depreciation and amortization 2,972 2,873 Non-cash interest expense 6 11 Non-cash rent expense – 1 Bad debt expense – 2 Deferred revenue ( 28 ) ( 30 ) Stock-based compensation 1,109 1,144 Deferred income taxes ( 172 ) 257 Loss on sale of property and equipment 241 88 (Increase) decrease in operating assets: Accounts receivable ( 1,483 ) ( 1,931 ) Inventories ( 1,345 ) ( 1,356 ) Refundable income taxes 300 ( 313 ) Prepaid expenses and other current assets ( 191 ) ( 91 ) Increase (decrease) in operating liabilities: Accounts payable 1,945 1,022 Accrued expenses 434 504 Accrued income taxes ( 725 ) 72 Net cash provided by operating activities 3,987 5,564 Cash flows from investing activities: Purchases of property and equipment ( 3,449 ) ( 1,922 ) Acquisition, net of cash acquired ( 580 ) ( 5,220 ) Net cash used in investing activities ( 4,029 ) ( 7,142 ) Cash flows from financing activities: Purchase of treasury stock ( 3,997 ) ( 1,583 ) Payment of deferred financing cost – ( 32 ) Proceeds from note payable – 5,000 Repayment of note payable ( 750 ) ( 500 ) Net cash (used in) provided by financing activities ( 4,747 ) 2,885 Net (decrease) increase in cash and cash equivalents ( 4,789 ) 1,307 Cash and cash equivalents at the beginning of the period 9,233 7,926 Cash and cash equivalents at the end of the period $ 4,444 $ 9,233 Supplemental cash flow information: Cash paid for income taxes, net of (refunds) $ 1,121 $ 2,288 Cash paid for interest $ 247 $ 102 Non-cash investing activities Increase in right-of-use assets and operating lease obligations $ 83 $ 45 Business acquisition escrow payable $ – $ 580 See accompanying notes to consolidated financial statements F- 6 LIFEWAY FOODS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2022 and 2021 (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 Foods, Inc. and its wholly owned subsidiaries (collectively “Lifeway” or the “Company”). All inter-company balances and transactions have been eliminated in the consolidated financial statements. 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 $ 3,700 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 was effective January 1, 2022, at which time the Company began 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. F- 7 The Company has no restricted cash as of December 31, 2022. The Restricted cash escrow funds of $ 580 were 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 escrow funds were remitted to the sellers in August 2022. 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. 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 and beverage 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 includes 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. 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. F- 8 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. Intangible Assets Goodwill 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. 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 estimated 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. F- 9 Amortizable intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Lifeway conducts more frequent impairment assessments if certain conditions exist, such as a change in the competitive landscape, any internal decisions to pursue new or different strategies, a loss of a significant customer, or a significant change in the market place including changes in the prices paid for its products or changes in the size of the market for its products. If an evaluation of the undiscounted cash flows indicates impairment, the asset is written down to its estimated fair value, which is generally based on discounted future cash flows. If the estimated remaining useful life of an intangible asset is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life. Fair value measurements Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement: Level 1 – Quoted prices in active markets for identical assets or liabilities. Level 2 – 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, 2022, and 2021, 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 2022 or 2021. 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. F- 10 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. 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 $ 3,353 and $ 3,267 for the years ended December 31, 2022 and 2021, 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, 2022 and 2021, there were 322 and 236 common stock equivalents outstanding, respectively. Segments The Company is managed as a single reportable segment. The Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), reviews financial information on an aggregate basis for purposes of allocating resources and assessing financial performance, as well as for making strategic operational decisions and managing the organization. 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- 11 Recent accounting pronouncements Issued but not yet effective In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 does not expect the adoption of this ASU to have a material impact on its 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 will adopt this new guidance effective January 1, 2023, and does not expect the adoption of this ASU to have a material impact on its 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 does not expect the adoption of this ASU to have a material impact on its consolidated financial statements. Note 3 – Inventories, net Schedule of inventories December 31, 2022 2021 Ingredients $ 2,859 $ 2,279 Packaging 3,233 2,723 Finished goods 3,539 3,283 Total inventories, net $ 9,631 $ 8,285 F- 12 Note 4 – Property, Plant and Equipment, net Schedule of property, plant and equipment December 31, 2022 2021 Land $ 1,565 $ 1,565 Buildings and improvements 19,341 17,920 Machinery and equipment 32,786 32,073 Vehicles 640 640 Office equipment 979 900 Construction in process 1,180 417 56,491 53,515 Less accumulated depreciation ( 35,586 ) ( 33,385 ) Total property, plant and equipment, net $ 20,905 $ 20,130 Note 5 – Goodwill and Intangible Assets Goodwill Goodwill consisted of the following: Schedule of goodwill and indefinite-lived intangible assets Total Balance at December 31, 2021, before accumulated impairment loses $ 12,948 Accumulated impairment losses ( 1,244 ) Balance at December 31, 2021 $ 11,704 Balance at December 31, 2022 $ 11,704 Goodwill The Company performed the annual impairment assessment of goodwill for its single reporting unit as of December 31, 2022 and 2021, 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. Approximately $1,664 of goodwill is deductible for income tax purposes. F- 13 Intangible Assets The gross carrying amounts and accumulated amortization of intangible assets consisted of the following: Schedule of finite-lived intangible assets December 31, 2022 December 31, 2021 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 ( 1,212 ) 2,173 3,385 ( 1,052 ) 2,333 Brand names 7,948 ( 2,683 ) 5,265 7,948 ( 2,303 ) 5,645 Formula 438 ( 438 ) – 438 ( 438 ) – Total intangible assets, net $ 16,344 $ ( 8,906 ) $ 7,438 $ 16,344 $ ( 8,366 ) $ 7,978 Estimated amortization expense on intangible assets for the next five years is as follows: Schedule of amortization expense on intangible assets Year Amortization 2023 $ 540 2024 $ 540 2025 $ 540 2026 $ 540 2027 $ 540 F- 14 Note 6 – Accrued Expenses Accrued expenses consisted of the following: Schedule of accrued expenses December 31, 2022 2021 Payroll and incentive compensation $ 2,925 $ 2,951 Real estate taxes 394 359 Current portion of operating lease liabilities 70 131 Other 424 283 Total accrued expenses $ 3,813 $ 3,724 Note 7 – Debt Note payable consisted of the following: Schedule of notes payable December 31, 2022 2021 Term loan due August 18, 2026. Interest ( 6.29 % at December 31, 2022) payable monthly. $ 3,750 $ 4,500 Unamortized deferred financing costs ( 23 ) ( 30 ) Total note payable 3,727 4,470 Less current portion ( 1,250 ) ( 1,000 ) Total long-term portion $ 2,477 $ 3,470 The scheduled maturities of the term loan, excluding deferred financing costs, at December 31, 2022 are as follows: Schedule of maturities of long-term debt 2023 $ 1,250 2024 1,000 2025 1,000 2026 500 Total term loan $ 3,750 Credit Agreement On August 18, 2021, Lifeway entered into the Fourth Modification (the “Fourth Modification”) to the Amended and Restated Loan and Security Agreement (as amended and modified from time to time, the “Credit Agreement” and, as amended and modified by the Fourth Modification, the “Modified Credit Agreement”) with its existing lender and certain of its subsidiaries. The Fourth Modification amends the Credit Agreement to provide for, among other things, a $ 5 million term loan by the existing lender to the borrowers to be repaid in quarterly installments of principal and interest over a term of five years (the “Term Loan”). The termination date of the Term Loan is August 18, 2026, unless earlier terminated. 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. F- 15 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 %. The Modified Credit Agreement includes customary representations, warranties, and covenants, including financial covenants requiring the Company to maintain a fixed charge coverage ratio of no less than 1.25 to 1.00, and a minimum working capital financial covenant, as defined, of no less than $11.25 million, in 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, 2022. Revolving Credit Facility As of December 31, 2022, 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, 2022. Lifeway’s interest rate on debt outstanding under the Revolving Credit Facility as of December 31, 2022 was 6.17 %. Deferred Financing Costs As of December 31, 2022, net unamortized deferred financing costs of $ 23 related to the term loan were included as a direct deduction from outstanding long-term debt. Note 8 – Leases The Company 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. The Company includes lease extension options, if applicable and reasonably certain to be exercised, in the 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. 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. 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 $ 229 and $ 304 (including short term leases) for the years ended December 31, 2022 and 2021, respectively. F- 16 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. When the Company is unable to determine an implicit interest rate, 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 2023 $ 86 2024 67 2025 33 2026 10 2027 3 Total lease payments 199 Less: Interest ( 25 ) Present value of lease liabilities $ 174 The weighted-average remaining lease term for its operating leases was 2.7 years as of December 31, 2022. The weighted average discount rate of its operating leases was 11.70 % as of December 31, 2022. Cash paid for amounts included in the measurement of lease liabilities was $ 151 and $ 198 for the year ended December 31, 2022 and 2021, respectively. Note 9 – Commitments and Contingencies Litigation Lifeway is involved in various legal proceedings, claims, disputes, regulatory matters, audits, and proceedings arising in the ordinary course of, or incidental to the Company’s business, including commercial disputes, product liabilities, intellectual property matters and employment-related matters. Lifeway records provisions in the consolidated financial statements for pending 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. F- 17 Note 10 – Income taxes The provision for income taxes consists of the following: Provision for income taxes For the Years Ended December 31, 2022 2021 Current: Federal $ 645 $ 1,097 State and local 444 951 Total current 1,089 2,048 Deferred ( 172 ) 257 Provision for income taxes $ 917 $ 2,305 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 2022 2021 Amount Percentage Amount Percentage Federal income tax at statutory rate $ 392 21.0 % $ 1,179 21.0 % State and local tax, net 287 15.4 % 440 7.8 % Other permanent differences 8 0.4 % 6 0.1 % Section 162m 229 12.2 % 206 3.7 % Stock based compensation 127 6.8 % 100 1.8 % Uncertain tax positions – – % 218 3.9 % Change in tax rates ( 83 ) ( 4.4 % ) 198 3.4 % Other ( 43 ) ( 2.3 % ) ( 42 ) ( 0.7 % ) Provision for income taxes $ 917 49.1 % $ 2,305 41.0 % 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, 2022 2021 Deferred tax liabilities attributable to: Accumulated depreciation and amortization $ ( 3,394 ) $ ( 3,401 ) Unrealized gains ( 472 ) ( 473 ) Total deferred tax liabilities ( 3,866 ) ( 3,874 ) Deferred tax assets attributable to: Net operating losses 6 6 Accrued compensation 287 170 Incentive compensation 194 164 Inventory 328 324 Allowances for doubtful accounts and discounts 5 5 Deferred revenue – 10 Other 17 ( 6 ) Total net deferred tax assets 837 673 Net deferred tax liabilities $ ( 3,029 ) $ ( 3,201 ) F- 18 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 2022 2021 Balance at January 1 $ 396 $ 95 Additions based on tax positions of prior years – 301 Settlement for tax positions of prior years ( 396 ) – Balance at December 31 $ – $ 396 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 2019 and subsequent federal and state tax years remain open by statute. As of December 31, 2022, the unrecognized tax benefit is $0. The amount of interest and penalties recognized in the consolidated statements of operations was $ 0 during 2022 and 2021, respectively. The amount of accrued interest and penalties recognized in the consolidated balance sheets was $ 0 at December 31, 2022 and 2021, respectively. Note 11 – Stock-based and Other Compensation 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 December 31, 2022, no shares remain available for award under the 2015 Omnibus Incentive Plan as it was terminated on August 31, 2022. However, 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. The 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. F- 19 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 December 31, 2022, 3.00 million shares remain available to award under the 2022 Plan. Stock Options The following table summarizes stock option activity during the year ended December 31, 2022: Schedule of stock option activity Options Weighted average exercise price Weighted average remaining contractual life Aggregate intrinsic value Outstanding at December 31, 2021 41 $ 10.42 4.22 $ – Granted – – – Exercised – – – – Forfeited – – – – Outstanding at December 31, 2022 41 $ 10.42 3.22 $ – Exercisable at December 31, 2022 41 $ 10.42 3.22 $ – 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. 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, 2022. Schedule of RSA activity Restricted Stock Awards Weighted Average Grant Date Fair Value Outstanding at December 31, 2021 94 $ 4.50 Granted 97 6.25 Shares issued upon vesting ( 27 ) 3.43 Forfeited – – Outstanding at December 31, 2022 164 $ 5.69 Vested and deferred at December 31, 2022 37 $ 5.60 F- 20 Lifeway expenses RSAs over the service period. For the years ended December 31, 2022 and 2021 total stock-based compensation expense recognized in the consolidated statements of operations was $ 279 and $ 264 , respectively. For the years ended December 31, 2022 and 2021 tax-related benefits of $ 78 and $ 76 , respectively, were also recognized. As of December 31, 2022, the total remaining unearned compensation related to non-vested RSAs was $ 520 , which is expected to be amortized over the weighted-average remaining service period of 1.55 years. Long-Term Incentive Plan Compensation 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 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, 2022 and 2021, $ 229 and $ 342 was expensed as stock-based compensation expense in the consolidated statements of operations. As of December 31, 2022, the total remaining unearned compensation was $ 129 , of which $ 105 will be recognized 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 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. For the years ended December 31, 2022 and 2021, $ 449 and $ 386 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. As of December 31, 2022, the total remaining unearned compensation was $ 234 , of which $ 194 will be recognized in 2023, and $ 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. 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. The PSU awards do not vest during the three-year measurement period. The PSUs have a grant date fair value of $6.25 dollars per share. For the twelve months ended December 31, 2022, $ 151 w as 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. F- 21 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 December 31, 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 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, 2022 and 2021 total contribution expense recognized in the consolidated statements of operations was $ 446 and $ 432 , respectively. Note 12 – Segments, Products and Customers Lifeway’s primary product is drinkable kefir. The Company manufactures (directly or through a co-manufacturer) and markets products under the Lifeway, Fresh Made, and GlenOaks Farms brand names, as well as under private labels on behalf of certain customers. The Company’s product categories are: · Drinkable Kefir, a cultured dairy product 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 primarily consists of cream, a byproduct of raw milk processing. · Drinkable Yogurt, sold in a variety of sizes and flavors. · ProBugs, a line of kefir products designed for children. · Other Dairy, which primarily consists 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 as the Chief Executive 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- 22 Net sales of products by category were as follows for the years ended December 31: Schedule of sales of products by category 2022 2021 In thousands $ % $ % Drinkable Kefir other than ProBugs 110,247 78 % 95,850 80 % Cheese 12,651 9 % 12,612 11 % Cream and other 7,465 5 % 3,582 3 % Drinkable Yogurt 6,105 4 % 2,223 2 % ProBugs Kefir 3,403 3 % 3,178 3 % Other dairy 1,697 1 % 1,620 1 % Net Sales 141,568 100 % 119,065 100 % Significant Customers – Sales are predominately to companies in the retail food industry located within the United States. Two major customers accounted for approximately 22 % and 23 % of net sales for the years ended December 31, 2022 and 2021, respectively. Two major customers accounted for 28 % and 32 % of accounts receivable as of December 31, 2022 and 2021, respectively. Note 13 – Share repurchase program 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. Stock Purchase Agreement 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. Smolyansky. 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. Smolyansky 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, Ms. Smolyansky and Mr. Smolyansky delivered 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. Smolyansky. Pursuant 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. F- 23 Note 14 – Related party transactions Consulting Services 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 Ms. Smolyansky. 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. The Agreement shall continue until either party provides at least a 10-day written notice of termination. On January 4, 2022, the Company notified Ms. Smolyansky that it was terminating the Agreement effective January 17, 2022. Service fees earned are included in general and administrative expenses in the accompanying consolidated statements of operations and were $ 22 and $ 500 during the years ended December 31, 2022 and 2021, respectively. Endorsement Agreement 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 Agreement, the Company and Ms. Smolyansky have agreed, among other things, that (i) the Company will pay Ms. Smolyansky a lump sum payment of $ 400,000 , (ii) Ms. Smolyansky will no longer have any further claims against the Company 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 and $ 600 during the years ended December 31, 2022 and 2021, respectively. Stock Purchase Agreement See the November 2022 stock purchase agreement between Ms. Smolyansky and the Company in Note 13. F- 24 Note 15 – 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. F- 25 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. 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. F- 26 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.