What changed in this filing

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Item 1. Financial Statements

2023-05-15 compared with 2022-11-14 · 287 added, 440 removed, 293 unchanged (71% of the section changed)

3 unchanged sentences

Consolidated Balance Sheets

September 30, 2022 and December 31, 2021

March 31, 2023 and December 31, 2022

(In thousands)

September 30,

Current assets

Cash and cash equivalents

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

Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $ 1,750 and $ 1,820 at March 31, 2023 and December 31, 2022 respectively

Inventories, net

14 unchanged sentences

Deferred income taxes, net

Other long-term liabilities

Total liabilities

Commitments and contingencies

Commitments and contingencies (Note 9)

Stockholders' equity

1 unchanged sentence

2,500 shares authorized;

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

no shares issued or outstanding at March 31, 2023 and December 31, 2022

Common stock, no par value;

1 unchanged sentence

17,274 shares issued;

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

14,645 outstanding at March 31, 2023 and December 31, 2022

Paid-in capital

3 unchanged sentences

Total liabilities and stockholders' equity

See accompanying notes to consolidated financial

See accompanying notes to consolidated financial statements

LIFEWAY FOODS, INC.

1 unchanged sentence

Consolidated Statements of Operations

For the three and nine months ended September

30, 2022 and 2021

For the three months ended March 31, 2023 and 2022

(In thousands, except per share data)

Three Months Ended

September 30,

Nine months Ended

September 30,

Cost of goods sold

1 unchanged sentence

Total cost of goods sold

Selling expenses

General and administrative

Selling expense

General and administrative expense

Amortization expense

Total operating expenses

Income from operations

Other income (expense):

Income (loss) from operations

Other (expense) income:

Interest expense

Gain on investments

Loss on sale of property and equipment

Other (expense) income, net

Total other income (expense)

Income before provision (benefit) for income taxes

Total other (expense) income

Income (loss) before provision for income taxes

Provision (benefit) for income taxes

Net income (loss)

Earnings (loss) per common share:

Weighted average common shares:

See accompanying notes to consolidated financial

See accompanying notes to consolidated financial statements

LIFEWAY FOODS, INC.

5 unchanged sentences

Balance, March 31, 2022

Issuance of common stock in connection with stock-based compensation

Stock-based compensation

Balance, June 30, 2021

Issuance of common stock in connection with stock-based compensation

Treasury stock purchased

Stock-based compensation

Balance, September 30, 2021

LIFEWAY FOODS, INC.

5 unchanged sentences

Balance, March 31, 2023

Issuance of common stock in connection with stock-based compensation

Stock-based compensation

Balance, June 30, 2022

Issuance of common stock in connection with stock-based compensation

Treasury stock purchased

Stock-based compensation

Balance, September 30, 2022

See accompanying notes to consolidated financial

See accompanying notes to consolidated financial statements

LIFEWAY FOODS, INC.

2 unchanged sentences

(In thousands)

Nine months ended September 30,

Three months ended March 31,

Cash flows from operating activities:

Adjustments to reconcile net income to operating cash

Net income (loss)

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

Depreciation and amortization

Non-cash interest expense

Non-cash rent expense

Bad debt expense

Deferred revenue

Stock-based compensation

Loss on sale of property and equipment

(Increase) decrease in operating assets:

6 unchanged sentences

Accrued income taxes

Net cash provided by operating activities

Net cash provided by (used in) operating activities

Cash flows from investing activities:

Purchases of property and equipment

Acquisition, net of cash acquired

Net cash used in investing activities

Cash flows from financing activities:

Purchase of treasury stock

Payment of deferred financing cost

Proceeds from note payable

Repayment of note payable

Net cash used in financing activities

Net (decrease) increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at the beginning of the period

4 unchanged sentences

Non-cash investing activities

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

See accompanying notes to consolidated financial

Accrued purchase of property and equipment

Increase in right-of-use assets and operating lease obligations

See accompanying notes to consolidated financial statements

LIFEWAY FOODS, INC.

13 unchanged sentences

Principles of consolidation

The consolidated financial statements include

the accounts of Lifeway Foods, Inc.

The consolidated financial statements include the

accounts of Lifeway Foods, Inc.

and all its wholly owned subsidiaries (collectively “Lifeway” or the “Company”).

All significant intercompany accounts and transactions have been eliminated.

Restatement of Previously Issued Consolidated

Financial Statements

As previously disclosed in Note 1 to the Company’s

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

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

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

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

The consolidated financial statements

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

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

statements included in the 2021 Form 10-K.

Reclassification

Certain amounts have been reclassified from cash flows from investing

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

This reclassification

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

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

Note 2 – Summary of Significant Accounting

A detailed description of our significant accounting

policies can be found in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Our significant accounting policies, which are

summarized in detail in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, have not materially changed.

The following

is a description of certain of our significant accounting policies.

Use of estimates

9 unchanged sentences

Cash and cash equivalents

The Company has $ 0

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

The restricted cash escrow funds of

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

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

The escrow funds of

were remitted to the sellers in August 2022.

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.

Customer concentration

Sales are predominately to companies in the retail

food industry located within the United States.

Two major customers accounted for approximately 24 % and 21 % of net sales for the three

months ended March 31, 2023 and 2022, respectively.

Advertising and promotional costs

Lifeway expenses advertising costs as incurred

and is reported in Selling expense in the Company’s consolidated statement of operations.

Lifeway expenses advertising costs as incurred and

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

Total advertising expense was $ 1,463 and $ 1,204

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

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

advertising expenses were $ 848 and $ 726 , respectively.

The Company is managed as a single reportable

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.

for the three months ended March 31, 2023 and 2022, respectively.

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.

Recent accounting pronouncements

Issued by not yet effective

In October 2021, the Financial Accounting Standards

6 unchanged sentences

The amendments in this ASU are effective for fiscal years beginning after December 15, 2022.

Early adoption is permitted,

including adoption in an interim period.

With early adoption, the amendments are applied retrospectively to all business combinations

for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of adoption and prospectively

to all business combinations that occur on or after the date of initial application.

Management is evaluating the impact of the new guidance

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

The Company adopted this standard

during the first quarter of 2023.

The adoption did not have a material impact on the Company’s financial statements.

In March 2020, the FASB issued ASU No.

7 unchanged sentences

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

Management is evaluating the impact of the

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

The Company adopted this standard during the

first quarter of 2023.

The adoption did not have a material impact on the Company’s financial statements.

In June 2016, the FASB issued ASU No.

Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, in November

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

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

(Topic 815), and Leases (Topic 842):

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

Instruments – Credit Losses.

The series of new guidance amends the impairment model by requiring entities to use a

forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of

financial instruments, including trade receivables.

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

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

guidance is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years,

with early adoption permitted.

Management is currently evaluating the impact that the new guidance and does not currently expect the

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

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

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

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.

The Company adopted this standard during the first quarter of 2023.

The adoption did not have a material impact on the Company’s financial statements.

Note 3 – Inventories, net

1 unchanged sentence

Schedule of inventories

September 30,

Finished goods

Total inventories

Total inventories, net

Note 4 – Property, Plant and Equipment, net

1 unchanged sentence

Schedule of property, plant and equipment

September 30,

Buildings and improvements

10 unchanged sentences

Balance at December 31, 2022

Balance at September 30, 2022

Balance at March 31, 2023

Intangible Assets

1 unchanged sentence

Schedule of finite-lived intangible assets

September 30, 2022

March 31, 2023

December 31, 2022

Intangible assets with finite lives:

Customer lists and other customer related intangibles

Customer relationship

Total finite lived intangible assets

Intangible assets with indefinite lives:

Brand names (1)

Total intangible assets

During the fourth quarter of 2021, the Company completed an assessment of the useful life of its one 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 intangible asset over 15 years.

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

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

Estimated amortization expense on intangible

assets for the next five years is as follows:

Total intangible assets, net

Estimated amortization expense on intangible assets

for the next five years is as follows:

Schedule of amortization expense on intangible assets

Three months ended December 31, 2022

Nine months ended December 31, 2023

Note 6 – Accrued Expenses

1 unchanged sentence

Schedule of accrued expenses

September 30,

Payroll and incentive compensation

5 unchanged sentences

Schedule of debt

September 30,

Term loan due August 18, 2026.

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

Interest (6.71% at March 31, 2023) payable monthly.

Unamortized deferred financing costs

3 unchanged sentences

The scheduled maturities of the term loan, excluding deferred financing

costs, at September 30, 2022 are as follows:

costs, at March 31, 2023 are as follows:

Schedule of maturities of long-term debt

Three months ended December 31, 2022

Nine months ended December 31, 2023

Total term loan

14 unchanged sentences

of the Revolving Loan was extended to June 30, 2025 , unless earlier terminated.

As amended, all outstanding amounts under the

revolving line of credit and term loan bear interest, at Lifeway’s election, at either the lender Base Rate (the Prime Rate minus

1.00 %) or the LIBOR plus 1.95 %, payable monthly in arrears.

Lifeway is also required to pay a quarterly unused revolving line of credit

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

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 September 30, 2022.

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 March 31, 2023.

Revolving Credit Facility

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

outstanding under the Revolving Credit Facility.

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

as of September 30, 2022.

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

As of March 31, 2023, the Company had $ 2,777 outstanding

under the Revolving Credit Facility.

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

March 31, 2023.

Lifeway’s interest rate on debt outstanding under the Revolving Credit Facility as of March 31, 2023 was 6.66 %.

Note 8 – Leases

3 unchanged sentences

to five years.

Some of its leases include options to extend the leases for up to 5 years and have been included in our calculation of

the right-of-use asset and lease liabilities.

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

7 unchanged sentences

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.

and obtains substantially all the economic benefits of the asset.

Right-of-use assets and lease liabilities are measured

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

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.

expense for minimum lease payments is recognized on a straight-line basis over the lease term.

The Company does not record leases with an initial

1 unchanged sentence

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

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

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

Right-of-use assets and lease liabilities are

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.

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

Total lease expense was $ 31 and $ 65 (including short term leases) for the three months ended March 31, 2023 and 2022, respectively.

Future maturities of lease liabilities were as follows:

Future maturities of lease liabilities

Operating Leases

Three months ended December 31, 2022

Nine months ended December 31, 2023

Total lease payments

Present value of lease liabilities

The weighted-average remaining lease term for

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

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

of September 30, 2022.

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

September 30, 2022 and 2021, respectively.

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

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

The weighted-average remaining lease term for its

operating leases was 2.54 years as of March 31, 2023.

The weighted average discount rate of its operating leases was 11.67 % as of March

Cash paid for amounts included in the measurement of lease liabilities was $ 25 and $ 43 for the three months ended March 31,

2023 and 2022, respectively.

Note 9 – Commitments and contingencies

2 unchanged sentences

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

13 for subsequent event litigation.

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

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.

Note 10 – Income taxes

Income taxes were recognized at effective rates

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

The effective tax rate for the three months ended

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

The Company has historically calculated the provision

for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year income,

excluding unusual or infrequently occurring discrete items, for the reporting period.

In accordance with the authoritative guidance, the

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

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

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

During the quarter and year to date period

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

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

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

Income taxes were recognized at effective rates of

for the three months ended March 31, 2023 and 2022, respectively.

The change in the Company’s effective tax rate for the three

months ended March 31, 2023 compared to 2022 is primarily driven by the change in method for calculation of period expense.

period applies the estimated annual rate method.

As described below, the period ended March 31, 2022 applied the discrete rate method.

The Company calculates the provision for income taxes

during interim reporting periods by applying an estimate of the annual effective tax rate for the full year, excluding unusual or infrequently

occurring discrete items, and applies that rate to income (loss) before provision for income taxes for the period.

In accordance with

the authoritative guidance, the Company used a discrete effective tax rate method to calculate income taxes for the quarter ended March

31, 2022 because small changes in the estimated level and mix of annual income or loss by jurisdiction would result in significant changes

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

The Company’s effective tax rate may change

8 unchanged sentences

Although similar items were reflected in 2023, the percentage effect is different due to the difference

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

Unrecognized tax benefits were $ 0 and $ 98 at September

in pre-tax income (loss) in 2023 compared to 2022.

Unrecognized tax benefits were $ 0 at March 31, 2023

and 2022, respectively.

The Company settled its one unrecognized tax benefit during the quarter ended March 31, 2022.

does not expect material changes to its unrecognized tax benefits during the next twelve months.

However, the outcome of tax audits cannot

be predicted with certainty.

If a tax audit is resolved in a manner inconsistent with its expectations, the Company could be required

to adjust its provision for income taxes in the period such resolution occurs.

The Company does not expect material changes to its unrecognized tax benefits during the next twelve months.

the outcome of tax audits cannot be predicted with certainty.

If a tax audit is resolved in a manner inconsistent with its expectations,

the Company could be required to adjust its provision for income taxes in the period such resolution occurs.

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 September 30,

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

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

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

On August 31, 2022,

Lifeway stockholders approved the 2022 Plan.

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

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

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

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

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

Awards granted

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

Awards may be subject to cliff-vesting

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

The Plan Administrator may

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

for issuance under the 2022 Plan.

As of September 30, 2022, 3.00

million shares remain available to award under the 2022 Plan.

In December 2015, Lifeway stockholders approved the

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

appreciation rights, unrestricted stock, restricted stock, restricted stock units, performance shares and performance units to qualifying

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

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

The number of performance shares that participants

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

Stock awards generally vest over a three-year

performance or service period.

At March 31, 2023, 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.

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

As of March 31, 2023, 3.00 million shares remain available to award under the 2022 Plan.

Stock Options

The following table summarizes stock option activity during the nine

months ended September 30, 2022:

The following table summarizes stock option activity during the three months

ended March 31, 2023:

Schedule of stock option activity

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Outstanding at December 31, 2022

Outstanding at September 30, 2022

Exercisable at September 30, 2022

As of December 31, 2019, all outstanding options

were vested and there was no remaining unearned compensation expense.

Outstanding at March 31, 2023

Exercisable at March 31, 2023

Restricted Stock Awards

A Restricted Stock Award (“RSA”)

represents the right to receive one share of common stock in the future.

A Restricted Stock Award (“RSA”) represents

the right to receive one share of common stock in the future.

RSAs have no exercise price.

The grant date fair value of

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

Lifeway expenses RSAs over the vesting

The grant date fair value of the awards is

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

Lifeway expenses RSAs over the vesting period.

The following

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

table summarizes RSA activity during the three months ended March 31, 2023.

Schedule of RSA Activity

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Shares issued upon vesting

Outstanding at September 30, 2022

Vested and deferred at September 30, 2022

For the nine months ended September 30, 2022

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

respectively.

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

respectively, were also recognized.

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

expense recognized in the consolidated statements of operations was $ 48

respectively.

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

respectively, were also recognized.

Future compensation expense related to restricted stock awards was $ 624

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

Outstanding at March 31, 2023

Vested and deferred at March 31, 2023

For the three months ended March 31, 2023 and 2022

total pre-tax stock-based compensation expense recognized in the consolidated statements of operations was $ 104 and $ 63 , respectively.

For the three months ended March 31, 2023 and 2022 tax-related benefits of $ 29 and $ 18 , respectively, were also recognized.

Future compensation

expense related to restricted stock awards was $ 417 as of March 31, 2023 and will be recognized on a weighted average basis over the next

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.

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

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.

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under the Stock Purchase Agreement dated October 1, 1999.

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

For the three months ended March 31, 2023 and 2022, $ 43 and $ 85 was expensed

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

For the three months ended September 30,

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

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

in 2024, respectively, subject to vesting.

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

Therefore, the

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

As of March 31, 2023, the total remaining

unearned compensation was $ 86 , of which $ 62 will be recognized in 2023, and $ 24 in 2024, respectively, subject to vesting.

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.

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

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

For the three months ended

September 30, 2022 and 2021, $ 85 and

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

As of September 30, 2022,

the total remaining unearned compensation was $ 319 ,

of which $ 85 will

be recognized in 2022, $ 194 in

2023, $ 40 in

2024, respectively, subject to vesting.

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

Therefore, the

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

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 three months ended March 31, 2023 and 2022, $ 84 and $ 166 was expensed

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

As of March 31, 2023, the total remaining

unearned compensation was $ 150 , of which $ 110 will be recognized in 2023, $ 40 in 2024, respectively, subject to vesting.

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.

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

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

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

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

The PSU awards will be

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

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

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

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

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

For the three months ended

September 30, 2022 and 2021, $ 31 and

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

The 2022 long-term incentive plan also granted

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

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

The stock based compensation expense for these awards is included

in the Restricted Stock Award section above.

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.

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

For the three months ended March 31, 2023 and 2022, $ 112 and $ 0 was expensed

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

The 2022 long-term incentive plan also granted restricted

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

three anniversaries of the August 31, 2022 grant date.

The stock-based compensation expense for these awards is included in the Restricted

Stock Award section above.

Non-Employee Director Plan

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the 2022 Directors Plan is 500 thousand shares.

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

Director Plan.

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

in any year shall not exceed $170.

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

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

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

Deferred benefits are paid in a lump sum upon the

applicable director’s departure from the Board of Directors.

As of March 31, 2023, 466 thousand shares remain available to award under the 2022 Director

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, the Company matches employee contributions under a

prescribed formula.

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

of operations was $ 328 and $ 315 , respectively.

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

in the consolidated statements of operations was $ 97 .

Note 12 – 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.

Net sales by product category were as follows

for the nine months ended September 30:

Schedule of sales of products by category

Drinkable Kefir other than ProBugs

Cream and other

Drinkable yogurt

ProBugs Kefir

Net sales of products by category were as follows

for the three months ended September 30:

Drinkable Kefir other than ProBugs

Cream and other

Drinkable yogurt

ProBugs Kefir

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 nine months ended September 30, 2022 and 2021, respectively.

Two major customers accounted for approximately

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

Lifeway has a defined contribution plan which is available

to substantially all full-time employees.

Under the terms of the plan, the Company matches employee contributions under a prescribed formula.

For the three months ended March 31, 2023 and 2022, total contribution expense recognized in the consolidated statements of operations

was $ 150 and $ 129 , respectively.

Note 12 – Related Party Transactions

Lifeway obtains consulting services from Ludmila

Consulting Services

Lifeway obtained consulting services from Ludmila

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

On December 28, 2020,

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

Under the terms and conditions of the Agreement, Ms.

Smolyansky will continue to provide consulting services with respect

to, among other things, the Company’s business strategy, international expansion and product management and expansion.

For the services,

the Company will pay an annual service fee of $500, and Ms.

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

based on the achievement of specified performance criteria.

The annual service fee and target bonus amounts are subject to periodic change

by the Compensation Committee of the Company’s Board of Directors on 30 days’ prior written notice to the Chairperson.

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

On January 4, 2022, the Company notified Ms.

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

Service fees earned are included in general and administrative expenses

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

and 2021, respectively.

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

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

Lifeway is also a party to an endorsement agreement,

On January 4, 2022, the

Company notified Ms.

Smolyansky that it was terminating the amended and restated consultancy agreement effective January 17, 2022.

fees earned are included in general and administrative expenses in the accompanying consolidated statements of operations and were $ 0

and $ 22 during each of the three months ended March 31, 2023 and 2022, respectively.

Endorsement Agreement

Lifeway was 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

Chairperson of its Board of Directors (the “Endorsement Agreement”) under which it paid 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.

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

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of $400, (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

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

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

Royalties earned were $ 100

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

Royalties earned were $ 0 and $ 150 during each of the

three months ended March 31, 2023 and 2022, respectively.

Note 13 – Subsequent Events

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

Purchase Agreement with Ludmila Smolyansky (“Ms.

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

Pursuant to the Stock Purchase Agreement, the

Company and Ms.

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

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

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

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

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

Smolyansky, which are secured by previously disclosed

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

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

As a closing condition to the Stock Purchase Agreement,

Smolyansky and Mr.

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

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

Smolyansky and Mr.

to the Amendment, Ms.

Smolyansky and Mr.

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

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

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

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

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

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

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

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

assets of the Company;

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

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

On April 14, 2023, the Company filed a lawsuit against

Ludmila Smolyansky, a current director of the Company (“Ms.

Smolyansky”), and Edward Smolyansky, a former director and

executive officer of the Company (“Mr.

Smolyansky,” and together with Ms.

Smolyansky, the “Defendants”) in

the Circuit Court of Cook County, Illinois.

The Company alleged, among other claims, that the Defendants breached their contractual obligations

under the Proxy Settlement Agreement, the Employment Settlement Agreement between the Company and Mr.

Smolyansky and the Endorsement Termination

Agreement between the Company and Ms.

Smolyansky (collectively, the “Agreements”), as applicable, by publicly making statements

which negatively commented upon the Company, including the Company’s corporate activities, Board and management and submitting what

was purported to be an alternate slate of director nominees for consideration at this Annual Meeting in violation of the Proxy Settlement

The Company is seeking recovery of at least $100 from Mr.

Smolyansky and at least

$400 from Ms.

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

What changed 10-Q

Item 1. Financial Statements