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Item 8. Financial Statements and Supplementary Data

2024-03-20 compared with 2023-03-27 · 438 added, 542 removed, 503 unchanged (66% of the section changed)

STATEMENTS AND SUPPLEMENTARY DATA

FINANCIAL STATEMENTS

AND SUPPLEMENTARY DATA

Report of Independent Registered Accounting Firm (PCAOB ID 248 )

Report of Independent Registered Accounting Firm (PCAOB

Consolidated Balance Sheets as of December 31, 2023 and 2022

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Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting

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

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

Report of Independent Registered Public Accounting

Board of Directors and Stockholders

OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Lifeway Foods, Inc.

Opinion on the financial statements

We have audited the accompanying consolidated balance sheet of Lifeway

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.

We have audited the accompanying consolidated balance sheets of Lifeway

(an Illinois corporation) and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated

statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2023,

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, 2023 and 2022, and the results of its operations

and its cash flows for each of the two years in the period ended December 31, 2023, 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

Our responsibility is to express an opinion on the Company’s financial statements based on our audit.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public

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of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of 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

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of its internal control over financial reporting.

As part of our audit we are required to obtain an understanding of internal control

As part of our audits we are required to obtain an understanding of internal control

over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control

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Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material

Our audits included performing procedures to assess the risks of material

misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included

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 provides a reasonable basis for our opinion.

We believe that our audits provide a reasonable basis for our opinion.

Critical audit matters

Critical audit matters are matters arising from the current period

The 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:

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We determined that there are no critical audit matters.

/s/ GRANT THORNTON LLP

GRANT THORNTON LLP

We have served as the Company’s auditor since 2022.

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Cash and cash equivalents

Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $ 1,820 and $ 1,170 at December 31, 2022 and 2021, respectively

Accounts receivable, net of allowance for credit losses and discounts & allowances of $ 1,270 and $ 1,820 at December 31, 2023 and 2022, respectively

Inventories, net

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Deferred income taxes, net

Other long-term liabilities

Total liabilities

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Interest expense

Realized gain on investments, net

Loss on sale of property and equipment

Other (expense) income

Gain (loss) on sale of property and equipment

Other income (expense)

Total other income (expense)

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Provision for income taxes

Basic earnings per common share

Diluted earnings per common share

Weighted average number of shares outstanding - Basic

Weighted average number of shares outstanding - Diluted

Net earnings per common share:

Weighted average common shares outstanding:

See accompanying notes to consolidated financial

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AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Stockholders’

For the Years Ended December 31, 2023 and 2022

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Balance, December 31, 2022

Treasury stock purchased

Issuance of common stock in connection with stock-based compensation

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Non-cash interest expense

Non-cash rent expense

Bad debt expense

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Deferred income taxes

Loss on sale of property and equipment

(Gain) loss on sale of property and equipment

(Increase) decrease in operating assets:

Accounts receivable

Refundable income taxes

Prepaid expenses and other current assets

Refundable income taxes

Increase (decrease) in operating liabilities:

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Purchases of property and equipment

Proceeds from sale of equipment

Acquisition, net of cash acquired

Purchase of investments

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 line of credit

Repayment of note payable

Net cash (used in) provided by financing activities

Net (decrease) increase in cash and cash equivalents

Purchase of treasury stock

Net cash used in financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at the beginning of the period

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Non-cash investing activities

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

Business acquisition escrow payable

Accrued purchase of property and equipment

Right-of-use assets obtained in exchange for lease obligations

See accompanying notes to consolidated financial

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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

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approximates or equals fair value due to their short-term nature.

Lifeway from time to time may have bank deposits in

excess of insurance limits of the Federal Deposit Insurance Corporation.

The Company places its cash and cash equivalents with high credit

quality financial institutions.

Lifeway has not experienced any losses in such accounts and believes the financial risks associated with

these financial instruments are minimal.

The Company has no restricted cash as of December

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.

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.

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

Lifeway sells food and beverage products across

select product categories to customers predominantly within the United States (see Note 13 – Disaggregation of Revenue, Significant

Customers, and Geographic Information).

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

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.

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.

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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.

such, the Company does not capitalize contract inception costs and it capitalizes product fulfillment costs in accordance with U.S.

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.

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.

with industry standards and maintains allowances for potential credit losses based on historical collection experiences and the current

economic condition of specific customers.

All account receivables have an original term of less than one year.

Customer balances are written

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The Company does not charge interest on past due accounts receivable.

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 at the lower of cost or

net realizable value, valued on a first in, first out basis (“FIFO”).

The costs of finished goods inventories include raw

materials, direct labor, and overhead costs.

Inventories are stated net of reserves for excess or obsolete inventory.

Property, plant and equipment

Property, plant and equipment are recorded at cost.

Property, plant and equipment are recorded at

Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets as follows:

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extend the life of the assets, are expensed as incurred.

Intangible Assets

Goodwill represents the excess purchase price over

the fair value of the net tangible and other identifiable intangible assets acquired.

Lifeway estimates the fair value of its one reporting

unit annually (as of December 31), or more frequently if certain conditions exist, using a combination of the fair values derived from

both the income approach and the market approach.

Under the income approach, it calculates the fair value of a reporting unit based on

the present value of estimated future cash flows.

Cash flow projections are based on the Company’s estimates of revenue growth rates

and operating margins, taking into consideration industry and market conditions.

The discount rate used to determine the present value

of future cash flows is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific

characteristics and the uncertainty related to the business's ability to execute on the projected cash flows.

The market approach estimates

fair value based on market multiples of revenue and earnings derived from comparable publicly traded companies with similar operating

and investment characteristics.

The resulting fair value, based on the income and market approaches, is then compared to the carrying

value to determine if impairment is necessary.

Goodwill represents the excess purchase price

over the fair value of the net tangible and other identifiable intangible assets acquired.

Goodwill is not amortized, but it is subject

to an annual assessment for impairment, which the Company performs on its one reporting unit during the fourth quarter (as of December

31), or more frequently if events occur or circumstances change such that it is more likely than not that an impairment may exist.

In testing goodwill for impairment, the Company

has the option to perform a qualitative test (also known as “Step 0”) or a quantitative test (“Step 1”).

the Step 0 test, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of

the reporting unit is less than its carrying value.

Qualitative factors may include, but are not limited to, economic conditions, industry

and market considerations, cost factors, overall financial performance of the reporting unit and other entity and reporting unit specific

If after assessing these qualitative factors, the Company determines it is “more-likely-than-not” that the fair value

of the reporting unit is less than the carrying value, then performing the Step 1 quantitative test is necessary.

Step 1 of the quantitative test requires comparison

of the fair value of the Company’s one reporting unit to the carrying value.

If the carrying value of the reporting unit is less

than the fair value, no impairment exists.

Otherwise, the Company would recognize an impairment charge for the amount by which the carrying

amount of the reporting unit exceeds its fair value up to the amount of goodwill allocated to the reporting unit.

Under a Step 1 quantitative test, we estimate

the fair value of our one reporting unit using a combination of the fair values derived from both the income approach and the market approach.

Under the income approach, the Company uses a discounted cash flow methodology which requires management to make significant estimates

and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth

rates, and long-term discount rates, among others.

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.

For the market approach, the Company uses the guideline public

company method.

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 Company also reconciles the fair value of its reporting unit

to its current market capitalization, allowing for a reasonable control premium.

Intangible Assets

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Customer relationships

All amortization expense related to intangible assets is recorded in Amortization

expense in the consolidated statements of operations.

Amortizable intangible assets are evaluated for impairment

whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Lifeway conducts more frequent impairment

assessments if certain conditions exist, such as a change in the competitive landscape, any internal decisions to pursue new or different

strategies, a loss of a significant customer, or a significant change in the market place including changes in the prices paid for its

products or changes in the size of the market for its products.

If an evaluation of the undiscounted cash flows indicates impairment,

the asset is written down to its estimated fair value, which is generally based on discounted future cash flows.

If the estimated remaining

useful life of an intangible asset is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the

revised remaining useful life.

All amortization expense related to intangible assets is recorded in

Amortization expense in the consolidated statements of operations.

Amortizable intangible assets are evaluated for

impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Lifeway conducts more

frequent impairment assessments if certain conditions exist, such as a change in the competitive landscape, any internal decisions to

pursue new or different strategies, a loss of a significant customer, or a significant change in the marketplace 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

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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

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

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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

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

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

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, 2023, and 2022,

the Company has one equity 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 for this equity investment includes a cumulative unrealized gain of $ 1,731 resulting from

an observable price change in 2019.

There were no upward or downward observable price change adjustments to the equity investment cost

during 2023 or 2022.

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.

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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.

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 and performance share

awards are 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 fair value of stock options are measured 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.

The Company issues share-based equity awards from

treasury shares.

Treasury stock

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

Expenditures totaled $ 3,353

Total advertising expense was $ 3,733 and $ 3,353

for the years ended December 31, 2023 and 2022, 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

Earnings per common share

Basic earnings per common share is computed

by dividing net income 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

Diluted earnings per common share is computed by dividing net income 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.

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.

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.

Recent accounting pronouncements

Issued but not yet effective

In October 2021, the Financial Accounting Standards

In November 2023, the Financial Accounting Standards

Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

Segment Reporting (Topic 280):

to Reportable Segment Disclosures.

The new guidance requires entities to report incremental information about significant segment expenses

included in a segment’s profit or loss measure as well as the name and title of the chief operating decision maker.

also requires interim disclosures related to reportable segment profit or loss and assets that had previously only been disclosed annually.

The new standard is effective for our annual period ending December 31, 2024 and our interim periods during the fiscal year ending December

The guidance does not affect recognition or measurement in the Company’s consolidated financial statements.

In December 2023, the FASB issued ASU No.

Income Taxes (Topic 740):

Improvements to Income Tax Disclosures that requires entities to disclose additional information

about federal, state, and foreign income taxes primarily related to the income tax rate reconciliation and income taxes paid.

standard also eliminates certain existing disclosure requirements related to uncertain tax positions and unrecognized deferred tax liabilities.

The guidance is effective for our fiscal year ending December 31, 2024.

The guidance does not affect recognition or measurement in the

Company’s consolidated financial statements.

In October 2021, the FASB issued ASU No.

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

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.

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.

2020-04, Reference

Rate Reform (Topic 848):

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.

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.

The ASU was effective upon issuance and allowed

companies to adopt the amendments on a prospective basis through December 31, 2024.

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.

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):

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.

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

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

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Goodwill consisted of the following:

Schedule of goodwill and indefinite-lived intangible assets

Balance at December 31, 2021, before accumulated impairment loses

Schedule of goodwill

Balance at December 31, 2022

Accumulated impairment losses

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Balance at December 31, 2023

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.

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.

Accumulated impairment losses

Balance at December 31, 2023

The Company performed an annual Step 0 impairment

assessment for its single reporting unit as of December 31, 2023, noting no impairment loss.

The Company performed an annual Step 1 impairment

assessment for its single reporting unit as of December 31, 2022, noting no impairment loss.

Approximately $1,664 of goodwill is deductible

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for the next five years is as follows:

Schedule of amortization expense on intangible assets

Schedule of estimated amortization expense on intangible assets

The weighted-average remaining amortization

expense period for the customer relationship and brand name intangible assets is 12.6

years, respectively, as of December 31, 2023.

The weighted-average remaining amortization expense period for total intangible assets

years as of December 31, 2023.

Note 6 – Accrued Expenses

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Real estate taxes

Accrued utilities

Current portion of operating lease liabilities

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Note payable consisted of the following:

Schedule of notes payable

Schedule of debt

Term loan due August 18, 2026.

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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 Company is party to an Amended and Restated

Loan and Security Agreement (as amended and modified from time to time, the “Credit Agreement”) with its existing lender and

certain of its subsidiaries.

The Credit Agreement provides for, among other things, a $ 5 million term loan to be repaid in quarterly installments

of principal and interest over a term of five years, a revolving line of credit up to a maximum of $ 5 million (the “Revolving Credit

Facility”) and an incremental facility not to exceed $ 5 million.

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.

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,

The termination date of the revolving credit facility is June 30, 2025 , unless earlier terminated.

All outstanding amounts under the Credit Agreement

bear interest at the Secured Overnight Financing Rate (“SOFR”), plus 2.07%, 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 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

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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.

The 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 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, 2023.

Revolving Credit Facility

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under the Revolving Credit Facility.

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

Lifeway’s interest rate on debt outstanding under the Revolving Credit Facility as of December 31, 2022 was 6.17 %.

The Company had $ 5,000 available for future borrowings under the Revolving Credit Facility as of

December 31, 2023.

Deferred Financing Costs

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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.

to six 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

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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.

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.

The Company does not record leases with an initial

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Total lease expense was $ 138 and $ 229 (including short term leases) for the years ended December 31, 2023 and 2022, 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.

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.

Future maturities of lease liabilities were as follows:

Future maturities of lease liabilities

Schedule of future maturities of lease liabilities

Operating Leases

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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.

its operating leases was 3.6 years as of December 31, 2023.

The weighted average discount rate of its operating leases was 9.85 % as of

December 31, 2023.

Cash paid for amounts included in the measurement of lease liabilities was $ 94 and $ 151 for the year ended December

31, 2023 and 2022, respectively.

Note 9 – Commitments and Contingencies

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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

The Company evaluates, on a periodic basis, developments in legal matters that could affect the amount of any accrual and developments

that would make a loss contingency both probable and reasonably estimable.

If a loss contingency is not both probable and estimable, it

does not establish an accrued liability.

Currently, none of its accruals for outstanding legal matters are material individually or in

the aggregate to its financial position and it is management’s opinion that the ultimate resolution of these outstanding legal matters

will not have a material adverse effect on its business, financial condition, results of operations, or cash flows.

However, if the Company

is ultimately required to make payments in connection with an adverse outcome, it is possible that such contingency could have a material

adverse effect on the Company’s business, financial condition, results of operations or cash flows.

Lifeway 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

Note 10 – Income taxes

The provision for income taxes consists of the following:

The provision for income taxes consists of the

Provision for income taxes

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Provision for income taxes

The following is a reconciliation of income tax expense computed at the

The following is a reconciliation of income tax expense computed at

federal statutory tax rate to income tax expense reported in the consolidated statement of operations:

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Stock based compensation

Uncertain tax positions

Change in tax rates

Provision for income taxes

The tax effects of temporary differences giving rise

to deferred income tax assets and liabilities were:

The tax effects of temporary differences giving

rise to deferred income tax assets and liabilities were:

Schedule of deferred tax assets and liabilities

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Allowances for doubtful accounts and discounts

Deferred revenue

Total net deferred tax assets

Net deferred tax liabilities

The following table details the Company's tax attributes

related to net operating losses for which it has recorded deferred tax assets.

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

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State net operating losses

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:

A reconciliation of the beginning and ending amount

of unrecognized tax benefits is as follows:

Reconciliation of amount of unrecognized tax benefits

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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.

in the consolidated statements of operations was $ 0 during 2023 and 2022, respectively.

The amount of accrued interest and penalties recognized

in the consolidated balance sheets was $ 0 at December 31, 2023 and 2022, 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

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

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Incentive Plan.

Awards granted under the

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

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

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intrinsic value

(In thousands)

Outstanding at December 31, 2022

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Exercisable at December 31, 2023

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

Restricted Stock Units

A Restricted Stock Unit (“RSU”) 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

RSUs have no exercise price.

The following table summarizes RSU activity

during the year ended December 31, 2023.

Schedule of RSU Activity

Restricted Stock Units

Weighted Average Grant Date Fair Value

Outstanding at December 31, 2021

(In thousands)

Nonvested, at December 31, 2022

Shares issued upon vesting

Outstanding at December 31, 2022

Vested and deferred at December 31, 2022

Lifeway expenses RSAs over the service period.

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.

Nonvested, at December 31, 2023

Earned and deferred, at December 31, 2023

For the years ended December 31, 2023 and 2022

total pre-tax stock-based compensation expense recognized in the consolidated statements of operations was $ 506 and $ 279 , respectively.

For the years ended December 31, 2023 and 2022 tax-related benefits of $ 142 and $ 78 , respectively, were also recognized.

Future compensation

expense related to nonvested restricted stock units was $ 682 as of December 31, 2023 and will be recognized over a weighted-average period

of 1.4 years.

Long-Term Incentive Plan Compensation

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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.

During 2020, Lifeway awarded a long-term equity-based

incentive of $ 750 to its Chief Executive Officer (the “2020 CEO Award”) based on Lifeway’s 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.

The RSU awards have a grant date fair value of $5.13 dollars per share.

For the years ended December

31, 2023 and 2022, $ 105 and $ 229 was expensed as stock-based compensation expense in the consolidated statements of operations.

December 31, 2023, the total remaining unearned compensation was $ 24 , which will be recognized in 2024, subject to vesting.

2021 Equity Award

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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

The RSU awards have a grant date fair value of $6.00 dollars per share.

the years ended December 31, 2023 and 2022, $ 194 and $ 449 was expensed as stock-based compensation expense in the consolidated statements

of operations, respectively.

As of December 31, 2023, the total remaining unearned compensation was $ 40 , which will be recognized in 2024,

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

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.

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

For the twelve months ended December 31, 2023, and 2022, $ 473 and $ 151 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.

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 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 Units section above.

2023 Equity Award

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Collectively, the participants can earn 115,622 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.

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

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have a grant date fair value of $6.88 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.

For the twelve months ended December 31, 2023 and 2022, $ 219 and $ 0 was expensed

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

The 2023 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 June 16, 2023 grant date.

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

the Restricted Stock Units section above.

Non-Employee Director Plan

On August 31, 2022, Lifeway

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

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

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

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

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

As of the date of each annual shareholder meeting, the

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

Whether and how many

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

to the 2022 Director Plan’s overall share limits.

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

the 2022 Directors Plan is 500 thousand shares.

As of 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.

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

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, 2023, 431

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.

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.

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 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

For the years ended December 31, 2023 and 2022 total contribution expense recognized in the consolidated statements of operations

was $ 499 and $ 446 , respectively.

Note 12 - Earnings Per Share

The following table summarizes the effects of

the share-based compensation awards on the weighted average number of shares outstanding used in calculating diluted earnings per

Schedule of weighted average number of shares

(In thousands)

Weighted average common shares outstanding

Assumed exercise/vesting of equity awards

Weighted average diluted common shares outstanding

– Disaggregation of Revenue, Significant Customers and Geographic Information

Lifeway’s primary product is drinkable kefir.

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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.

Net sales of products by category were as follows

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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 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.

Significant Customers

Sales are predominately to companies in the retail

food industry located within the United States.

Two major customers accounted for approximately 24 % and 22 % of net sales for the years

ended December 31, 2023 and 2022, respectively.

Two major customers accounted for 25 % and 28 % of accounts receivable as of December 31,

2023 and 2022, respectively.

Geographic Information

Net sales outside the of the United States represented

less than 1% of total consolidated net sales in 2023 and 2022, respectively.

Net sales are determined based on the destination where the

products are shipped by Lifeway.

All the Company’s long-lived assets are

in the United States.

Note 14 – Share repurchases

Stock Purchase Agreement

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The shares were repurchased during the fourth quarter of 2022.

Pursuant to the Stock Purchase Agreement, the

Company and Ms.

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

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

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

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

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

Smolyansky, which are secured by previously disclosed

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

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

Pursuant to the Stock Purchase Agreement, (i)

Smolyansky sold 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 used a portion of the proceeds to satisfy in full certain obligations of Ms.

which are secured by previously disclosed pledges of common stock, causing all such pledges to be released.

The purchased shares are held

in treasury by the Company.

As a closing condition to the Stock Purchase Agreement,

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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.

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.

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.

Lifeway obtained consulting services from Ludmila

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

On January 4, 2022, the Company notified

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

Service fees earned are included in general

and administrative expenses in the accompanying consolidated statements of operations and were $ 0 and $ 22 during the years ended December

31, 2023 and 2022, 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.

Lifeway was also a party to an endorsement agreement,

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

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

Smolyansky 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,

1 unchanged sentence

Agreement, the Company and Ms.

Smolyansky have agreed, among other things, that (i) the Company will pay Ms.

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

Smolyansky a lump sum payment

8 unchanged sentences

and the Company in Note 14.

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.

Management considers the purchase of Glen Oaks Farms

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.

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

Assets acquired

Liabilities assumed

Total purchase price

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.

IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

CHANGES IN AND DISAGREEMENTS

WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data