[PART I – FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20%E2%80%93%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements.](index=4&type=section&id=Item%201.%20Financial%20Statements.) This section presents Lifeway Foods' unaudited consolidated financial statements and notes covering accounting policies, assets, liabilities, and related party transactions [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) [Consolidated Statements of Operations](index=6&type=section&id=Consolidated%20Statements%20of%20Operations) [Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Stockholders'%20Equity) [Consolidated Statements of Cash Flows](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) [Note 1 – Basis of Presentation](index=10&type=section&id=Note%201%20%E2%80%93%20Basis%20of%20Presentation) This note details the basis of financial statement presentation, including restatements for prior period errors and reclassifications - The Company **restated** its historical consolidated financial statements for the three and nine months ended September 30, 2021, to correct errors in accounting for **deferred income tax liabilities** and **goodwill** from a 2009 acquisition[23](index=23&type=chunk) - Certain amounts were **reclassified** from **investing to operating cash flows** for the nine months ended September 31, 2021, with no impact on other consolidated statements[24](index=24&type=chunk) [Note 2 – Summary of Significant Accounting Policies](index=10&type=section&id=Note%202%20%E2%80%93%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines the company's significant accounting policies, including its single reportable segment and evaluation of new accounting guidance - The Company is managed as a **single reportable segment**, with substantially all revenues from **cultured dairy products** sold in the United States[29](index=29&type=chunk) - Management is evaluating **new accounting guidance** (ASU 2021-08, ASU 2020-04, ASU 2016-13) but does **not currently expect a material impact** on its consolidated financial statements[30](index=30&type=chunk)[31](index=31&type=chunk)[32](index=32&type=chunk) [Note 3 – Inventories, net](index=12&type=section&id=Note%203%20%E2%80%93%20Inventories,%20net) This note provides a detailed breakdown of the company's inventory composition, including ingredients, packaging, and finished goods **Inventory Composition (in thousands):** | Category | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Change ($ in thousands) | Change (%) | | :------------ | :----------- | :----------- | :--------- | :--------- | | Ingredients | $2,536 | $2,279 | +$257 | +11.3% | | Packaging | $3,254 | $2,723 | +$531 | +19.5% | | Finished goods | $3,402 | $3,283 | +$119 | +3.6% | | Total | $9,192 | $8,285 | +$907 | +10.9% | [Note 4 – Property, Plant and Equipment, net](index=12&type=section&id=Note%204%20%E2%80%93%20Property,%20Plant%20and%20Equipment,%20net) This note details the composition of property, plant, and equipment, highlighting changes in construction in process and total net assets **Property, Plant and Equipment, net (in thousands):** | Category | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Change ($ in thousands) | Change (%) | | :---------------------- | :----------- | :----------- | :--------- | :--------- | | Construction in process | $1,894 | $417 | +$1,477 | +354.2% | | Total, net | $20,905 | $20,130 | +$775 | +3.8% | [Note 5 – Goodwill and Intangible Assets](index=12&type=section&id=Note%205%20%E2%80%93%20Goodwill%20and%20Intangible%20Assets) This note discusses the company's goodwill and intangible assets, including the reclassification of a brand name asset and changes in total finite-lived assets - Goodwill balance remained unchanged at **$11,704 thousand** as of September 30, 2022[36](index=36&type=chunk) - An indefinite-lived brand name intangible asset with a net book value of **$3,700 thousand** was reclassified to a finite-lived asset (**15 years useful life**) effective January 1, 2022[37](index=37&type=chunk) - Total finite-lived intangible assets increased from **$4,278 thousand** (Dec 31, 2021) to **$7,573 thousand** (Sep 30, 2022), primarily due to the reclassification and an increase in brand names[37](index=37&type=chunk) [Note 6 – Accrued Expenses](index=13&type=section&id=Note%206%20%E2%80%93%20Accrued%20Expenses) This note provides a breakdown of accrued expenses, including payroll, incentive compensation, and total accrued liabilities **Accrued Expenses (in thousands):** | Category | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Change ($ in thousands) | Change (%) | | :---------------------------- | :----------- | :----------- | :--------- | :--------- | | Payroll and incentive compensation | $3,438 | $2,951 | +$487 | +16.5% | | Total accrued expenses | $4,378 | $3,724 | +$654 | +17.6% | [Note 7 – Debt](index=14&type=section&id=Note%207%20%E2%80%93%20Debt) This note details the company's debt obligations, including term loans and revolving credit facilities, and confirms compliance with financial covenants - Term loan balance decreased to **$3,750 thousand** (gross) as of September 30, 2022, from **$4,500 thousand** at December 31, 2021[40](index=40&type=chunk) - The Revolving Credit Facility had **$2,777 thousand** outstanding and **$2,223 thousand** available for future borrowings as of September 30, 2022[45](index=45&type=chunk) - The Company was in compliance with all financial covenants (fixed charge coverage ratio and minimum working capital) at September 30, 2022[44](index=44&type=chunk)[127](index=127&type=chunk) [Note 8 – Leases](index=15&type=section&id=Note%208%20%E2%80%93%20Leases) This note provides information on the company's lease expenses, weighted-average remaining lease term, and discount rate for operating leases - Total lease expense (including short-term leases) for the nine months ended September 30, 2022, was **$191 thousand**, a decrease from **$245 thousand** in 2021[48](index=48&type=chunk) - The weighted-average remaining lease term for operating leases was **2.51 years**, with a weighted average discount rate of **14.20%** as of September 30, 2022[50](index=50&type=chunk) [Note 9 – Commitments and Contingencies](index=16&type=section&id=Note%209%20%E2%80%93%20Commitments%20and%20Contingencies) This note outlines the company's policies for recording provisions for legal matters and assesses the materiality of current accruals - The Company records provisions for legal matters when a loss is **probable and estimable**[52](index=52&type=chunk) - Current accruals for outstanding legal matters are **not material** individually or in aggregate, and management believes ultimate resolution will not have a material adverse effect[52](index=52&type=chunk) [Note 10 – Income taxes](index=16&type=section&id=Note%2010%20%E2%80%93%20Income%20taxes) This note details the company's effective income tax rates, explains changes, and reports on unrecognized tax benefits **Effective Income Tax Rates:** | Period | Sep 30, 2022 | Sep 30, 2021 | | :----- | :----------- | :----------- | | 3 Months | 11.7% | 52.3% | | 9 Months | (0.8)% | 35.2% | - The change in effective tax rate is attributed to the **difference in pre-tax (loss) income** in 2022 compared to 2021, and recurring/non-recurring factors[55](index=55&type=chunk) - Unrecognized tax benefits decreased from **$98 thousand** at September 30, 2021, to **$0** at September 30, 2022, following a settlement in Q1 2022[56](index=56&type=chunk) [Note 11 – Stock-based and Other Compensation](index=16&type=section&id=Note%2011%20%E2%80%93%20Stock-based%20and%20Other%20Compensation) This note describes the company's stock-based compensation plans, including authorized shares, compensation expense, and future recognition - The 2022 Omnibus Incentive Plan was approved, authorizing **3.25 million shares** for various awards, with **3.00 million shares** remaining available as of September 30, 2022[59](index=59&type=chunk)[60](index=60&type=chunk) - Total pre-tax stock-based compensation expense for the nine months ended September 30, 2022, was **$175 thousand**, up from **$106 thousand** in 2021[63](index=63&type=chunk) - Future compensation expense related to restricted stock awards was **$624 thousand** as of September 30, 2022, to be recognized on a weighted average basis over the next **1.57 years**[63](index=63&type=chunk) [Note 12 – Products and Customers](index=20&type=section&id=Note%2012%20%E2%80%93%20Products%20and%20Customers) This note details Lifeway's primary products, net sales by category, and identifies major customer concentrations - Lifeway's primary product is **drinkable kefir**, and it manufactures and markets products under various brand names[72](index=72&type=chunk) **Net Sales by Product Category (Nine Months Ended September 30):** | Product Category | 2022 ($ in thousands) | 2022 (%) | 2021 ($ in thousands) | 2021 (%) | | :--------------------------- | :-------------------- | :------- | :-------------------- | :------- | | Drinkable Kefir other than ProBugs | $82,779 | 78% | $72,204 | 82% | | Cheese | $9,233 | 9% | $9,158 | 11% | | Cream and other | $5,438 | 5% | $2,568 | 3% | | Drinkable yogurt | $4,559 | 5% | $739 | 1% | | ProBugs Kefir | $2,481 | 2% | $2,197 | 2% | | Other dairy | $1,240 | 1% | $1,225 | 1% | | **Total Net Sales** | **$105,730** | **100%** | **$88,091** | **100%** | - Two major customers accounted for approximately **22% of net sales** for the nine months ended September 30, 2022[75](index=75&type=chunk) [Note 13 – Related Party Transactions](index=22&type=section&id=Note%2013%20%E2%80%93%20Related%20Party%20Transactions) This note describes transactions with related parties, including consulting and endorsement agreements with a Board member - A consulting agreement with Ludmila Smolyansky, a Board member, was terminated effective January 17, 2022, significantly reducing service fees from **$375 thousand** in 2021 to **$22 thousand** in 2022 (nine months)[77](index=77&type=chunk) - An endorsement agreement with Ms. Smolyansky was terminated on September 6, 2022, with a **$400 thousand lump sum payment**[80](index=80&type=chunk)[81](index=81&type=chunk) - Royalties paid under the endorsement agreement were **$400 thousand** for the nine months ended September 30, 2022, down from **$450 thousand** in 2021[82](index=82&type=chunk) [Note 14 – Subsequent Events](index=23&type=section&id=Note%2014%20%E2%80%93%20Subsequent%20Events) This note discloses significant events occurring after the reporting period, including a share repurchase and an amendment to a settlement agreement - On November 7, 2022, the Company agreed to purchase **850,340 shares** of common stock from Ludmila Smolyansky at **$4.70 per share**, representing a **20% discount** to the average closing price[83](index=83&type=chunk)[84](index=84&type=chunk) - The purchased shares will be held in **treasury**[84](index=84&type=chunk) - An amendment to a prior Settlement Agreement grants the Company a **right of first refusal** on shares (subject to Danone's right) and extends a **standstill agreement** for Ms. Smolyansky and Mr. Smolyansky through the **2024 annual meeting**[85](index=85&type=chunk) **Consolidated Balance Sheet Highlights (September 30, 2022 vs. December 31, 2021):** | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Change (in thousands) | | :----------------------------- | :-------------------------- | :-------------------------- | :----- | | Total Assets | $73,771 | $70,874 | +$2,897 | | Total Liabilities | $23,274 | $21,743 | +$1,531 | | Total Stockholders' Equity | $50,497 | $49,131 | +$1,366 | **Consolidated Statements of Operations Highlights (Three Months Ended September 30):** | Metric | 2022 (in thousands) | 2021 (in thousands) | Change ($ in thousands) | Change (%) | | :----------------------------- | :------------------ | :------------------ | :--------- | :--------- | | Net Sales | $38,140 | $29,553 | +$8,587 | +29.1% | | Gross Profit | $7,588 | $6,993 | +$595 | +8.5% | | Income from Operations | $1,195 | $1,044 | +$151 | +14.5% | | Net Income | $983 | $480 | +$503 | +104.8% | | Basic EPS | $0.06 | $0.03 | +$0.03 | +100.0% | **Consolidated Statements of Operations Highlights (Nine Months Ended September 30):** | Metric | 2022 (in thousands) | 2021 (in thousands) | Change ($ in thousands) | Change (%) | | :----------------------------- | :------------------ | :------------------ | :--------- | :--------- | | Net Sales | $105,730 | $88,091 | +$17,639 | +20.0% | | Gross Profit | $18,865 | $22,719 | -$3,854 | -17.0% | | Income from Operations | $387 | $5,474 | -$5,087 | -92.9% | | Net Income | $208 | $3,404 | -$3,196 | -93.9% | | Basic EPS | $0.01 | $0.22 | -$0.21 | -95.5% | **Consolidated Statements of Cash Flows Highlights (Nine Months Ended September 30):** | Metric | 2022 (in thousands) | 2021 (in thousands) | Change ($ in thousands) | | :-------------------------------- | :------------------ | :------------------ | :--------- | | Net cash provided by operating activities | $3,639 | $5,855 | -$2,216 | | Net cash used in investing activities | $(3,189) | $(6,905) | +$3,716 | | Net cash (used in) provided by financing activities | $(750) | $3,142 | -$3,892 | | Net (decrease) increase in cash and cash equivalents | $(300) | $2,092 | -$2,392 | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.](index=24&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations.) This section analyzes Lifeway's financial condition and operational results, including forward-looking statements, recent developments, performance, liquidity, and critical accounting policies - The Company has seen **increased demand** for products during the pandemic and has **managed supply chain and labor effectively**, but anticipates **continued pressure from milk pricing and other input costs**[91](index=91&type=chunk)[92](index=92&type=chunk)[97](index=97&type=chunk)[108](index=108&type=chunk) - Management believes current liquidity (cash flow from operations, revolving credit and term loan facility, and cash) is **sufficient for working capital, capital requirements, and growth initiatives**[115](index=115&type=chunk) - **No material changes** to critical accounting policies and estimates, except for the **change in useful life of one brand name intangible asset**, as detailed in Note 5[129](index=129&type=chunk) [Cautionary Statement Regarding Forward-Looking Statements](index=24&type=section&id=Cautionary%20Statement%20Regarding%20Forward-Looking%20Statements) This statement advises that the report contains forward-looking information based on management's beliefs, subject to material differences due to various risks - The report contains **forward-looking statements** identified by words such as 'anticipate,' 'intend,' 'plan,' and 'expect,' which are based on management's beliefs and assumptions[88](index=88&type=chunk) - Actual outcomes and results may **differ materially due to various risks**, including actions of competitors and customers, changes in commodity pricing, government regulation, and supply chain disruptions[89](index=89&type=chunk) [Recent Developments](index=25&type=section&id=Recent%20Developments) This section discusses the impact of the COVID-19 pandemic on demand and the challenges of rising input costs, particularly milk and transportation - The COVID-19 pandemic led to **increased customer and consumer demand** for products for in-home consumption, which the Company met without significant supply chain or labor disruptions[91](index=91&type=chunk) - In 2022, costs increased primarily due to **inflationary price increases** of milk, other ingredients, packaging materials, and transportation[92](index=92&type=chunk) - The Company's **pricing actions may sometimes lag input cost changes** or may not be able to pass along the full effect of increases due to market conditions or competitive reasons[92](index=92&type=chunk) [Results of Operations - Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021](index=26&type=section&id=Results%20of%20Operations%20-%20Three%20Months%20Ended%20September%2030,%202022%20Compared%20to%20Three%20Months%20Ended%20September%2030,%202021) This section compares the company's operational performance for the three months ended September 30, highlighting changes in net sales, gross profit, expenses, and income taxes - Net sales increased by **$8,587 thousand (29.1%)** to **$38,140 thousand**, primarily driven by higher volumes of branded drinkable kefir and price increases[95](index=95&type=chunk) - Gross profit as a percentage of net sales decreased to **19.9%** from **23.7%** in the prior year, mainly due to unfavorable milk pricing and increased freight and other input costs[97](index=97&type=chunk) - General and administrative expenses increased by **$221 thousand** to **$3,415 thousand**, primarily due to increased legal and professional fees and incentive compensation, partially offset by lower consulting expense[99](index=99&type=chunk) - The provision for income taxes decreased to **$130 thousand (11.7% effective rate)** from **$527 thousand (52.3% effective rate)**, influenced by the difference in pre-tax income[100](index=100&type=chunk)[101](index=101&type=chunk) [Results of Operations - Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021](index=28&type=section&id=Results%20of%20Operations%20-%20Nine%20Months%20Ended%20September%2030,%202022%20Compared%20to%20Nine%20Months%20Ended%20September%2030,%202021) This section compares the company's operational performance for the nine months ended September 30, detailing changes in net sales, gross profit, expenses, and income taxes - Net sales increased by **$17,639 thousand (20.0%)** to **$105,730 thousand**, primarily driven by higher volumes of branded drinkable kefir and price increases[106](index=106&type=chunk) - Gross profit as a percentage of net sales decreased to **17.8%** from **25.8%** in the prior year, mainly due to unfavorable milk pricing and increased freight and other input costs[108](index=108&type=chunk) - General and administrative expenses increased by **$844 thousand** to **$9,546 thousand**, primarily due to increased legal and professional fees and incentive compensation, partially offset by lower consulting expense[110](index=110&type=chunk) - The provision for income taxes decreased to **$(2) thousand ((0.8)% effective rate)** from **$1,851 thousand (35.2% effective rate)**, influenced by the difference in pre-tax (loss) income[111](index=111&type=chunk)[112](index=112&type=chunk) [Liquidity and Capital Resources](index=29&type=section&id=Liquidity%20and%20Capital%20Resources) This section analyzes the company's cash flow activities, changes in investing and financing, and its compliance with debt covenants - Net cash provided by operating activities decreased to **$3,639 thousand** for the nine months ended September 30, 2022, from **$5,855 thousand** in 2021, due to lower cash earnings and changes in working capital[122](index=122&type=chunk) - Net cash used in investing activities decreased to **$3,189 thousand** from **$6,905 thousand**, reflecting the prior year's GlenOaks Farms acquisition, partially offset by increased capital spending[123](index=123&type=chunk) - Net cash used in financing activities was **$750 thousand** in 2022, compared to net cash provided of **$3,142 thousand** in 2021, primarily due to term loan repayments versus proceeds from a term loan in the prior year[125](index=125&type=chunk) - The Company had **$2,223 thousand** available for future borrowings under the Revolving Credit Facility as of September 30, 2022, and was in compliance with all applicable financial debt covenants[117](index=117&type=chunk)[126](index=126&type=chunk)[127](index=127&type=chunk) [Recent Accounting Pronouncements](index=31&type=section&id=Recent%20Accounting%20Pronouncements) This section refers to Note 2 for details on recent accounting pronouncements and their expected impact on financial statements - Information regarding recent accounting pronouncements is provided in **Note 2 – Summary of Significant Accounting Policies**[128](index=128&type=chunk) [Critical Accounting Policies and Estimates](index=31&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section confirms no material changes to critical accounting policies, except for a change in the useful life of one brand name intangible asset - There were **no material changes** to the Company's critical accounting policies and estimates in the nine months ended September 30, 2022, except for the change in the estimated useful life of one brand name intangible asset, as disclosed in Note 5[129](index=129&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk.](index=31&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk.) This item states that there are no quantitative and qualitative disclosures about market risk applicable for this filing - Not applicable[130](index=130&type=chunk) [Item 4. Controls and Procedures.](index=31&type=section&id=Item%204.%20Controls%20and%20Procedures.) This section details the evaluation of the Company's disclosure controls and procedures, deemed effective, and ongoing remediation for a material weakness in income tax accounting - The CEO and CFO concluded that the Company's disclosure controls and procedures were **effective** as of September 30, 2022[131](index=131&type=chunk) - Remediation efforts for a previously disclosed **material weakness** in internal control over financial reporting, specifically concerning income tax accounting and reporting, were ongoing during the three months ended September 30, 2022[132](index=132&type=chunk)[133](index=133&type=chunk) [Evaluation of Disclosure Controls and Procedures](index=31&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This section confirms the effectiveness of the company's disclosure controls and procedures as evaluated by management [Changes in Internal Control over Financial Reporting](index=32&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) This section addresses ongoing remediation efforts for a previously identified material weakness in internal control over financial reporting related to income tax accounting [PART II – OTHER INFORMATION](index=33&type=section&id=PART%20II%20%E2%80%93%20OTHER%20INFORMATION) [Item 1. Legal Proceedings.](index=33&type=section&id=Item%201.%20Legal%20Proceedings.) This item refers to Note 9, Commitments and Contingencies, for information regarding legal proceedings - Information on legal proceedings is available in **Note 9, Commitment and Contingencies**[137](index=137&type=chunk) [Item 1A. Risk Factors.](index=33&type=section&id=Item%201A.%20Risk%20Factors.) This item states that there have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K - No material changes from the risk factors disclosed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2021[138](index=138&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.](index=33&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds.) This item indicates that there were no unregistered sales of equity securities or use of proceeds to report during the period - None[139](index=139&type=chunk) [Item 3. Defaults Upon Senior Securities.](index=33&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities.) This item states that there were no defaults upon senior securities to report during the period - None[140](index=140&type=chunk) [Item 5. Other Information.](index=33&type=section&id=Item%205.%20Other%20Information.) This item indicates that there is no other information to report - None[141](index=141&type=chunk) [Item 6. Exhibits.](index=34&type=section&id=Item%206.%20Exhibits.) This section lists all exhibits filed with the Form 10-Q, including various agreements, incentive plans, and certifications - Exhibits include Settlement Agreements, the 2022 Omnibus Incentive Plan, the 2022 Non-Employee Director Equity and Deferred Compensation Plan, and certifications[143](index=143&type=chunk) [Signatures.](index=35&type=section&id=Signatures.) [Signatures](index=35&type=section&id=Signatures) The report was duly signed on November 14, 2022, by Julie Smolyansky, CEO, President, and Director, and Eric Hanson, CFO & Accounting Officer - The report was signed by Julie Smolyansky (CEO, President, and Director) and Eric Hanson (CFO & Accounting Officer) on November 14, 2022[147](index=147&type=chunk)

PART I – FINANCIAL INFORMATION This section presents Lifeway Foods, Inc.'s unaudited consolidated financial statements, management's analysis, market risk, and controls [ITEM 1. FINANCIAL STATEMENTS.](index=4&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS.) This section presents Lifeway Foods, Inc.'s unaudited consolidated financial statements and comprehensive notes [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) This section presents the company's financial position, detailing assets, liabilities, and equity at specific dates | Metric | June 30, 2022 (Unaudited, in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :------------------------------------- | :------------------------------- | | Cash and cash equivalents | $6,494 | $9,233 | | Total current assets | $27,168 | $29,046 | | Total assets | $69,154 | $70,874 | | Total current liabilities | $11,025 | $12,063 | | Total liabilities | $20,062 | $21,743 | | Total stockholders' equity | $49,092 | $49,131 | - Total assets decreased from **$70,874 thousand** at December 31, 2021, to **$69,154 thousand** at June 30, 2022, while total liabilities also decreased from **$21,743 thousand** to **$20,062 thousand** over the same period[11](index=11&type=chunk) [Consolidated Statements of Operations](index=5&type=section&id=Consolidated%20Statements%20of%20Operations) This section details the company's financial performance over specific periods, including net sales, gross profit, and net income Three Months Ended June 30 | Metric | 2022 (in thousands) | 2021 (in thousands) | Change ($) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :--------- | :--------- | | Net sales | $33,491 | $29,162 | $4,329 | 14.8% | | Gross profit | $5,697 | $7,677 | $(1,980) | -25.8% | | Income from operations | $241 | $2,494 | $(2,253) | -90.3% | | Net income | $120 | $1,618 | $(1,498) | -92.6% | | Basic EPS | $0.01 | $0.10 | $(0.09) | -90.0% | | Diluted EPS | $0.01 | $0.10 | $(0.09) | -90.0% | Six Months Ended June 30 | Metric | 2022 (in thousands) | 2021 (in thousands) | Change ($) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :--------- | :--------- | | Net sales | $67,590 | $58,538 | $9,052 | 15.5% | | Gross profit | $11,277 | $15,726 | $(4,449) | -28.3% | | Income from operations | $(808) | $4,430 | $(5,238) | -118.2% | | Net (loss) income | $(775) | $2,924 | $(3,699) | -126.5% | | Basic EPS | $(0.05) | $0.19 | $(0.24) | -126.3% | | Diluted EPS | $(0.05) | $0.19 | $(0.24) | -126.3% | [Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Stockholders%27%20Equity) This section outlines changes in the company's equity components over time, reflecting net income, stock transactions, and other comprehensive income | Equity Component | Balance, January 1, 2022 (in thousands) | Balance, June 30, 2022 (in thousands) | | :----------------------- | :-------------------------------------- | :------------------------------------ | | Common Stock | $6,509 | $6,509 | | Treasury stock | $(13,436) | $(13,156) | | Paid-in capital | $2,552 | $3,008 | | Retained earnings | $53,506 | $52,731 | | Total Stockholders' Equity | $49,131 | $49,092 | - Total stockholders' equity slightly decreased from **$49,131 thousand** at January 1, 2022, to **$49,092 thousand** at June 30, 2022, primarily due to a net loss of **$775 thousand** for the six months ended June 30, 2022, partially offset by stock-based compensation[15](index=15&type=chunk) [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section summarizes the cash inflows and outflows from operating, investing, and financing activities over specific periods Six Months Ended June 30 | Cash Flow Activity | 2022 (in thousands) | 2021 (in thousands) | | :------------------------------------ | :------------------ | :------------------ | | Net cash (used in) provided by operating activities | $(529) | $3,647 | | Net cash used in investing activities | $(1,710) | $(1,161) | | Net cash used in financing activities | $(500) | $0 | | Net (decrease) increase in cash and cash equivalents | $(2,739) | $2,486 | | Cash and cash equivalents at end of period | $6,494 | $10,412 | - The company experienced a net decrease in cash and cash equivalents of **$2,739 thousand** for the six months ended June 30, 2022, compared to a net increase of **$2,486 thousand** in the prior year, driven by cash used in operating, investing, and financing activities[18](index=18&type=chunk) [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures supporting the consolidated financial statements [Note 1 – Basis of Presentation](index=9&type=section&id=Note%201%20%E2%80%93%20Basis%20of%20Presentation) The unaudited consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and include all necessary adjustments for fair presentation - The consolidated financial statements for the three and six months ended June 30, 2021, have been restated to correct errors in accounting for deferred income tax liabilities and goodwill from a 2009 acquisition[22](index=22&type=chunk) [Note 2 – Summary of Significant Accounting Policies](index=9&type=section&id=Note%202%20%E2%80%93%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines key accounting policies, including the use of estimates for promotional allowances, goodwill and intangible asset valuation, stock-based compensation, and deferred income taxes - Lifeway operates as a **single reportable segment**, with substantially all revenues from cultured dairy products sold in the United States[27](index=27&type=chunk) - Management does not currently expect the adoption of recent ASUs (2021-08, 2020-04, 2016-13) to have a material impact on its consolidated financial statements[28](index=28&type=chunk)[29](index=29&type=chunk)[30](index=30&type=chunk) Advertising Expense | Period | 2022 (in thousands) | 2021 (in thousands) | | :-------------------------- | :------------------ | :------------------ | | Six months ended June 30 | $1,738 | $2,166 | | Three months ended June 30 | $533 | $773 | [Note 3 – Inventories, net](index=11&type=section&id=Note%203%20%E2%80%93%20Inventories%2C%20net) Inventories primarily consist of ingredients, packaging, and finished goods, showing a slight increase from December 31, 2021, to June 30, 2022 | Inventory Category | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------- | :--------------------------- | :------------------------------- | | Ingredients | $2,220 | $2,279 | | Packaging | $2,707 | $2,723 | | Finished goods | $3,509 | $3,283 | | Total inventories | $8,436 | $8,285 | [Note 4 – Property, Plant and Equipment, net](index=11&type=section&id=Note%204%20%E2%80%93%20Property%2C%20Plant%20and%20Equipment%2C%20net) Net property, plant, and equipment increased to **$20,595 thousand** at June 30, 2022, from **$20,130 thousand** at December 31, 2021, primarily due to an increase in construction in process | Asset Category | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------------- | :--------------------------- | :------------------------------- | | Land | $1,565 | $1,565 | | Buildings and improvements | $18,079 | $17,920 | | Machinery and equipment | $32,620 | $32,073 |

PART I – FINANCIAL INFORMATION [Item 1. Financial Statements.](index=4&type=section&id=Item%201.%20Financial%20Statements%2E) Presents unaudited consolidated financial statements for Q1 2022 and Q4 2021, detailing financial position, performance, and cash flows, noting a net loss [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) Presents the company's financial position, detailing assets, liabilities, and equity as of March 31, 2022, and December 31, 2021 Consolidated Balance Sheet Data (in thousands) | Balance Sheet Item (in thousands) | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :---------------- | | Total current assets | $29,594 | $29,046 | | Total assets | $70,979 | $70,874 | | Total current liabilities | $13,112 | $12,063 | | Total liabilities | $22,634 | $21,743 | | Total stockholders' equity | $48,345 | $49,131 | [Consolidated Statements of Operations](index=6&type=section&id=Consolidated%20Statements%20of%20Operations) Details the company's revenues, expenses, and net income or loss for the three months ended March 31, 2022, and 2021 Consolidated Statements of Operations Data (in thousands, except per share data) | Income Statement Item (in thousands, except per share data) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net Sales | $34,099 | $29,376 | | Gross profit | $5,580 | $8,049 | | (Loss) income from operations | $(1,049) | $1,936 | | Net (loss) income | $(895) | $1,306 | | Basic Earnings (loss) per common share | $(0.06) | $0.08 | | Diluted Earnings (loss) per common share | $(0.06) | $0.08 | [Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Stockholders%27%20Equity) Outlines changes in stockholders' equity, including net loss and stock-based compensation, for Q1 2022 Consolidated Statements of Stockholders' Equity Data (in thousands) | Stockholders' Equity Item (in thousands) | Balance, January 1, 2022 | Balance, March 31, 2022 | | :--------------------------------------- | :----------------------- | :---------------------- | | Total Equity | $49,131 | $48,345 | | Net loss | - | $(895) | | Stock-based compensation | - | $109 | [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Presents cash inflows and outflows from operating, investing, and financing activities for Q1 2022 and Q1 2021 Consolidated Statements of Cash Flows Data (in thousands) | Cash Flow Item (in thousands) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash (used in) provided by operating activities | $(648) | $1,210 | | Net cash used in investing activities | $(348) | $(518) | | Net cash used in financing activities | $(250) | $0 | | Net (decrease) increase in cash and cash equivalents | $(1,246) | $692 | | Cash and cash equivalents at end of period | $7,987 | $8,618 | [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Provides detailed explanations of accounting policies, specific account balances, and recent accounting pronouncements [Note 1 – Basis of Presentation](index=9&type=section&id=Note%201%20%E2%80%93%20Basis%20of%20Presentation) Describes the basis of financial statement presentation, including restatements for prior period errors - The consolidated financial statements for the three months ended March 31, 2021, have been restated to correct errors in accounting for deferred income tax liabilities and goodwill from a 2009 acquisition[24](index=24&type=chunk) [Note 2 – Summary of Significant Accounting Policies](index=9&type=section&id=Note%202%20%E2%80%93%20Summary%20of%20Significant%20Accounting%20Policies) Outlines key accounting policies, including revenue recognition, segment reporting, and evaluation of new accounting pronouncements - Lifeway recognizes revenue when control over products transfers to customers, generally upon delivery, estimating variable consideration like rebates and allowances[29](index=29&type=chunk)[32](index=32&type=chunk) - The company operates as a single reportable segment, primarily selling cultured dairy products in the United States[35](index=35&type=chunk) - Management is evaluating the impact of new ASUs on Business Combinations (ASU 2021-08), Reference Rate Reform (ASU 2020-04), and Credit Losses (ASU 2016-13), but does not currently expect a material impact from the first two[36](index=36&type=chunk)[37](index=37&type=chunk)[38](index=38&type=chunk) [Note 3 – Inventories, net](index=11&type=section&id=Note%203%20%E2%80%93%20Inventories%2C%20net) Details the composition of inventories, including ingredients, packaging, and finished goods, as of March 31, 2022, and December 31, 2021 Inventories, Net (in thousands) | Inventory Item (in thousands) | March 31, 2022 | December 31, 2021 | | :---------------------------- | :------------- | :---------------- | | Ingredients | $2,207 | $2,279 | | Packaging | $2,933 | $2,723 | | Finished goods | $3,509 | $3,283 | | Total inventories | $8,649 | $8,285 | [Note 4 – Property, Plant and Equipment, net](index=12&type=section&id=Note%204%20%E2%80%93%20Property%2C%20Plant%20and%20Equipment%2C%20net) Provides a breakdown of property, plant, and equipment, net of accumulated depreciation Property, Plant and Equipment, Net (in thousands) | Property, Plant and Equipment (in thousands) | March 31, 2022 | December 31, 2021 | | :------------------------------------------- | :------------- | :---------------- | | Total property, plant and equipment, net | $19,822 | $20,130 | [Note 5 – Goodwill and Intangible Assets](index=12&type=section&id=Note%205%20%E2%80%93%20Goodwill%20and%20Intangible%20Assets) Details the company's goodwill and intangible assets, including reclassification and amortization changes Goodwill and Intangible Assets Data (in thousands) | Intangible Asset Item (in thousands) | March 31, 2022 | December 31, 2021 | | :----------------------------------- | :------------- | :---------------- | | Goodwill | $11,704 | $11,704 | | Total intangible assets, net | $7,843 | $7,978 | - Effective January 1, 2022, an indefinite-lived brand name intangible asset with a net book value of **$3,700 thousand** was reclassified to a finite-lived asset and is now amortized over 15 years[42](index=42&type=chunk) [Note 6 – Accrued Expenses](index=13&type=section&id=Note%206%20%E2%80%93%20Accrued%20Expenses) Outlines the components of accrued expenses, including payroll and incentive compensation Accrued Expenses Data (in thousands) | Accrued Expense Item (in thousands) | March 31, 2022 | December 31, 2021 | | :---------------------------------- | :------------- | :---------------- | | Payroll and incentive compensation | $2,444 | $2,951 | | Total accrued expenses | $3,190 | $3,724 | [Note 7 – Debt](index=14&type=section&id=Note%207%20%E2%80%93%20Debt) Details the company's debt obligations, including term loans and revolving lines of credit, and covenant compliance Debt Obligations (in thousands) | Debt Item (in thousands) | March 31, 2022 | December 31, 2021 | | :----------------------- | :------------- | :---------------- | | Term loan | $4,250 | $4,500 | | Revolving line of credit | $2,777 | $2,777 | | Total note payable, net | $4,222 | $4,470 | - Lifeway was in compliance with its fixed charge coverage ratio and minimum working capital covenants as of March 31, 2022[51](index=51&type=chunk)[109](index=109&type=chunk) [Note 8 – Leases](index=15&type=section&id=Note%208%20%E2%80%93%20Leases) Provides information on lease expenses, remaining lease terms, and weighted-average discount rates for operating leases - Total lease expense for the three months ended March 31, 2022, was **$65 thousand**, down from **$78 thousand** in 2021[55](index=55&type=chunk) - The weighted-average remaining lease term for operating leases was **2.4 years**, with a weighted average discount rate of **12.9%** as of March 31, 2022[58](index=58&type=chunk) [Note 9 – Commitments and contingencies](index=16&type=section&id=Note%209%20%E2%80%93%20Commitments%20and%20contingencies) Discusses the company's commitments and contingencies, including legal matters - Management believes the ultimate resolution of outstanding legal matters will not have a material adverse effect on the company's business, financial condition, results of operations, or cash flows[60](index=60&type=chunk) [Note 10 – Income taxes](index=17&type=section&id=Note%2010%20%E2%80%93%20Income%20taxes) Presents information on income taxes, including effective tax rates and unrecognized tax benefits Income Tax Data | Income Tax Item | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------- | :-------------------------------- | :-------------------------------- | | Effective tax rate | 18.1% | 31.2% | - The company settled its one unrecognized tax benefit during Q1 2022, resulting in **$0** unrecognized tax benefits at March 31, 2022[65](index=65&type=chunk) [Note 11 – Stock-based and Other Compensation](index=17&type=section&id=Note%2011%20%E2%80%93%20Stock-based%20and%20Other%20Compensation) Details stock-based compensation expense and future compensation related to restricted stock awards - Total pre-tax stock-based compensation expense recognized was **$63 thousand** for Q1 2022, up from **$36 thousand** in Q1 2021[69](index=69&type=chunk) - Future compensation expense related to restricted stock awards was **$135 thousand** as of March 31, 2022, to be recognized on a weighted average basis over the next **1.12 years**[69](index=69&type=chunk) - The 2020 CEO Award has **$274 thousand** in remaining unearned compensation, while the 2021 Equity Award has **$516 thousand** remaining, both payable in restricted stock subject to vesting[71](index=71&type=chunk)[72](index=72&type=chunk) [Note 12 – Products and Customers](index=19&type=section&id=Note%2012%20%E2%80%93%20Products%20and%20Customers) Describes the company's primary products and customer concentration - Lifeway's primary product is drinkable kefir, sold under Lifeway, Fresh Made, GlenOaks Farms, and private labels[74](index=74&type=chunk) Product Category Net Sales (in thousands) | Product Category (in thousands) | Q1 2022 Net Sales | Q1 2022 % of Total | Q1 2021 Net Sales | Q1 2021 % of Total | | :------------------------------ | :---------------- | :----------------- | :---------------- | :----------------- | | Drinkable Kefir (excl. ProBugs) | $26,362 | 77% | $24,203 | 82% | | Cheese | $3,024 | 9% | $3,199 | 11% | | Cream and other | $1,968 | 6% | $863 | 3% | | Drinkable yogurt | $1,551 | 5% | $0 | 0% | | ProBugs Kefir | $782 | 2% | $680 | 2% | | Other dairy | $412 | 1% | $431 | 2% | | **Total Net Sales** | **$34,099** | **100%** | **$29,376** | **100%** | - Two major customers accounted for approximately **21%** of net sales for the three months ended March 31, 2022[76](index=76&type=chunk) [Note 13 – Related Party Transactions](index=20&type=section&id=Note%2013%20%E2%80%93%20Related%20Party%20Transactions) Reports on transactions with related parties, including consulting agreements and royalty payments - The consulting agreement with the Chairperson of the Board was terminated effective January 17, 2022, reducing service fees from **$125 thousand** in Q1 2021 to **$22 thousand** in Q1 2022[77](index=77&type=chunk)[78](index=78&type=chunk) - Royalty payments to the Chairperson remained at **$150 thousand** for both Q1 2022 and Q1 2021[79](index=79&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.](index=21&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations%2E) Management discusses Q1 2022 financial condition, operations, and cash flows, highlighting inflation, COVID-19 impacts, and liquidity [Cautionary Statement Regarding Forward-Looking Statements](index=21&type=section&id=Cautionary%20Statement%20Regarding%20Forward-Looking%20Statements) Highlights that forward-looking statements involve risks and uncertainties that could cause actual results to differ materially - Forward-looking statements are based on management's beliefs and assumptions and involve risks, uncertainties, and assumptions that could cause actual results to differ materially[82](index=82&type=chunk) [Recent Developments](index=22&type=section&id=Recent%20Developments) Discusses recent events impacting the company, including the COVID-19 pandemic and inflationary cost increases [COVID-19 Pandemic Impact](index=22&type=section&id=COVID-19%20Pandemic%20Impact) Examines the pandemic's effects on customer demand, supply chain, labor, and increased input costs - Increased customer and consumer demand for products was observed during the pandemic, with no significant supply chain or labor shortages[85](index=85&type=chunk) - In 2022, costs increased primarily due to inflationary price increases of milk, other ingredients, packaging materials, and transportation[86](index=86&type=chunk) [Results of Operations](index=23&type=section&id=Results%20of%20Operations) Analyzes the company's financial performance, including net sales, gross profit, and operating expenses [Net Sales](index=24&type=section&id=Net%20Sales) Details the company's net sales performance, including drivers of increases such as higher volumes and price adjustments Net Sales Data (in thousands) | Metric | Q1 2022 (in thousands) | Q1 2021 (in thousands) | Change ($) | Change (%) | | :-------- | :--------------------- | :--------------------- | :--------- | :--------- | | Net Sales | $34,099 | $29,376 | $4,723 | 16.1% | - The increase in net sales was primarily due to higher volumes of branded drinkable kefir, price increases, and the acquisition of GlenOaks Farms[89](index=89&type=chunk) [Gross Profit](index=24&type=section&id=Gross%20Profit) Analyzes gross profit and its percentage, highlighting factors like milk pricing and increased freight costs Gross Profit Percentage | Metric | Q1 2022 | Q1 2021 | | :----------- | :------ | :------ | | Gross profit % | 16.4% | 27.4% | - The decrease in gross profit percentage was primarily due to unfavorable milk pricing and increased freight and other input costs[90](index=90&type=chunk) [Selling Expenses](index=24&type=section&id=Selling%20Expenses) Reports on selling expenses for the three months ended March 31, 2022, and 2021 Selling Expenses Data (in thousands) | Metric | Q1 2022 (in thousands) | Q1 2021 (in thousands) | Change ($) | | :-------------- | :--------------------- | :--------------------- | :--------- | | Selling expenses | $3,202 | $3,222 | $(20) | [General and Administrative Expenses](index=24&type=section&id=General%20and%20Administrative%20Expenses) Details general and administrative expenses, noting increases due to legal and professional fees General and Administrative Expenses Data (in thousands) | Metric | Q1 2022 (in thousands) | Q1 2021 (in thousands) | Change ($) | | :----------------------------------- | :--------------------- | :--------------------- | :--------- | | General and administrative expenses | $3,292 | $2,891 | $401 | - The increase in G&A expenses was primarily due to increased legal and professional fees, including those related to the fiscal year 2020 Form 10-K restatement[92](index=92&type=chunk) [Provision for Income Taxes](index=24&type=section&id=Provision%20for%20Income%20Taxes) Presents the provision for income taxes and the effective tax rate for Q1 2022 and Q1 2021 Provision for Income Taxes Data (in thousands) | Metric | Q1 2022 (in thousands) | Q1 2021 (in thousands) | | :------------------------- | :--------------------- | :--------------------- | | Provision for income taxes | $197 | $593 | | Effective income tax rate | 18.1% | 31.2% | [Liquidity and Capital Resources](index=25&type=section&id=Liquidity%20and%20Capital%20Resources) Assesses the company's ability to meet short-term and long-term obligations, including cash flow and debt covenants - Management believes cash flow from operations, revolving credit and term loan facility, and cash and cash equivalents will provide sufficient liquidity for working capital, capital requirements, and growth initiatives[98](index=98&type=chunk) - As of March 31, 2022, **$2,223 thousand** was available under the Revolving Credit Facility[99](index=99&type=chunk) [Cash Flow](index=25&type=section&id=Cash%20Flow) Summarizes cash flows from operating, investing, and financing activities for Q1 2022 and Q1 2021 Cash Flow Activities (in thousands) | Cash Flow Activity (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash (used in) provided by operating activities | $(648) | $1,210 | | Net cash (used in) provided by investing activities | $(348) | $(518) | | Net cash (used in) provided by financing activities | $(250) | $0 | [Operating Activities](index=25&type=section&id=Operating%20Activities) Analyzes net cash flow from operating activities, noting the impact of lower cash earnings - Net cash used in operating activities was **$648 thousand** in Q1 2022, compared to **$1,210 thousand** provided in Q1 2021, primarily due to lower cash earnings from input and freight cost inflation[104](index=104&type=chunk) [Investing Activities](index=26&type=section&id=Investing%20Activities) Examines net cash flow from investing activities, primarily driven by capital spending - Net cash used in investing activities decreased to **$348 thousand** in Q1 2022 from **$518 thousand** in Q1 2021, driven by lower capital spending[106](index=106&type=chunk) [Financing Activities](index=26&type=section&id=Financing%20Activities) Details net cash flow from financing activities, including term loan principal payments - Net cash used in financing activities was **$250 thousand** in Q1 2022, compared to **$0** in Q1 2021, due to term loan principal payments[107](index=107&type=chunk) [Debt Obligations](index=26&type=section&id=Debt%20Obligations) Outlines the company's debt structure, including revolving line of credit and note payable balances Debt Obligations Summary (in thousands) | Debt Obligation (in thousands) | Amount Outstanding (March 31, 2022) | | :----------------------------- | :---------------------------------- | | Revolving line of credit | $2,777 | | Note payable, net | $4,222 | | Available under Revolving Credit Facility | $2,223 | - The company's interest rate on outstanding debt under the revolving line of credit and note payable was **2.15%** as of March 31, 2022[108](index=108&type=chunk) [Recent Accounting Pronouncements](index=26&type=section&id=Recent%20Accounting%20Pronouncements) Refers to Note 2 for information on recently issued accounting pronouncements and their potential impact - Information regarding recent accounting pronouncements is provided in Note 2 – Summary of Significant Accounting Policies[110](index=110&type=chunk) [Critical Accounting Policies and Estimates](index=26&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Discusses critical accounting policies and estimates, noting changes to intangible asset useful life - No material changes to critical accounting policies and estimates occurred, except for the change in the estimated useful life of a brand name intangible asset (Note 5)[111](index=111&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk.](index=27&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk%2E) The company states that this item is not applicable for the reporting period [Item 4. Controls and Procedures.](index=27&type=section&id=Item%204.%20Controls%20and%20Procedures%2E) Details evaluation of disclosure controls and procedures and changes in internal control over financial reporting, including material weakness remediation [Evaluation of Disclosure Controls and Procedures](index=27&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Reports on the effectiveness of the company's disclosure controls and procedures as of March 31, 2022 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2022[114](index=114&type=chunk) [Changes in Internal Control over Financial Reporting](index=27&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) Details ongoing remediation efforts for a previously identified material weakness in internal control over financial reporting - Remediation efforts for a previously identified material weakness in internal control over financial reporting, related to income tax accounting, were ongoing during Q1 2022[115](index=115&type=chunk)[116](index=116&type=chunk) PART II – OTHER INFORMATION [Item 1. Legal Proceedings.](index=28&type=section&id=Item%201.%20Legal%20Proceedings%2E) Refers to Note 9 for legal proceedings, indicating no material individual or aggregate accruals for outstanding legal matters [Item 1A. Risk Factors.](index=28&type=section&id=Item%201A.%20Risk%20Factors%2E) States no material changes from risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021 [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.](index=28&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds%2E) Reports no unregistered sales of equity securities or use of proceeds during the period [Item 3. Defaults Upon Senior Securities.](index=28&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities%2E) Reports no defaults upon senior securities during the period [Item 5. Other Information.](index=28&type=section&id=Item%205.%20Other%20Information%2E) States that there is no other information to report under this item [Item 6. Exhibits.](index=28&type=section&id=Item%206.%20Exhibits%2E) Lists exhibits filed or furnished with the Form 10-Q, including certifications and a press release Exhibits Filed or Furnished | No. | Description | Filing Type | | :----- | :----------------------------------------------------------------------- | :---------------- | | 31.1 | Rule 13a-14(a)/15d-14(a) Certification of Julie Smolyansky | Filed Herewith | | 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Eric Hanson | Filed Herewith | | 32.1 | Section 1350 Certification of Julie Smolyansky* | Furnished Herewith| | 32.2 | Section 1350 Certification of Eric Hanson* | Furnished Herewith| | 99.1 | Press release dated August 26, 2022 reporting Lifeway's financial results for the three months ended March 31, 2022.* | Furnished Herewith| [Signatures.](index=29&type=section&id=Signatures%2E) Contains required signatures from the CEO, President, Director, and CFO, certifying the report on August 26, 2022 - The report was signed by Julie Smolyansky, Chief Executive Officer, President, and Director, and Eric Hanson, Chief Financial & Accounting Officer, on August 26, 2022[130](index=130&type=chunk)

PART I [Item 1. Business](index=6&type=section&id=Item%201.%20Business) Lifeway Foods, Inc. is the largest U.S. kefir producer, marketing probiotic dairy products, focusing on innovation and operating four manufacturing facilities - **Lifeway Foods, Inc.**, founded in 1986, is the largest U.S. producer and marketer of kefir, expanding into probiotic and natural foods[24](index=24&type=chunk) Net Sales by Product Category (2021 vs. 2020) | In thousands | 2021 ($ in thousands) | 2021 (%) | 2020 ($ in thousands) | 2020 (%) | | :----------------------------- | :------- | :------- | :------- | :------- | | Drinkable Kefir other than ProBugs | 95,850 | 80% | 81,437 | 80% | | Cheese | 12,612 | 11% | 12,905 | 13% | | Cream and other | 3,582 | 3% | 2,872 | 3% | | ProBugs Kefir | 3,178 | 3% | 2,733 | 2% | | Drinkable Yogurt | 2,223 | 2% | – | 0% | | Other dairy (a) | 1,620 | 1% | 2,079 | 2% | | **Net Sales** | **119,065**| **100%** | **102,026**| **100%** | - In 2021, Lifeway acquired the Glen Oaks drinkable yogurt product line and launched an oat-based kefir, demonstrating a focus on **product innovation and category expansion**[30](index=30&type=chunk) - Approximately **98% of 2021 revenue** originated from products manufactured at Lifeway's own facilities in Morton Grove, IL; Waukesha, WI; Niles, IL; and Philadelphia, PA[31](index=31&type=chunk) - Sales outside the United States constituted approximately **2% of net sales** in 2021, primarily via distributors in Mexico, South America, the Caribbean, UK, Ireland, and the Middle East[39](index=39&type=chunk) - Two major customers collectively represented approximately **23% of total net sales** and **32% of net accounts receivable** as of December 31, 2021[50](index=50&type=chunk) [Item 1A. Risk Factors](index=12&type=section&id=Item%201A.%20Risk%20Factors) Lifeway faces intense competition, strategic execution risks, supply chain disruptions, financial obligations, internal control weaknesses, and pandemic-related uncertainties - Lifeway faces **significant competition** from dairy and non-dairy probiotic products, with competitors often possessing greater financial and marketing resources, potentially impacting sales and profitability[67](index=67&type=chunk)[68](index=68&type=chunk) - The company's business strategy, reliant on product innovation and market expansion, is vulnerable to **rapidly changing consumer tastes**, dietary trends, and potential competitor mislabeling[70](index=70&type=chunk)[72](index=72&type=chunk) - **Supply chain interruptions**, including reliance on single suppliers and disruptions to manufacturing or distribution facilities (e.g., natural disasters, cybersecurity threats), could adversely affect operations and increase costs[75](index=75&type=chunk)[77](index=77&type=chunk)[78](index=78&type=chunk)[79](index=79&type=chunk)[80](index=80&type=chunk) - As of December 31, 2021, Lifeway had **$2.77 million outstanding** under its Revolving Credit Facility and **$4.47 million** under a note payable, with restrictive loan covenants limiting financial flexibility[83](index=83&type=chunk)[85](index=85&type=chunk)[86](index=86&type=chunk) - A **material weakness in internal control over financial reporting** was identified, stemming from an understatement of deferred income tax liabilities and goodwill from a 2009 acquisition, necessitating financial statement restatement[93](index=93&type=chunk)[94](index=94&type=chunk)[95](index=95&type=chunk) - The COVID-19 pandemic increased customer demand but also caused **inflationary price increases** for milk, ingredients, packaging, and freight, with future impacts on demand and costs remaining uncertain[113](index=113&type=chunk)[114](index=114&type=chunk)[115](index=115&type=chunk) [Item 1B. Unresolved Staff Comments](index=22&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) There are no unresolved staff comments from the SEC [Item 2. Properties](index=22&type=section&id=Item%202.%20Properties) Lifeway Foods operates four owned manufacturing and distribution facilities, deemed adequate for current needs with potential for additional space Lifeway Foods Facilities | Location | Owned / Leased | Principal Use | | :---------------------- | :------------- | :----------------------------------------------- | | Morton Grove, Illinois | Owned | Production of kefir and cheese, principal executive offices | | Waukesha, Wisconsin | Owned | Production of kefir, administrative offices | | Niles, Illinois | Owned | Distribution center, administrative offices | | Philadelphia, Pennsylvania | Owned | Production of kefir and cheese, administrative offices | [Item 3. Legal Proceedings](index=22&type=section&id=Item%203.%20Legal%20Proceedings) Lifeway is involved in routine litigation matters but believes none are likely to have a material adverse effect on its financial position or results of operations - Lifeway is engaged in routine litigation, but management believes no matter is reasonably likely to have a **material adverse effect** on its financial position or results of operations[120](index=120&type=chunk) [Item 4. Mine Safety Disclosures](index=22&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to Lifeway Foods, Inc PART II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=23&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Lifeway's common stock trades on Nasdaq under 'LWAY'; the company does not routinely pay dividends but repurchased **250,000 shares** in 2021 - Lifeway's common stock is listed on the Nasdaq Global Market under the symbol **'LWAY'**, with trading commencing on March 29, 1988[124](index=124&type=chunk) - Lifeway does not routinely declare and pay dividends, with **no dividends** declared or paid in fiscal 2021 or 2020[126](index=126&type=chunk)[127](index=127&type=chunk) Issuer Purchases of Equity Securities (2020-2021) | Period | Total number of shares purchased | Average price paid per share ($) | Total number of shares purchased as part of a publicly announced program (a) | Approximate Dollar Value of Shares that may yet be Purchased Under the Plans or Programs ($ in thousands) | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------------------- | | Fiscal Year 2020 | 178,417 | 2.27 | 178,417 | 3,560 | | Fiscal Year 2021 | 250,000 | 6.33 | 250,000 | – | - On June 24, 2021, the Board authorized a plan to repurchase up to **250,000 shares** at no more than $10 per share, fully executed by December 31, 2021, at a cost of **$1,583,000**[129](index=129&type=chunk) [Item 6. [RESERVED]](index=24&type=section&id=Item%206.%20%5BRESERVED%5D) This item is reserved and contains no information [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=24&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section analyzes Lifeway's 2021 financial performance, including a restatement, **16.7% net sales growth**, decreased gross profit, and liquidity management - Lifeway restated its consolidated financial statements for 2020 and 2021 to correct a material error from a 2009 acquisition, which understated deferred income tax liabilities and goodwill by **$1.18 million**[132](index=132&type=chunk)[198](index=198&type=chunk) - The COVID-19 pandemic increased customer and consumer demand for Lifeway's products but also caused **inflationary price increases** for milk, ingredients, packaging, and freight in 2021[137](index=137&type=chunk) Key Financial Results (2021 vs. 2020) | Metric | 2021 ($ in thousands) | 2021 (%) | 2020 ($ in thousands) | 2020 (%) | | :-------------------------- | :-------------------- | :------- | :-------------------- | :------- | | Net sales | 119,065 | 100.0% | 102,026 | 100.0% | | Total cost of goods sold | 90,355 | 75.9% | 75,093 | 73.6% | | Gross profit | 28,710 | 24.1% | 26,933 | 26.4% | | Total operating expenses | 22,830 | 19.2% | 22,010 | 21.6% | | Income from operations | 5,880 | 4.9% | 4,923 | 4.8% | | Net income | 3,311 | 2.8% | 3,232 | 3.1% | | Basic earnings per common share | 0.21 | | 0.21 | | | Diluted earnings per common share | 0.21 | | 0.21 | | - Net sales increased by **$17,039 (16.7%)** in 2021, primarily due to higher volumes of branded drinkable kefir (69% of increase) and the acquisition of Glen Oaks Farms (11% of increase), along with the Farmers to Families Food Box program (20% of increase)[141](index=141&type=chunk) - Gross profit as a percentage of net sales decreased from **26.4% in 2020 to 24.1% in 2021**, mainly due to unfavorable milk pricing and inflationary increases in other ingredients, packaging, and freight costs[142](index=142&type=chunk) - Net cash provided by operating activities decreased by **$241 thousand to $6,144 thousand** in 2021, while net cash used in investing activities increased by **$5,832 thousand to $7,722 thousand**, largely due to the **$5,800 thousand acquisition** of Glen Oaks Farms, Inc[154](index=154&type=chunk)[155](index=155&type=chunk) - As of December 31, 2021, Lifeway had **$2,777 thousand outstanding** under its Revolving Credit Facility and **$4,470 thousand** under a note payable, with **$2,223 thousand available** for future borrowings[160](index=160&type=chunk) [Restatement of Previously Issued Consolidated Financial Statements](index=25&type=section&id=Restatement%20of%20Previously%20Issued%20Consolidated%20Financial%20Statements) Lifeway restated prior financial statements to correct a material error related to deferred income tax liabilities and goodwill from a 2009 acquisition - Lifeway restated its consolidated financial statements for 2020 and 2021 to correct a material error from a 2009 acquisition, which understated deferred income tax liabilities and goodwill by **$1.18 million**[132](index=132&type=chunk)[198](index=198&type=chunk) - The restatement had **no impact** on the Consolidated Statements of Operations, Cash Flows, or Stockholders' Equity for 2021 and 2020, nor on opening retained earnings as of January 1, 2020[132](index=132&type=chunk)[198](index=198&type=chunk) [Recent Developments](index=25&type=section&id=Recent%20Developments) Recent developments include increased demand and inflationary costs due to COVID-19, with proactive planning mitigating operational disruptions - The COVID-19 pandemic led to increased customer and consumer demand but also resulted in **inflationary price increases** for milk, ingredients, packaging, and freight in 2021[137](index=137&type=chunk) - Lifeway's proactive planning avoided disruptions in manufacturing, production, transportation, and sales, meeting **increased demand without delay** during the pandemic[136](index=136&type=chunk) - Increased demand from at-home consumption and e-commerce during COVID-19 may change or decrease as social distancing mandates are reduced, creating **uncertainty for future sales**[138](index=138&type=chunk) [Results of Operations](index=26&type=section&id=Results%20of%20Operations) Lifeway reported **16.7% net sales growth** in 2021, driven by kefir volumes and acquisitions, despite a decrease in gross profit margin due to inflationary costs Key Financial Results (2021 vs. 2020) | Metric | 2021 ($ in thousands) | 2021 (%) | 2020 ($ in thousands) | 2020 (%) | | :-------------------------- | :-------------------- | :------- | :-------------------- | :------- | | Net sales | 119,065 | 100.0% | 102,026 | 100.0% | | Total cost of goods sold | 90,355 | 75.9% | 75,093 | 73.6% | | Gross profit | 28,710 | 24.1% | 26,933 | 26.4% | | Selling expenses | 11,097 | 9.3% | 10,197 | 10.0% | | General & administrative expenses | 11,611 | 9.8% | 11,661 | 11.4% | | Amortization expense | 122 | 0.1% | 152 | 0.2% | | Total operating expenses | 22,830 | 19.2% | 22,010 | 21.6% | | Income from operations | 5,880 | 4.9% | 4,923 | 4.8% | | Net income | 3,311 | 2.8% | 3,232 | 3.1% | | Basic earnings per common share | 0.21 | | 0.21 | | | Diluted earnings per common share | 0.21 | | 0.21 | | - Net sales increased by **$17,039 thousand (16.7%)** to **$119,065 thousand** in 2021, driven by higher branded drinkable kefir volumes, the Glen Oaks Farms acquisition, and the Farmers to Families Food Box program[141](index=141&type=chunk) - Gross profit margin decreased from **26.4% in 2020 to 24.1% in 2021**, primarily due to higher milk prices and inflationary increases in ingredients, packaging, and freight costs, partially offset by improved labor efficiency[142](index=142&type=chunk) - Selling expenses increased by **$900 thousand to $11,097 thousand** in 2021 due to increased advertising and marketing, while general and administrative expenses slightly decreased by **$50 thousand to $11,611 thousand**[143](index=143&type=chunk)[144](index=144&type=chunk) - The effective income tax rate increased from **33.1% in 2020 to 41.0% in 2021**, influenced by non-deductible officer compensation, equity incentive awards, and separate state tax rates[146](index=146&type=chunk) - Net income for 2021 was **$3,311 thousand**, a slight increase from **$3,232 thousand** in 2020, with basic and diluted EPS remaining constant at **$0.21**[151](index=151&type=chunk) [Liquidity and Capital Resources](index=28&type=section&id=Liquidity%20and%20Capital%20Resources) Lifeway expects to meet liquidity needs through operating cash flows and its revolving credit facility, with capital spending focused on growth and efficiency - Lifeway expects to meet liquidity and capital requirements through operating cash flows, its revolving credit facility, and cash equivalents, with **$2,223 thousand available** under the Revolving Credit Facility as of December 31, 2021[152](index=152&type=chunk) Cash Flow Summary (2021 vs. 2020) | Cash Flow Activity | 2021 ($ in thousands) | 2020 ($ in thousands) | | :----------------------------- | :-------------------- | :-------------------- | | Net cash provided by operating activities | 5,564 | 6,385 | | Net cash used in investing activities | (7,142) | (1,890) | | Net cash provided by (used in) financing activities | 2,885 | (405) | | Net increase in cash and cash equivalents | 1,307 | 4,090 | - Net cash used in investing activities increased significantly in 2021 to **$7,142 thousand**, primarily due to the **$5,800 thousand acquisition** of Glen Oaks Farms, Inc., funded by a new **$5,000 thousand term loan** and existing cash[155](index=155&type=chunk) - As of December 31, 2021, Lifeway had **$4,500 thousand outstanding** on a term loan due August 2026 and **$2,777 thousand outstanding** under its Revolving Credit Facility, with an interest rate of **2.15%** on outstanding debt[160](index=160&type=chunk)[48](index=48&type=chunk) [Critical Accounting Estimates](index=30&type=section&id=Critical%20Accounting%20Estimates) Critical accounting estimates include goodwill, indefinite-lived brand assets, sales discounts, share-based compensation, and income taxes - Goodwill totaled **$11,704 thousand** as of December 31, 2021, with annual impairment analyses using income and market approaches resulting in **no impairment**[166](index=166&type=chunk) - The company's indefinite-lived brand name intangible assets, totaling **$3,700 thousand**, were assessed for impairment using the relief from royalty method, with **no impairment** found in 2021[167](index=167&type=chunk) - In Q4 2021, Lifeway changed the estimated useful life of its indefinite-lived brand name intangible asset from indefinite to **15 years**, effective January 1, 2022, which will result in future amortization expense[202](index=202&type=chunk)[239](index=239&type=chunk) - Sales discounts and allowances, accrued at **$1,170 thousand** as of December 31, 2021, are estimated based on historical experience and specific customer program accruals[168](index=168&type=chunk) - Share-based compensation expense is recognized based on grant date fair values, with stock option fair values estimated using the Black-Scholes model and restricted stock awards based on closing stock price[169](index=169&type=chunk)[227](index=227&type=chunk) - Income taxes are accounted for under the asset and liability method, recognizing deferred income tax assets and liabilities for temporary differences, with a valuation allowance recorded if a tax benefit is unlikely to be realized[170](index=170&type=chunk)[171](index=171&type=chunk)[225](index=225&type=chunk) [Recent Accounting Pronouncements](index=32&type=section&id=Recent%20Accounting%20Pronouncements) Lifeway is evaluating the impact of recent ASUs on business combinations, reference rate reform, and financial instruments - Lifeway is evaluating the impact of **ASU No. 2021-08** (Business Combinations: Accounting for Contract Assets and Liabilities from Contracts with Customers), effective for fiscal years beginning after December 15, 2022[231](index=231&type=chunk) - The company is also evaluating **ASU No. 2020-04** (Reference Rate Reform) and **ASU No. 2016-13** (Financial Instruments – Credit Losses), with respective effective dates[232](index=232&type=chunk)[233](index=233&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures about Market Risk](index=32&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This item is not applicable to Lifeway Foods, Inc [Item 8. Financial Statements and Supplementary Data](index=32&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents Lifeway's audited consolidated financial statements for 2021 and 2020, including restated 2020 figures and detailed notes on accounting policies and specific accounts - The 2020 financial statements have been restated to correct a misstatement related to deferred income tax liabilities and goodwill, as discussed in Note 1[178](index=178&type=chunk) Consolidated Balance Sheets (December 31, 2021 vs. 2020) | (In thousands) | 2021 ($ in thousands) | 2020 (As Restated) ($ in thousands) | | :----------------------------- | :------- | :--------------------- | | **Current assets** | | | | Cash and cash equivalents | 9,233 | 7,926 | | Accounts receivable, net | 9,930 | 8,002 | | Inventories, net | 8,285 | 6,930 | | Prepaid expenses and other current assets | 1,254 | 1,163 | | Refundable income taxes | 344 | 31 | | **Total current assets** | **29,046** | **24,052** | | Property, plant and equipment, net | 20,130 | 21,048 | | Operating lease right-of use asset | 216 | 345 | | **Intangible assets** | | | | Goodwill and indefinite-lived intangibles | 15,404 | 14,004 | | Other intangible assets, net | 4,278 | – | | **Total intangible assets** | **19,682** | **14,004** | | Other Assets | 1,800 | 1,800 | | **Total assets** | **70,874** | **61,249** | | **Current liabilities** | | | | Current portion of note payable | 1,000 | – | | Accounts payable | 6,614 | 5,592 | | Accrued expenses | 3,724 | 2,196 | | Accrued income taxes | 725 | 653 | | **Total current liabilities** | **12,063** | **8,441** | | Line of credit | 2,777 | 2,768 | | Note Payable | 3,470 | – | | Operating lease liabilities | 85 | 165 | | Deferred income taxes, net | 3,201 | 2,944 | | Other long-term liabilities | 147 | 77 | | **Total liabilities** | **21,743** | **14,395** | | **Stockholders' equity** | | | | Common stock | 6,509 | 6,509 | | Paid-in capital | 2,552 | 2,600 | | Treasury stock, at cost | (13,436) | (12,450) | | Retained earnings | 53,506 | 50,195 | | **Total stockholders' equity** | **49,131** | **46,854** | | **Total liabilities and stockholders' equity** | **70,874** | **61,249** | Consolidated Statements of Operations (2021 vs. 2020) | (In thousands, except per share data) | 2021 ($ in thousands) | 2020 (As Restated) ($ in thousands) | | :------------------------------------ | :------- | :--------------------- | | Net sales | 119,065 | 102,026 | | Total cost of goods sold | 90,355 | 75,093 | | Gross profit | 28,710 | 26,933 | | Selling expenses | 11,097 | 10,197 | | General and administrative | 11,611 | 11,661 | | Amortization expense | 122 | 152 | | Total operating expenses | 22,830 | 22,010 | | Income from operations | 5,880 | 4,923 | | Total other income (expense) | (264) | (95) | | Income before provision for income taxes | 5,616 | 4,828 | | Provision for income taxes | 2,305 | 1,596 | | Net income | 3,311 | 3,232 | | Basic earnings per common share | 0.21 | 0.21 | | Diluted earnings per common share | 0.21 | 0.21 | Consolidated Statements of Cash Flows (2021 vs. 2020) | (In thousands) | 2021 ($ in thousands) | 2020 (As Restated) ($ in thousands) | | :-------------------------------------------- | :------- | :--------------------- | | Net cash provided by operating activities | 5,564 | 6,385 | | Net cash used in investing activities | (7,142) | (1,890) | | Net cash provided by (used in) financing activities | 2,885 | (405) | | Net increase in cash and cash equivalents | 1,307 | 4,090 | | Cash and cash equivalents at the beginning of the period | 7,926 | 3,836 | | Cash and cash equivalents at the end of the period | 9,233 | 7,926 | [Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=65&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) Lifeway Foods, Inc. reported no changes in or disagreements with accountants on accounting and financial disclosure matters [Item 9A. Controls and Procedures](index=65&type=section&id=Item%209A.%20Controls%20and%20Procedures) Lifeway's management concluded that its disclosure controls were effective, but internal control over financial reporting was not effective due to a material weakness related to a 2009 acquisition, prompting a remediation plan - As of December 31, 2021, Lifeway's principal executive and financial officers concluded that **disclosure controls and procedures were effective** at a reasonable assurance level[305](index=305&type=chunk) - Management concluded that **internal control over financial reporting was not effective** as of December 31, 2021, due to a material weakness[309](index=309&type=chunk) - The material weakness stemmed from a 2009 Fresh Made, Inc. acquisition error, where a deferred income tax liability and corresponding goodwill increase were not recorded, resulting in a **$1.18 million understatement** of both[311](index=311&type=chunk)[312](index=312&type=chunk) - Management has initiated a remediation plan to enhance controls over income taxes and goodwill for acquired intangible assets, aiming to ensure proper accounting and periodic reconciliation[314](index=314&type=chunk) [Item 9B. Other Information](index=66&type=section&id=Item%209B.%20Other%20Information) This item contains no additional information [Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections](index=66&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20That%20Prevent%20Inspections) This item is not applicable to Lifeway Foods, Inc PART III [Item 10. Directors, Executive Officers and Corporate Governance](index=68&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) This section details Lifeway's Board, executive officers, corporate governance framework, independent committee oversight, and the Smolyansky family's controlling interest - The Board of Directors includes Ludmila Smolyansky (Chairperson), Julie Smolyansky (CEO), Edward Smolyansky (former COO), and independent directors Pol Sikar, Jason Scher, Jody Levy, and Dorri McWhorter[320](index=320&type=chunk)[322](index=322&type=chunk)[324](index=324&type=chunk)[326](index=326&type=chunk)[328](index=328&type=chunk)[331](index=331&type=chunk)[333](index=333&type=chunk) - The Smolyansky family controls **49.61% of Lifeway's common stock**, granting them significant influence over stockholder approval matters, including director elections and corporate transactions[92](index=92&type=chunk) - The Audit and Corporate Governance Committee oversees internal controls, financial reporting, and director nominations, with Mr. Scher and Ms. McWhorter identified as **audit committee financial experts**[340](index=340&type=chunk)[342](index=342&type=chunk)[344](index=344&type=chunk)[345](index=345&type=chunk) - The Compensation Committee, composed of independent directors, reviews and approves executive compensation, recommends non-employee director compensation, and administers incentive and equity plans[348](index=348&type=chunk)[349](index=349&type=chunk) - Executive officers include Julie Smolyansky (CEO), Eric Hanson (CFO & Chief Accounting Officer), and Amy Feldman (Senior Executive Vice President of Sales)[350](index=350&type=chunk)[351](index=351&type=chunk)[352](index=352&type=chunk) [Item 11. Executive Compensation](index=75&type=section&id=Item%2011.%20Executive%20Compensation) Lifeway's executive compensation aligns with shareholder interests and business growth, featuring performance-based incentives, independent oversight, and specific compensation details for NEOs and directors - Lifeway's executive compensation program aims to attract and motivate talented executives, align with shareholder interests, and promote business growth, focusing on **performance-based compensation**[358](index=358&type=chunk)[360](index=360&type=chunk) - Following shareholder feedback, Lifeway established an independent Compensation Committee, refined performance review processes, and rationalized total compensation, leading to **aggregate compensation reductions** for NEOs and Ludmila Smolyansky[354](index=354&type=chunk)[355](index=355&type=chunk)[359](index=359&type=chunk) NEO Summary Compensation (2021 vs. 2020) | Name and Principal Position(s) | Year | Salary ($) | Stock Awards ($) | Nonequity incentive plan compensation ($) | All Other Compensation ($) | Total ($) | | :----------------------------- | :--- | :--------- | :--------------- | :--------------------------------------- | :------------------------- | :-------- | | Julie Smolyansky, CEO | 2021 | 1,000,000 | 783,409 | 957,000 | 25,758 | 2,766,167 | | | 2020 | 1,000,000 | 800,320 | 250,000 | 23,856 | 2,324,176 | | Edward Smolyansky, Former COO | 2021 | 500,000 | 33,409 | – | 9,194 | 542,603 | | | 2020 | 1,000,000 | 50,320 | – | 9,582 | 1,059,902 | | Eric Hanson, CFO | 2021 | 325,000 | 130,451 | 142,000 | 13,232 | 610,683 | | | 2020 | 325,000 | 25,160 | 75,000 | 15,000 | 440,160 | - For fiscal 2021, CEO Julie Smolyansky and CFO Eric Hanson were eligible for annual cash incentive awards based on Adjusted EBITDA, with actual performance exceeding targets, resulting in payouts of approximately **190% of target** for each[370](index=370&type=chunk)[374](index=374&type=chunk) - Equity incentive awards for the CEO and former COO are subject to consent from Danone SA due to a Shareholders' Agreement, which has historically led to **delays or cancellations of awards**[395](index=395&type=chunk)[396](index=396&type=chunk)[397](index=397&type=chunk) Fiscal Year 2021 Director Compensation | Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | All Other Compensation ($) | Total ($) | | :---------------- | :------------------------------ | :--------------- | :------------------------- | :-------- | | Ludmila Smolyansky | – | – | 1,105,427 | 1,105,427 | | Jason Scher | – | 30,000 | 197,500 | 227,500 | | Jody Levy | 147,502 | 30,000 | – | 177,502 | | Dorri McWhorter | 117,502 | 30,000 | – | 147,502 | | Pol Sikar | 117,502 | 30,000 | – | 147,502 | - Ludmila Smolyansky's 'All Other Compensation' in 2021 included **$505,427 for consulting services** (terminated January 2022) and **$600,000 in royalty payments**[404](index=404&type=chunk)[285](index=285&type=chunk)[286](index=286&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=90&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) As of July 6, 2022, Lifeway's directors and NEOs collectively beneficially own **50.34% of common stock**, granting significant influence, with Danone North America PBC holding **22.33%** - As of July 6, 2022, Lifeway's directors, director nominees, and Named Executive Officers beneficially own approximately **50.34% of outstanding Common Stock**, granting them significant influence over company affairs[420](index=420&type=chunk) Beneficial Ownership of Common Stock (July 6, 2022) | Name and Address (a) | Shares Beneficially Owned (b) (Number) | Percent | | :------------------------------- | :------------------------------------- | :------ | | Julie Smolyansky | 2,357,262 | 15.10% | | Edward Smolyansky | 2,473,553 | 15.99% | | Ludmila Smolyansky | 3,413,984 | 22.06% | | Eric Hanson | 40,487 | * | | Jason Scher | 54,819 | * | | Pol Sikar | 27,290 | * | | Jody Levy | 12,069 | * | | Dorri McWhorter | 9,361 | * | | All directors and executive officers as a group (8 persons) | 7,888,825 | 50.34% | | Danone North America PBC | 3,454,756 | 22.33% | - Julie Smolyansky and Edward Smolyansky share voting and disposal power over **500,000 shares** held by Smolyansky Family Holdings, LLC[423](index=423&type=chunk) - A significant portion of shares held by Julie Smolyansky, Edward Smolyansky, and Ludmila Smolyansky are **pledged to a lender** under full recourse loan agreements[423](index=423&type=chunk) [Item 13. Certain Relationships and Related Transactions and Director Independence](index=92&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%20and%20Director%20Independence) Lifeway engages in related party transactions primarily with the Smolyansky family, including consulting and royalty payments, and compensation to the CEO's spouse - Ludmila Smolyansky received **$505,427** in 2021 for consulting services under an agreement terminated effective January 17, 2022[424](index=424&type=chunk)[426](index=426&type=chunk) - Ludmila Smolyansky also received **$600,000 in royalty payments** in 2021 for the use of her name, image, and likeness on certain Lifeway products, capped at **$50,000 per fiscal month**[425](index=425&type=chunk)[426](index=426&type=chunk) - Jason Burdeen, spouse of CEO Julie Smolyansky, is employed as the CEO's Chief of Staff and received **$132,000 in total compensation** in 2021[427](index=427&type=chunk) - Director Jason Scher converted his **$227,500 cash and restricted stock compensation** for fiscal year 2021 into Restricted Stock Units (RSUs), with up to **40,625 shares** of common stock to be issued upon payment, subject to shareholder approval[428](index=428&type=chunk) [Item 14. Principal Accountant Fees and Services](index=93&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Lifeway paid Mayer Hoffman McCann P.C. (MHM) **$671,323** in audit fees for 2021, including non-recurring procedures for a restatement, with all services pre-approved by the Audit and Corporate Governance Committee Fees Billed by Independent Registered Public Accounting Firm (MHM) | Type of Fees | 2021 ($) | 2020 ($) | | :----------- | :------- | :------- | | Audit Fees | 671,323 | 448,767 | | Audit-Related Fees | – | – | | Tax Fees | – | – | | All Other Fees | – | – | | **Total** | **671,323**| **448,767**| - The 2021 audit fees included **$120,000** for non-recurring audit procedures related to the company's restatement of fiscal year ended December 31, 2020[431](index=431&type=chunk) - The Audit and Corporate Governance Committee pre-approves all audit and non-audit services, and MHM performed **no non-audit work** for Lifeway in fiscal years 2021 or 2020[436](index=436&type=chunk)[437](index=437&type=chunk) PART IV [Item 15. Exhibits, Financial Statement Schedules](index=95&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists all exhibits and financial statement schedules filed as part of the 10-K report, including organizational documents, agreements, and incentive plans - The report includes a list of financial statements and financial statement schedules, with separate schedules omitted as information is included in the consolidated financial statements[442](index=442&type=chunk) - Exhibits include key agreements such as Amended and Restated Bylaws, Articles of Incorporation, Stockholders' Agreement with Danone, employment agreements, and various loan and security agreements[441](index=441&type=chunk)[443](index=443&type=chunk) [Item 16. Form 10-K Summary](index=97&type=section&id=Item%2016.%20Form%2010-K%20Summary) This item is not applicable to Lifeway Foods, Inc

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 2021 ☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number: 000-17363 LIFEWAY FOODS, INC. (Exact Name of Registrant as Specified in its Charter) (State or Other Ju ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2021 ☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number: 000-17363 LIFEWAY FOODS, INC. (Exact Name of Registrant as Specified in its Charter) (State or Other Jurisdi ...

SEC Filing Details This section provides an overview of the SEC filing, including company identification and common stock outstanding details [Form 10-Q Details](index=1&type=section&id=Form%2010-Q%20Details) This section details the filing specifics for Lifeway Foods, Inc.'s Form 10-Q for the quarterly period ended March 31, 2021, identifying the company as a non-accelerated and smaller reporting filer with 15,631,314 shares of common stock outstanding as of May 3, 2021 - Filing is a Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended March 31, 2021[2](index=2&type=chunk) | Filer Status | Value | | :--- | :--- | | Large accelerated filer | No | | Accelerated filer | No | | Non-accelerated filer | Yes | | Smaller reporting company | Yes | | Emerging growth company | No | - Number of shares of Common Stock, no par value, outstanding as of May 3, 2021: **15,631,314**[4](index=4&type=chunk) PART I – FINANCIAL INFORMATION This part presents the unaudited consolidated financial statements and management's discussion and analysis for the quarter ended March 31, 2021 [Item 1. Financial Statements.](index=3&type=section&id=Item%201.%20Financial%20Statements.) This section presents the unaudited consolidated financial statements of Lifeway Foods, Inc. and its subsidiaries for the quarter ended March 31, 2021, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific financial accounts [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) This section details the company's financial position, including assets, liabilities, and equity as of March 31, 2021 | Metric | March 31, 2021 (Unaudited) (in thousands) | December 31, 2020 (in thousands) | | :--- | :--- | :--- | | Total current assets | $26,471 | $24,052 | | Total assets | $62,156 | $60,069 | | Total current liabilities | $9,091 | $8,441 | | Total liabilities | $13,932 | $13,215 | | Total stockholders' equity | $48,224 | $46,854 | [Consolidated Statements of Operations](index=5&type=section&id=Consolidated%20Statements%20of%20Operations) This section outlines the company's financial performance, including net sales, gross profit, and net income for the three months ended March 31 | Metric (Three Months Ended March 31) | 2021 (in thousands) | 2020 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $29,376 | $25,388 | +15.7% | | Gross profit | $8,049 | $5,997 | +34.2% | | Income from operations | $1,936 | $238 | +713.4% | | Net income | $1,306 | $146 | +794.5% | | Basic EPS | $0.08 | $0.01 | +700% | | Diluted EPS | $0.08 | $0.01 | +700% | [Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Stockholders'%20Equity) This section details changes in stockholders' equity, including common stock, paid-in capital, and retained earnings | Metric (in thousands) | Balance, January 1, 2021 | Balance, March 31, 2021 | | :--- | :--- | :--- | | Common Stock | $6,509 | $6,509 | | Paid-In Capital | $2,600 | $2,664 | | Treasury stock, at cost | $(12,450) | $(12,450) | | Retained earnings | $50,195 | $51,501 | | Total Equity | $46,854 | $48,224 | - Net income for the three months ended March 31, 2021, contributed **$1,306 thousand** to retained earnings, and stock-based compensation added **$64 thousand** to paid-in capital[15](index=15&type=chunk) [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section presents cash flows from operating, investing, and financing activities for the three months ended March 31 | Cash Flow Activity (Three Months Ended March 31) | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $1,210 | $(1,055) | | Net cash used in investing activities | $(518) | $(398) | | Net cash used in financing activities | $0 | $(405) | | Net increase (decrease) in cash and cash equivalents | $692 | $(1,858) | | Cash and cash equivalents at end of period | $8,618 | $1,978 | [Notes to Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed explanations supporting the financial statements, covering accounting policies and specific accounts [Note 1 – Basis of Presentation](index=8&type=section&id=Note%201%20%E2%80%93%20Basis%20of%20Presentation) This note describes the preparation of unaudited consolidated financial statements in accordance with U.S. GAAP - Unaudited consolidated financial statements prepared in accordance with U.S. GAAP for interim financial information, including all necessary adjustments for fair presentation[19](index=19&type=chunk) - Consolidated financial statements include Lifeway Foods, Inc. and all wholly-owned subsidiaries, with significant intercompany accounts and transactions eliminated[21](index=21&type=chunk) [Note 2 – Significant Accounting Policies](index=8&type=section&id=Note%202%20%E2%80%93%20Significant%20Accounting%20Policies) This note outlines key accounting principles and estimates, including revenue recognition and expense treatment - Management makes estimates and assumptions affecting reported amounts, including reserves for promotional allowances, valuation of goodwill and intangible assets, stock-based compensation, and deferred income taxes[22](index=22&type=chunk) - Revenue is recognized when control of food and beverage products transfers to customers, generally upon delivery, using the five-step method of ASC 606[23](index=23&type=chunk) - Advertising expenses are expensed as incurred, totaling **$1,393 thousand** for Q1 2021, up from **$536 thousand** in Q1 2020[29](index=29&type=chunk) [Note 3 – Inventories, net](index=9&type=section&id=Note%203%20%E2%80%93%20Inventories%2C%20net) This note provides a breakdown of inventory categories as of March 31, 2021, and December 31, 2020 | Inventory Category (in thousands) | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Ingredients | $1,684 | $1,725 | | Packaging | $2,114 | $2,234 | | Finished goods | $2,938 | $2,971 | | Total inventories | $6,736 | $6,930 | [Note 4 – Property, Plant and Equipment, net](index=10&type=section&id=Note%204%20%E2%80%93%20Property%2C%20Plant%20and%20Equipment%2C%20net) This note details the composition of property, plant, and equipment, net of depreciation | Asset Category (in thousands) | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Land | $1,565 | $1,565 | | Buildings and improvements | $17,182 | $17,834 | | Machinery and equipment | $31,716 | $31,707 | | Construction in process | $587 | $228 | | Total property, plant and equipment, net | $20,744 | $21,048 | [Note 5 – Goodwill and Intangible Assets](index=10&type=section&id=Note%205%20%E2%80%93%20Goodwill%20and%20Intangible%20Assets) This note presents the carrying amounts of goodwill and other intangible assets | Intangible Asset (in thousands) | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Goodwill | $9,124 | $9,124 | | Brand names | $3,700 | $3,700 | | Total goodwill and indefinite-lived intangible assets | $12,824 | $12,824 | - Finite-lived intangible assets, including recipes, customer lists, customer relationships, trade names, and formulas, were fully amortized to **$0** as of March 31, 2021, and December 31, 2020[36](index=36&type=chunk) [Note 6 – Accrued Expenses](index=11&type=section&id=Note%206%20%E2%80%93%20Accrued%20Expenses) This note itemizes accrued expenses, including payroll, incentive compensation, and real estate taxes | Accrued Expense Category (in thousands) | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Payroll and incentive compensation | $1,825 | $1,366 | | Real estate taxes | $271 | $341 | | Current portion of operating lease liabilities | $174 | $179 | | Other | $317 | $310 | | Total accrued expenses | $2,587 | $2,196 | [Note 7 – Debt](index=11&type=section&id=Note%207%20%E2%80%93%20Debt) This note describes the company's debt obligations, including its revolving credit facility and financial covenants - Lifeway has a Modified Revolving Credit Facility with a maximum revolving line of credit of **$5 million** and an incremental facility not exceeding **$5 million**, extended to June 30, 2025[40](index=40&type=chunk) - As of March 31, 2021, **$2,774 thousand** was outstanding under the Revolving Credit Facility, with **$2,223 thousand** available for future borrowings[42](index=42&type=chunk) - The company was in compliance with fixed charge coverage ratio and minimum working capital covenants as of March 31, 2021[44](index=44&type=chunk) [Note 8 – Leases](index=12&type=section&id=Note%208%20%E2%80%93%20Leases) This note details operating lease commitments, remaining terms, future payments, and discount rates - Lifeway holds operating leases for two retail stores and certain machinery/equipment, with remaining lease terms ranging from less than **1 year** to **4 years**[45](index=45&type=chunk) | Year | Operating Leases (in thousands) | | :--- | :--- | | Nine months ended December 31, 2021 | $147 | | 2022 | $158 | | 2023 | $23 | | 2024 | $7 | | 2025 | $5 | | Thereafter | $2 | | Total lease payments | $342 | | Less: Interest | $(26) | | Present value of lease liabilities | $316 | - The weighted-average remaining lease term for operating leases was **2.05 years**, and the weighted average discount rate was **7.85%** as of March 31, 2021[49](index=49&type=chunk) [Note 9 – Commitments and contingencies](index=13&type=section&id=Note%209%20%E2%80%93%20Commitments%20and%20contingencies) This note addresses legal actions and claims, and management's assessment of their potential financial impact - Lifeway is involved in various legal actions and claims in the normal course of business, accruing for probable and estimable losses[50](index=50&type=chunk)[51](index=51&type=chunk) - Management believes the ultimate resolution of outstanding legal matters will not have a material adverse effect on the business, financial condition, results of operations, or cash flows, though outcomes are uncertain[51](index=51&type=chunk)[52](index=52&type=chunk) [Note 10 – Income taxes](index=13&type=section&id=Note%2010%20%E2%80%93%20Income%20taxes) This note discusses the effective tax rate, its changes, and unrecognized tax benefits - The effective tax rate for the three months ended March 31, 2021, was **31.2%**, an increase from **27.5%** in the prior year, partly due to a tax benefit from the CARES Act in Q1 2020[53](index=53&type=chunk)[54](index=54&type=chunk) - Unrecognized tax benefits were **$96 thousand** at March 31, 2021, and no material changes are expected in the next twelve months[55](index=55&type=chunk) [Note 11 – Stock-based and Other Compensation](index=14&type=section&id=Note%2011%20%E2%80%93%20Stock-based%20and%20Other%20Compensation) This note details stock-based compensation plans, authorized shares, and unearned compensation - The 2015 Omnibus Incentive Plan authorized **3.5 million shares** for various stock awards, with **3.317 million shares** remaining available as of March 31, 2021[56](index=56&type=chunk) | Stock-based Compensation Expense (in thousands) | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Restricted Stock Awards | $36 | $5 | | 2019 Plan | $19 | $13 | | 2019 Retention Award | $8 | $43 | | 2020 CEO Incentive Award | $90 | $0 | | Total Stock-based Compensation Expense | $153 | $61 | - Total remaining unearned compensation for non-vested RSAs was **$108 thousand** as of March 31, 2021, expected to be amortized over **1.22 years**[59](index=59&type=chunk) [Note 12 – Segments, Products and Customers](index=16&type=section&id=Note%2012%20%E2%80%93%20Segments%2C%20Products%20and%20Customers) This note describes Lifeway's single reportable segment, primary products, and major customer sales concentration - Lifeway operates as one reportable segment, primarily selling drinkable kefir and other cultured dairy products in the United States[67](index=67&type=chunk)[69](index=69&type=chunk) | Product Category (Three Months Ended March 31) | 2021 Net Sales (in thousands) | 2021 % of Total | 2020 Net Sales (in thousands) | 2020 % of Total | | :--- | :--- | :--- | :--- | :--- | | Drinkable Kefir other than ProBugs | $24,203 | 82% | $19,857 | 78% | | Cheese | $3,199 | 11% | $3,260 | 13% | | Cream and other | $863 | 3% | $781 | 3% | | ProBugs Kefir | $680 | 2% | $860 | 3% | | Other dairy | $384 | 1% | $371 | 2% | | Frozen Kefir | $47 | 1% | $259 | 1% | | **Total Net Sales** | **$29,376** | **100%** | **$25,388** | **100%** | - Two major customers accounted for approximately **22%** of net sales for the three months ended March 31, 2021, and **21%** for the same period in 2020[70](index=70&type=chunk) [Note 13 – Related Party Transactions](index=17&type=section&id=Note%2013%20%E2%80%93%20Related%20Party%20Transactions) This note discloses transactions with related parties, including service fees and royalties paid to the Chairperson - Lifeway pays its Chairperson an annual service fee of **$500 thousand** and a potential annual performance fee target of **$500 thousand** for consulting services[72](index=72&type=chunk) - Service fees to the Chairperson were **$125 thousand** in Q1 2021 (down from **$250 thousand** in Q1 2020), and **$94 thousand** was recorded for the 2021 performance fee target[73](index=73&type=chunk) - Royalties of **$150 thousand** were paid to the Chairperson in both Q1 2021 and Q1 2020, based on sales of certain products, not exceeding **$50 thousand** per fiscal month[74](index=74&type=chunk) [Note 14 – COVID-19](index=17&type=section&id=Note%2014%20%E2%80%93%20COVID-19) This note discusses the pandemic's impact on operations, demand, and ongoing uncertainties - The company experienced increased customer and consumer demand due to pantry loading and increased at-home consumption during the COVID-19 pandemic[76](index=76&type=chunk) - Uncertainty remains regarding the pandemic's ultimate impact, including potential decreases in demand, supply chain constraints, and increased costs for raw materials[77](index=77&type=chunk)[79](index=79&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.](index=18&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations.) This section provides management's perspective on Lifeway Foods, Inc.'s financial condition and operational results for the three months ended March 31, 2021, discussing key performance drivers, the impact of the COVID-19 pandemic, and liquidity and capital resources. It highlights significant increases in net sales, gross profit, and net income, while also addressing forward-looking statements and associated risks [Cautionary Statement Regarding Forward-Looking Statements](index=18&type=section&id=Cautionary%20Statement%20Regarding%20Forward-Looking%20Statements) This section advises that the report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially - This report contains forward-looking statements identified by terms like 'anticipate,' 'intend,' 'plan,' and 'expect,' which are based on management's beliefs and assumptions about future events[81](index=81&type=chunk) - Actual outcomes may differ materially due to various risks and uncertainties, including competitor actions, customer decisions, commodity pricing, government regulation, and the impact of the COVID-19 outbreak[81](index=81&type=chunk)[84](index=84&type=chunk) [Recent Developments (COVID-19 Pandemic Impact)](index=18&type=section&id=Recent%20Developments%20(COVID-19%20Pandemic%20Impact)) This section discusses increased consumer demand during COVID-19 and management's successful mitigation efforts - Lifeway experienced increased orders from retail customers due to higher consumer demand for at-home food consumption and the immune-boosting qualities of its products during the COVID-19 pandemic[83](index=83&type=chunk) - Management implemented proactive measures to mitigate COVID-19 effects on supply, transportation, and staffing, successfully avoiding disruptions and meeting increased demand[87](index=87&type=chunk) - The company has maintained full production capacity and does not anticipate manufacturing or staffing disruptions in the near term[87](index=87&type=chunk) [Results of Operations](index=20&type=section&id=Results%20of%20Operations) This section analyzes the company's financial performance, detailing changes in net sales, gross profit, and expenses [Net Sales](index=21&type=section&id=Net%20Sales) This section analyzes the drivers behind the **15.7%** increase in net sales, primarily from higher branded drinkable kefir volumes | Metric | Q1 2021 (in thousands) | Q1 2020 (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $29,376 | $25,388 | $3,988 | 15.7% | - The increase in net sales was primarily driven by higher volumes of branded drinkable kefir, with approximately **30%** of the increase attributed to the USDA's Farmers to Families Food Box program[89](index=89&type=chunk) [Gross Profit](index=21&type=section&id=Gross%20Profit) This section examines the **34.2%** increase in gross profit and improved percentage due to operating leverage and milk pricing | Metric | Q1 2021 | Q1 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Gross profit | $8,049 (in thousands) | $5,997 (in thousands) | +34.2% | | Gross Profit % to net sales | 27.4% | 23.6% | +3.8 pp | - The increase in gross profit percentage was mainly due to favorable operating leverage from higher net sales relative to fixed costs and, to a lesser extent, favorable milk pricing[90](index=90&type=chunk) [Selling Expenses](index=21&type=section&id=Selling%20Expenses) This section details the **25.1%** increase in selling expenses, primarily driven by higher advertising costs | Metric | Q1 2021 (in thousands) | Q1 2020 (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Selling expenses | $3,222 | $2,575 | $(647) | (25.1%) | | Selling expenses % to net sales | 11.0% | 10.1% | +0.9 pp | - The increase in selling expenses was primarily due to higher advertising costs for television and digital campaigns in Q1 2021, partially offset by lower compensation expense[91](index=91&type=chunk) [General and Administrative Expenses](index=21&type=section&id=General%20and%20Administrative%20Expenses) This section analyzes the **8.1%** decrease in general and administrative expenses, mainly due to lower compensation and professional fees | Metric | Q1 2021 (in thousands) | Q1 2020 (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | General and administrative expenses | $2,891 | $3,145 | $254 | 8.1% | | General and administrative % to net sales | 9.8% | 12.4% | -2.6 pp | - The decrease in general and administrative expenses was mainly due to lower compensation expense from organizational changes in 2020 and reduced professional fees[92](index=92&type=chunk) [Provision for Income Taxes](index=21&type=section&id=Provision%20for%20Income%20Taxes) This section explains the increase in the effective tax rate to **31.2%**, due to the absence of a prior-year CARES Act benefit | Metric | Q1 2021 (in thousands) | Q1 2020 (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Provision for income taxes | $593 | $55 | $(538) | (978.2%) | | Effective income tax rate | 31.2% | 27.5% | +3.7 pp | - The effective tax rate increased due to the absence of the CARES Act's net operating loss carryback benefit, which reduced the Q1 2020 rate[94](index=94&type=chunk) - Beginning in 2020, compensation exceeding **$1,000,000** for covered employees is non-deductible for income tax purposes under Section 162(m) of the Internal Revenue Code[97](index=97&type=chunk) [Net Income](index=22&type=section&id=Net%20Income) This section highlights the significant **794.5%** increase in net income and basic and diluted EPS | Metric | Q1 2021 (in thousands) | Q1 2020 (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net income | $1,306 | $146 | $1,160 | 794.5% | | Basic EPS | $0.08 | $0.01 | +$0.07 | +700% | | Diluted EPS | $0.08 | $0.01 | +$0.07 | +700% | [Liquidity and Capital Resources](index=22&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses the company's ability to meet financial obligations, discussing cash flow, capital spending, and debt [COVID-19 Pandemic Impact](index=22&type=section&id=Liquidity%20and%20Capital%20Resources%20-%20COVID-19%20Pandemic%20Impact) This section confirms COVID-19 has not significantly impacted manufacturing and proactive measures maintained operations - Lifeway's manufacturing facilities have not been significantly impacted by COVID-19, maintaining full production capacity[105](index=105&type=chunk) - The food industry, including Lifeway, was classified by the U.S. federal government as a critical infrastructure industry, allowing continued operations during the pandemic[105](index=105&type=chunk) - Management's proactive planning mitigated COVID-19 effects on supply, transportation, and staffing, preventing disruptions[105](index=105&type=chunk) [Cash Flow](index=23&type=section&id=Cash%20Flow) This section states the company expects to meet liquidity needs through operating cash flows and its revolving credit facility - The COVID-19 pandemic has not materially impacted operations, and Lifeway expects to meet liquidity needs through anticipated cash flows from operations, its revolving credit facility, and cash equivalents[106](index=106&type=chunk) [Sources and Uses of Cash](index=23&type=section&id=Sources%20and%20Uses%20of%20Cash) This section analyzes changes in cash flows from operating, investing, and financing activities, highlighting increased operating cash | Cash Flow Activity (Three Months Ended March 31) | 2021 (in thousands) | 2020 (in thousands) | Change ($) | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $1,210 | $(1,055) | +$2,265 | | Net cash used in investing activities | $(518) | $(398) | $(120) | | Net cash used in financing activities | $0 | $(405) | +$405 | | Net increase (decrease) in cash and cash equivalents | $692 | $(1,858) | +$2,550 | - The increase in operating cash flow was driven by higher revenues and reduced expenses in 2021, alongside a change in working capital[107](index=107&type=chunk) - Capital spending increased to **$518 thousand** in Q1 2021 (from **$403 thousand** in Q1 2020), focusing on growth, cost reduction, and facility improvements[108](index=108&type=chunk) [Debt Obligations](index=23&type=section&id=Debt%20Obligations) This section details the revolving credit facility, outstanding debt, available borrowings, and compliance with financial covenants - The Revolving Credit Facility's termination date was extended to June 30, 2025, with a maximum line of credit of **$5 million** and an incremental facility of **$5 million**[111](index=111&type=chunk) - As of March 31, 2021, **$2,774 thousand** was outstanding under the Revolving Credit Facility, with **$2,223 thousand** available for future borrowings[113](index=113&type=chunk) - Lifeway was in compliance with all financial debt covenants as of March 31, 2021, including a fixed charge coverage ratio of no less than **1.25 to 1.00** and a minimum working capital of **$11.25 million**[112](index=112&type=chunk)[115](index=115&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk.](index=24&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk.) This section states that there are no quantitative and qualitative disclosures about market risk applicable for the reporting period - Not applicable for this reporting period[116](index=116&type=chunk) [Item 4. Controls and Procedures.](index=24&type=section&id=Item%204.%20Controls%20and%20Procedures.) Management, with the participation of the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of March 31, 2021, concluding they were effective. There were no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2021[117](index=117&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2021[118](index=118&type=chunk) PART II – OTHER INFORMATION This part covers various other information, including legal proceedings, risk factors, equity sales, and exhibits [Item 1. Legal Proceedings.](index=25&type=section&id=Item%201.%20Legal%20Proceedings.) Lifeway is involved in routine litigation, but management believes no current matter is likely to have a material adverse effect on its financial position or results of operations - The company is engaged in litigation matters arising in the ordinary course of business[121](index=121&type=chunk) - Management believes no current legal matter is reasonably likely to have a material adverse effect on financial position or results of operations[121](index=121&type=chunk) [Item 1A. Risk Factors.](index=25&type=section&id=Item%201A.%20Risk%20Factors.) There have been no material changes to the risk factors previously disclosed in Part I, Item 1A of the company's 2020 Form 10-K - No material changes to risk factors disclosed in the 2020 Form 10-K[122](index=122&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.](index=25&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds.) There were no unregistered sales of equity securities or use of proceeds to report for the period - None to report[123](index=123&type=chunk) [Item 3. Defaults Upon Senior Securities.](index=25&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities.) There were no defaults upon senior securities to report for the period - None to report[124](index=124&type=chunk) [Item 4. Mine Safety Disclosure.](index=25&type=section&id=Item%204.%20Mine%20Safety%20Disclosure.) Mine safety disclosure is not applicable to the company's operations - Not applicable[125](index=125&type=chunk) [Item 5. Other Information.](index=25&type=section&id=Item%205.%20Other%20Information.) There is no other information to report for the period - None to report[126](index=126&type=chunk) [Item 6. Exhibits.](index=26&type=section&id=Item%206.%20Exhibits.) This section lists the exhibits filed or furnished with the Form 10-Q, including certifications, a press release, and interactive data files | No. | Description | | :--- | :--- | | 31.1 | Rule 13a-14(a)/15d-14(a) Certification of Julie Smolyansky | | 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Eric Hanson | | 32.1 | Section 1350 Certification of Julie Smolyansky* | | 32.2 | Section 1350 Certification of Eric Hanson* | | 99.1 | Press release dated May 17, 2021 reporting Lifeway's financial results for the three months ended March 31, 2021.* | | 101 | Interactive Data Files | Signatures This section confirms the official signing of the report by the company's Chief Executive Officer and Chief Financial Officer [Signatures Details](index=27&type=section&id=Signatures%20Details) The report is duly signed on behalf of Lifeway Foods, Inc. by Julie Smolyansky, Chief Executive Officer, President, and Director, and Eric Hanson, Chief Financial & Accounting Officer, on May 17, 2021 - Report signed by Julie Smolyansky (CEO, President, Director) and Eric Hanson (CFO & Accounting Officer) on May 17, 2021[133](index=133&type=chunk)

Lifeway Foods, Inc. (NASDAQ:LWAY) Q4 2020 Earnings Conference Call March 25, 2021 9:00 AM ET Company Participants John Waldron - Chief Financial Officer Julie Smolyansky - Chief Executive Officer Conference Call Participants John Waldron Good afternoon. Welcome to Lifeway Foods Fourth Quarter and Full Year 2020 Earnings Conference Call. On the call, with me today are Julie Smolyansky, Chief Executive Officer. By now, everyone should have access to the press release that went out this morning. If you've not ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2020 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission file number: 000-17363 LIFEWAY FOODS, INC. (Name of registrant as specified in its charter) (State or other jurisd ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 2020 o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number: 000-17363 LIFEWAY FOODS, INC. (Exact Name of Registrant as Specified in its Charter) (State or Other Ju ...