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 ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (Mark One) x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2020 o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FORM 10-Q 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 ...

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: March 31, 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 Jurisd ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 For the fiscal year ended December 31, 2019 Form 10-K Commission file number: 000-17363 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 LIFEWAY FOODS, INC. (Name of registrant as specified in its charter) (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) Illinois 36-3442829 6431 West Oakton St., Morton Grove, Illinois 60053 (Address of ...