LIFEWAY FOODS INC (Form: 10-Q, Received: 11/14/2017 17:21:12)

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, 2017

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)

_____________________

Illinois

36-3442829

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

6431 West Oakton, Morton Grove, IL 60053

(Address of Principal Executive Offices, Zip Code)

(847) 967-1010

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

	Large accelerated filer o	Accelerated filer o
	Non-accelerated filer o	Smaller reporting company x
	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 3, 2017, 16,024,264 shares of the registrant’s common stock, no par value, were outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements.	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	19
Item 4.	Controls and Procedures.	19

PART II – OTHER INFORMATION
Item 1.	Legal Proceedings.	21
Item 1 A.	Risk Factors.	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	21
Item 3.	Defaults Upon Senior Securities.	21
Item 4.	Mine Safety Disclosure.	21
Item 5.	Other Information.	21
Item 6.	Exhibits.	21
	Signatures.	22
	Index of Exhibits.	23

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

September 30, 2017 and December 31, 2016

(In thousands)

	September 30, 2017 (Unaudited)			December 31, 2016
Current assets
Cash and cash equivalents	$	7,264		$	8,812
Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $1,160 and $1,600 at September 30, 2017 and December 31, 2016 respectively		10,408			9,594
Inventories, net		8,050			8,042
Prepaid expenses and other current assets		1,016			785
Refundable income taxes		771			309
Total current assets		27,509			27,542

Property, plant and equipment, net		23,888			21,832

Intangible assets
Goodwill & indefinite-lived intangibles		14,068			14,068
Other intangible assets, net		1,143			1,647
Total intangible assets		15,211			15,715

Other assets		150			125
Total assets	$	66,758		$	65,214

Current liabilities
Current maturities of notes payable	$	3,292		$	840
Accounts payable		7,104			5,718
Accrued expenses		2,866			2,169
Accrued income taxes		74			654
Total current liabilities		13,336			9,381

Notes payable		3,197			6,279
Deferred income taxes, net		1,192			1,192
Other long-term liabilities		406			–
Total liabilities		18,131			16,852

Stockholders' equity
Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 16,037 and 16,154 outstanding at September 30, 2017 and December 31, 2016, respectively		6,509			6,509
Paid-in capital		2,247			2,198
Treasury stock, at cost		(11,527	)		(10,340	)
Retained earnings		51,398			49,995
Total stockholders' equity		48,627			48,362

Total liabilities and stockholders' equity	$	66,758		$	65,214

See accompanying notes to consolidated financial statements

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)

For the three months and nine months ended September 30, 2017 and 2016

(Unaudited)

(In thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016

Net sales	$	28,786		$	29,990		$	92,636		$	93,691

Cost of goods sold		20,331			21,478			65,262			65,480
Depreciation expense		618			533			1,801			1,797
Total cost of goods sold		20,949			22,011			67,063			67,277

Gross profit		7,837			7,979			25,573			26,414

Selling expenses		4,010			4,306			11,648			10,733
General and administrative		3,145			3,308			10,743			10,300
Amortization expense		168			176			504			529
Total operating expenses		7,323			7,790			22,895			21,562

Income from operations		514			189			2,678			4,852

Other income (expense):
Interest expense		(62	)		(56	)		(180	)		(161	)
Gain (loss) on sale of investments, net reclassified from OCI		–			12			–			(15	)
Loss on sale of property and equipment		(34	)		(156	)		(39	)		(307	)
Other income, net		–			28			–			105
Total other income (expense)		(96	)		(172	)		(219	)		(378	)

Income before provision for income taxes		418			17			2,459			4,474

Provision for income taxes		175			81			1,056			1,476

Net income (loss)	$	243		$	(64	)	$	1,403		$	2,998

Earnings per common share:
Basic	$	0.02		$	0.00		$	0.09		$	0.19
Diluted	$	0.02		$	0.00		$	0.09		$	0.19

Weighted average common shares:
Basic		16,093			16,141			16,133			16,159
Diluted		16,168			16,161			16,218			16,181

COMPREHENSIVE INCOME (LOSS)

Net income (loss)	$	243		$	(64	)	$	1,403		$	2,998

Other comprehensive income (loss), net of tax:
Unrealized gains on investments, net of taxes		–			6			–			62
Reclassifications to earnings:
Realized (gains) losses on investments, net of taxes		–			(8	)		–			9

Comprehensive income (loss)	$	243		$	(66	)	$	1,403		$	3,069

See accompanying notes to consolidated financial statements

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

For the Nine Months Ended September 30, 2017 and 2016

(Unaudited)

(In thousands)

Accumulated

Other

Common Stock

Comprehensive

Issued

In treasury

Paid-In

Retained

Income (Loss),

Total

Shares

Capital

Earnings

Net of Tax

Equity

Balance, January 1, 2016

17,274

6,509

(1,064

)

(9,730

)

2,033

46,516

(71

)

45,257

Other comprehensive income

–

Treasury stock purchased

–

(69

)

(738

)

–

(738

)

Stock-based compensation

–

100

–

100

Net income

–

2,998

–

2,998

Balance, September 30, 2016

17,274

6,509

(1,133

)

(10,468

)

2,133

49,514

–

47,688

Balance, January 1, 2017

17,274

6,509

(1,120

)

(10,340

)

2,198

49,995

–

48,362

Treasury stock purchased

–

(117

)

(1,187

)

–

(1,187

)

Stock-based compensation

–

Net income

–

1,403

–

1,403

Balance, September 30, 2017

17,274

6,509

(1,237

)

(11,527

)

2,247

51,398

–

48,627

See accompanying notes to consolidated financial statements

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2017 and 2016

(Unaudited)

(In thousands)

	2017			2016

Cash flows from operating activities:
Net income	$	1,403		$	2,998
Adjustments to reconcile net income to operating cash flow:
Depreciation and amortization		2,305			2,326
Loss on sale of investments, net		–			15
Reserve for inventory obsolescence		320			89
Stock-based compensation		901			100
Deferred income taxes		–			444
Loss on sale of property and equipment		39			307
(Increase) decrease in operating assets:
Accounts receivable		(814	)		(823	)
Inventories		(328	)		(1,611	)
Refundable income taxes		(462	)		(72	)
Prepaid expenses and other current assets		(231	)		(310	)
Increase (decrease) in operating liabilities:
Accounts payable		1,384			370
Accrued expenses		252			465
Accrued income taxes		(580	)		215
Net cash provided by operating activities		4,189			4,513

Cash flows from investing activities:
Purchases of investments		(25	)		(559	)
Proceeds from sale of investments		–			2,751
Redemption of certificates of deposits		–			513
Purchases of property and equipment		(3,932	)		(2,481	)
Proceeds from sale of property and equipment		37			149
Net cash (used in) provided by investing activities		(3,920	)		373

Cash flows from financing activities:
Purchase of treasury stock		(1,187	)		(738	)
Repayment of notes payable		(630	)		(630	)
Net cash used in financing activities		(1,817	)		(1,368	)

Net (decrease) increase in cash and cash equivalents		(1,548	)		3,518

Cash and cash equivalents at the beginning of the period		8,812			5,646

Cash and cash equivalents at the end of the period	$	7,264		$	9,164

Supplemental cash flow information:
Cash paid for income taxes, net of refunds	$	2,098		$	886
Cash paid for interest	$	180		$	162

See accompanying notes to consolidated financial statements

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2017 and December 31, 2016

(Unaudited)

(In thousands, except per share data)

Note 1 – Basis of Presentation

Basis of presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) for interim financial information, and do not include all of the information and disclosures required for complete, audited financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation, have been included. For further information, refer to the consolidated financial statements and disclosures included in Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2016. Certain amounts in prior-year financial statements were reclassified to conform to the current-year presentation. The results for the period are not necessarily indicative of the results to be expected for other interim periods or the full year.

Principles of consolidation

Our consolidated financial statements include the accounts of Lifeway Foods, Inc. and all its wholly owned subsidiaries (collectively “Lifeway” or the “Company”). All significant intercompany accounts and transactions have been eliminated.

Note 2 – Significant Accounting Policies

Use of estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing the consolidated financial statements include the reserve for promotional allowances, the valuation of goodwill and intangible assets, stock-based and incentive compensation, and deferred income taxes.

Revenue Recognition

The Company records sales when the following four criteria have been met: (i) The product has been shipped and the Company has no significant remaining obligations; (ii) Persuasive evidence of an agreement exists; (iii) The price to the buyer is fixed or determinable; and (iv) Collection is probable. In addition, shipping costs invoiced to the customers are included in net sales and the related costs are included in cost of sales.

The Company routinely offers sales allowances and discounts to our customers and consumers. These programs include rebates, in-store display and demo allowances, allowances for non-salable product, coupons and other trade promotional activities. These allowances are considered reductions in the price of our products and thus are recorded as reductions to gross sales. Some of these incentives are recorded by estimating incentive costs based on our historical experience and expected levels of performance of the trade promotion. We maintain a reserve for the estimated allowances incurred but unpaid. Differences between estimated and actual allowances are normally insignificant and are recognized in income in the period such differences are determined. Product returns have historically not been material.

Bulk cream is a by-product of the Company’s fluid milk manufacturing process. The Company does not use its by-product bulk cream in any of its end products, but rather disposes of it through sales to other companies. Bulk cream by-product sales are included in net sales.

Advertising and promotional costs

The Company expenses advertising costs as incurred. For the nine months ended September 30, 2017 and 2016 total advertising expenses were $4,703 and $5,418 respectively. For the three months ended September 30, 2017 and 2016 total advertising expenses were $1,892 and $2,665 respectively.

Recently Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-09, Compensation-Stock Compensation – Improvements to Employee Share-Based Payment Accounting. The new guidance simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities, and classification in the statement of cash flows. Under this ASU, excess tax benefits and deficiencies are no longer recognized as additional paid-in capital in the consolidated balance sheets. This guidance was effective on January 1, 2017. The adoption of this amendment had no impact on the consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Income Taxes – Balance Sheet Classification of Deferred Taxes. This new guidance simplifies the presentation of deferred income taxes and requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. Previous guidance required deferred tax assets and liabilities to be separated into current and noncurrent amounts on the balance sheet. This guidance was effective on January 1, 2017. The Company elected to adopt this guidance as of the first fiscal quarter in 2017 and has applied the update on a retrospective basis. The Company changed its accounting principle to reduce the cost and complexity inherent in recording deferred taxes as current and noncurrent on the consolidated balance sheets. As a result, the Company has reclassified $662 of current deferred tax asset to noncurrent deferred tax liability in the consolidated balance sheet as of December 31, 2016.

In July 2015, the FASB issued ASU 2015-11, Inventory – Simplifying the Measurement of Inventory. The core principal of the guidance is that an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance was effective on January 1, 2017. The adoption of this amendment had no impact on the consolidated financial statements.

Recently Issued Accounting Pronouncements

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. The new guidance provides clarity and reduces both diversity in practice and cost of complexity when accounting for a change to the terms of or conditions of a share-based payment award. The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The new guidance will be effective for fiscal years beginning on or after December 15, 2017 and interim periods within those years. Early adoption of the guidance is permitted. The adoption of this amendment is not expected to have a material impact on the consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. The new guidance simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance will be effective for annual periods or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The amendment should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this amendment is not expected to have a material impact on the consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to address the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows, such as debt prepayment or debt extinguishment costs, contingent consideration payments made after an acquisition, proceeds from the settlement of insurance claims, and other topics. The new guidance will be effective for fiscal years beginning on or after December 15, 2017 and interim periods within those years. Early adoption of the guidance is permitted. Management is currently evaluating the impact that the new guidance will have on the consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The guidance requires lessees to recognize lease assets and lease liabilities in the balance sheet and disclose key information about leasing arrangements, such as information about variable lease payments and options to renew and terminate leases. The amended guidance will require both operating and finance leases to be recognized in the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. The amendments in this ASU should be adopted using a modified retrospective transition approach, which requires application of the new guidance at the beginning of the earliest comparative period presented in the year of adoption. We do not intend to early adopt the standard. Management is currently evaluating the impact that the new guidance will have on the consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance modifies how entities measure equity investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will have to measure equity investments that do not result in consolidation and are not accounted under the equity method at fair value and recognize any changes in fair value in net income unless certain conditions exist. The new guidance will be effective for fiscal years beginning on or after December 15, 2017 and interim periods within those years. Early adoption of the guidance is not permitted. The adoption of this amendment is not expected to have an impact on the consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific requirements. ASU 2014-09 establishes a five-step revenue recognition process in which an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. ASU 2014-09 also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. On August 12, 2015, the FASB approved a one year delay of the effective date to reporting periods beginning after December 15, 2017, while permitting companies to voluntarily adopt the new standard as of the original effective date. In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which clarifies narrow aspects of ASC 606 or corrects unintended application of the guidance. The effective date and transition requirements for ASU 2016-20 are the same as the effective date and transition requirements for ASU 2014-09. Under the delayed effective date, the Company is required to adopt the new standard not later than January 1, 2018.

Management is currently evaluating the impact the adoption of this amendment will have on the Company's consolidated financial position, results of operations or cash flows and the method of retrospective application, either full or modified. Our completed evaluation will include the impact of the new standard on certain common practices currently employed by us, such as rebates, in-store display and demo allowances, allowances for non-saleable product, and coupons. We currently expect to utilize the modified retrospective transition method and to adopt the ASU on January 1, 2018. Based on our findings to date, we do not expect the standard to have a material impact on our results of operations or financial position; however, our assessment is not yet complete. During 2017, we plan to finalize our review and method of adoption.

Note 3 – Inventories, net

Inventories consisted of the following:

	September 30, 2017		December 31, 2016
Ingredients	$	2,056	$	2,256
Packaging		2,789		2,770
Finished goods		3,205		3,016
Total inventories	$	8,050	$	8,042

Note 4 – Property, Plant and Equipment, net

Property, plant and equipment consisted of the following:

	September 30, 2017			December 31, 2016
Land	$	1,747		$	1,747
Buildings and improvements		17,052			16,428
Machinery and equipment		26,625			23,122
Vehicles		861			848
Office equipment		734			709
Construction in process		1,454			1,873
		48,473			44,727
Less accumulated depreciation		(24,585	)		(22,895	)
Total property, plant and equipment, net	$	23,888		$	21,832

Note 5 – Intangible Assets

Goodwill & indefinite-lived intangible assets consisted of the following:

	September 30, 2017		December 31, 2016
Goodwill	$	10,368	$	10,368
Brand names		3,700		3,700
Goodwill and indefinite-lived intangible assets	$	14,068	$	14,068

Other intangible assets, net consisted of the following:

	September 30, 2017			December 31, 2016
Recipes	$	44		$	44
Customer lists and other customer related intangibles		4,529			4,529
Customer relationship		985			985
Trade names		2,248			2,248
Formula		438			438
		8,244			8,244
Accumulated amortization		(7,101	)		(6,597	)
Other intangible assets, net	$	1,143		$	1,647

Note 6 – Accrued Expenses

Accrued expenses consisted of the following:

	September 30, 2017		December 31, 2016
Payroll and incentive compensation	$	2,318	$	1,560
Real estate taxes		301		394
Other		247		215
	$	2,866	$	2,169

Note 7 – Notes Payable

	September 30, 2017			December 31, 2016

Variable rate term loan due May 31, 2018. Principal and interest (3.74% at September 30, 2017) payable monthly with a balloon payment due at maturity.	$	2,959		$	3,339

Variable rate term loan due May 31, 2019. Principal and interest (3.74% at September 30, 2017) payable monthly with a balloon payment due at maturity.		3,530			3,780
Total notes payable		6,489			7,119
Less current portion		(3,292	)		(840	)
Total long-term portion	$	3,197		$	6,279

The variable rate term loans are subject to interest at the prime rate or at the LIBOR rate plus 2.5% and are collateralized by substantially all of the assets of the Company. In addition, under the terms of the related agreements, the Company is subject to minimum fixed charged ratio and tangible net worth thresholds, which among other things may limit the Company's ability to pay dividends or repurchase shares of its common stock. Further, under the agreements the Company is required to deliver its annual and quarterly financial statements and related SEC filings within specified timeframes. The Company was in compliance with these financial covenants at September 30, 2017.

In addition, the Company has a $5 million revolving credit facility. Borrowings under the facility are subject to interest at the prime rate or LIBOR plus 2.5%. As of September 30, 2017 there were no borrowings under the facility. The facility expires in July 2018.

Note 8 – Commitments and contingencies

Lease obligations

The Company leases three retail stores for its Lifeway Kefir Shop subsidiary, certain machinery and equipment, and office space under operating leases. Total lease expense was $497 and $331 for the nine months ended September 30, 2017 and 2016, respectively. Total lease expense was $175 and $171 for the three months ended September 30, 2017 and 2016, respectively.

Litigation

The Company is engaged in various legal actions, claims and proceedings arising in the normal course of business, including commercial disputes, product liabilities, intellectual property matters and employment-related matters resulting from the Company’s business activities.

The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated. The Company evaluates, on a periodic basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. Currently, none of the Company’s accruals for outstanding legal matters are material individually or in the aggregate to the Company’s financial position and it is management’s opinion that the ultimate resolution of these outstanding legal matters will not have a material adverse effect on our business, financial condition, results of operations, or cash flows. However, if the Company ultimately is required to make payments in connection with an adverse outcome, it is possible that it could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

The Company’s contingencies are subject to substantial uncertainties, including for each such contingency the following, among other factors: (i) the procedural status of the case; (ii) whether the case has or may be certified as a class action suit; (iii) the outcome of preliminary motions; (iv) the impact of discovery; (v) whether there are significant factual issues to be determined or resolved; (vi) whether the proceedings involve a large number of parties and/or parties and claims in multiple jurisdictions or jurisdictions in which the relevant laws are complex or unclear; (vii) the extent of potential damages, which are often unspecified or indeterminate; and (viii) the status of settlement discussions, if any, and the settlement posture of the parties. Consequently, the Company cannot predict with any reasonable certainty the timing or outcome of such contingencies, and the Company is unable to estimate a possible loss or range of loss.

In a letter dated May 19, 2016, the Company received a request to voluntarily produce documents in connection with a confidential, informal inquiry by the Division of Enforcement of the SEC concerning the Company’s internal controls, disclosure controls procedures, and internal control over financial reporting for fiscal years 2013 through the date of the letter. The SEC has informed the Company that the inquiry should not be construed as an indication that any violation of any federal securities law has occurred or as a reflection upon the merits of any person, company, or securities involved. Since receiving the letter, the Company has been cooperating with the SEC and will continue to do so.

Note 9 – Income taxes

For each interim period, the Company estimates the effective tax rate (“ETR”) expected to be applicable for the full year and applies that rate to income before provision for income taxes for the period. Additionally, the Company records discrete income tax items such as enacted tax rate changes and completed tax audits in the period in which they occur.

The effective tax rate for the three months ended September 30, 2017 was 41.9% compared to over 100.0% for the three months ended September 30, 2016. The effective tax rate for the nine months ended September 30, 2017 was 42.9% compared to 33.0% for the nine months ended September 30, 2016.

Note 10 – Fair Value Measurements

The Company’s financial assets and liabilities include cash and cash equivalents, accounts receivable, accounts payable and notes payable, and are reported at carrying value which approximates fair value.

Note 11 – Stock-based and Other Compensation

Stock Options

In December 2015, Lifeway shareholders approved the 2015 Omnibus Incentive Plan, which authorized the issuance of an aggregate of 3.5 million shares to satisfy awards of stock options, stock appreciation rights, unrestricted stock, restricted stock, restricted stock units, performance shares and performance units. At September 30, 2017, 3.448 million shares remain available under the Omnibus Incentive Plan. The Company has not established a pace for the frequency of awards under the Omnibus Incentive Plan, and may choose to suspend the issuance of new awards in the future and may grant additional awards at any time including issuing special grants of restricted stock, restricted stock units, and stock options to attract and retain new and existing executives.

The following table summarizes stock option activity during the nine months ended September 30, 2017:

	Options		Weighted average exercise price		Weighted average remaining contractual life		Aggregate intrinsic value

Outstanding at December 31, 2016		45	$	10.45
Granted		–	$	–
Exercised		–	$	–
Forfeited		–	$	–
Outstanding at September 30, 2017		45	$	10.45		8.50	$	(70	)
Exercisable at September 30, 2017		29	$	10.42		8.50	$	(44	)

For the nine months ended September 30, 2017 and 2016 total pre-tax stock-based compensation expense recognized in the consolidated statements of income and comprehensive income was $35 and $100, respectively. For the nine months ended September 30, 2017 and 2016 tax-related benefits of $14 and $37 were also recognized. For the three months ended September 30, 2017 and 2016 total pre-tax stock-based compensation expense recognized in the consolidated statements of income and comprehensive income was $6 and $58, respectively. For the three months ended September 30, 2017 and 2016 tax-related benefits of $3 and $22 were also recognized. As of September 30, 2017, the total remaining unearned compensation related to non-vested stock options was $25, which is expected to be amortized over the weighted-average remaining service period of 1.22 years.

We measure the fair value of stock options using the Black-Scholes option pricing model. The expected term of options granted was based on the weighted average time of vesting and the end of the contractual term. We utilized this simplified method as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term.

Restricted Stock Units

Pursuant to the 2015 Omnibus Incentive Plan, Lifeway granted 2 Restricted Stock Units (“RSUs”) to certain key employees in December 2016. An RSU represents the right to receive one share of common stock in the future. RSUs have no exercise price.

The following table summarizes RSU activity during the nine months ended September 30, 2017:

	RSU’s

Outstanding at December 31, 2016		2
Granted		–
Shares issued upon vesting		–
Forfeited		–
Outstanding at September 30, 2017		2
Weighted average grant date fair value per share	$	10.54

We expense RSU’s over the service period. For the nine months ended September 30, 2017 and 2016 total pre-tax stock-based compensation expense recognized in the consolidated statements of income and comprehensive income was $14 and $0, respectively. For the nine months ended September 30, 2017 and 2016 tax-related benefits of $6 and $0 were also recognized. For the three months ended September 30, 2017 and 2016 total pre-tax stock-based compensation expense recognized in the consolidated statements of income and comprehensive income was $5 and $0, respectively. For the three months ended September 30, 2017 and 2016 tax-related benefits of $2 and $0 were also recognized. As of September 30, 2017, the total remaining unearned compensation related to non-vested RSU’s was $6, which is expected to be amortized over the weighted-average remaining service period of 0.71 years.

Incentive Compensation

In March 2016 Lifeway established an incentive-based compensation program (the “2016 Plan”) for certain senior executives and key employees (the “participants”). The incentive compensation was based on the achievement of certain sales and EBITDA performance levels versus respective targets in 2016. Under the 2016 Plan, the senior executives had the opportunity to earn cash and equity-based incentive compensation in amounts ranging from $0 to $4,000 for fiscal 2016 depending on the performance levels compared to the respective targets. For the nine months and three months ended September 30, 2016, bonuses of $1,280 and $240 were expensed under the 2016 Plan, respectively.

In January 2017, Lifeway established an incentive-based compensation program (the “2017 Plan”) for certain senior executives and key employees (the “participants”). The number of participants under the 2017 Plan was expanded from the 2016 Plan. Under the 2017 Plan, incentive compensation is based on (a) the achievement of certain sales and EBITDA performance levels versus respective targets in 2017, and (b) for certain senior executives, the achievement of individual performance objectives. Under the 2017 Plan, collectively the participants may earn cash and equity based incentive compensation in amounts ranging from $0 to $11,025 depending on the Company’s performance levels compared to the respective targets and the senior executive’s performance compared to their individual objectives. The equity portion of the incentive compensation is payable in restricted stock that vests one-third in each of the three years from the 2017 grant dates. For the nine months ended September 30, 2017, $2,106 was accrued under the 2017 Plan, of which $1,254 was recorded as cash bonus expense and $852 was recorded as stock-based compensation expense in the consolidated statements of income and comprehensive income. For the three months ended September 30, 2017, $121 was accrued under the 2017 Plan, of which $6 was recorded as cash bonus expense and $115 was recorded as stock-based compensation expense in the consolidated statements of income and comprehensive income.

Retirement Benefits

The Company has a defined contribution plan which is available to substantially all full-time employees. Under the terms of the plan the Company matches employee contributions under a prescribed formula. For the nine months ended September 30, 2017 and 2016 total contribution expense recognized in the consolidated statements of income and comprehensive income was $296 and $255, respectively. For the three months ended September 30, 2017 and 2016 total contribution expense recognized in the consolidated statements of income and comprehensive income was $59 and $82, respectively.

Note 12 – Segments, Products and Customers

The Company manufactures probiotic, cultured, functional dairy health food products. The Company's primary product is kefir, a dairy beverage similar to but distinct from yogurt, in several flavors and in several package configurations. In addition to the drinkable products, Lifeway manufactures "Lifeway Farmer Cheese," a line of various farmer cheeses.

The Company has determined that it has one reportable segment based on how the Company's chief operating decision maker manages the business and in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing Company performance, has been identified collectively as the Chief Financial Officer, the Chief Operating Officer, the Chief Executive Officer and Chairperson of the board of directors. Substantially all of the consolidated revenues of the Company relate to the sale of fermented dairy products which are produced using the same processes and materials and are sold to consumers through a network of distributors and retailers in the United States.

Net sales of products by category were as follows:

	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
Drinkable Kefir (a)	$	25,134	$	25,533	$	80,382	$	80,135
Lifeway cheese products		2,561		2,479		7,750		7,579
Pro Bugs Kefir products		819		1,606		3,586		4,962
Frozen Kefir		272		372		918		1,015
Net Sales	$	28,786	$	29,990	$	92,636	$	93,691

(a)	Excludes ProBugs Kefir products, and includes cream, cupped Kefir and cupped cheese products, supplements and other.

Significant Customers – Sales are predominately to companies in the retail food industry, located within the United States. Two major customers accounted for approximately 22% and 23% of net sales for the nine months ended September 30, 2017 and 2016, respectively, and 21% and 22% of net sales for the three months ended September 30, 2017 and 2016, respectively.

Note 13 – Related party transactions

The Company obtains consulting services from the Chairperson of its board of directors. Fees earned by the Chairperson are included in general and administrative expenses in the accompanying consolidated statements of income and comprehensive income and were $750 and $787 during the nine months ended September 30, 2017 and 2016, respectively, and $250 and $248 during the three months ended September 30, 2017 and 2016, respectively.

The Company is also a party to a royalty agreement with the Chairperson of its board of directors under which the Company pays the Chairperson a royalty based on the sale of certain Lifeway product, not to exceed $50 in any fiscal month. Royalties earned by the Chairperson are included in selling expenses in the accompanying consolidated statements of income and comprehensive income and were $450 during the nine months ended September 30, 2017 and 2016, and $150 during the three months ended September 30, 2017 and 2016.

Note 14 – Subsequent Event

On September 24, 2015, the Company's Board of Directors authorized a stock repurchase program (the “2015 stock repurchase program”) under which the Company may, from time to time, repurchase shares of its common stock for an aggregate purchase price not to exceed the lesser of $3,500 or 250 shares. On November 1, 2017, the Company’s Board of Directors amended the Company’s 2015 stock repurchase program (the “2017 amendment”), by increasing the authorization to the lesser of $5,185 or 625 shares, exclusive of the shares previously authorized under the 2015 stock repurchase program. Under the amended authorization, share repurchases may be executed through various means, including without limitation in the open market or in privately negotiated transactions, in accordance with all applicable securities laws and regulations, including without limitation Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The extent to which the Company repurchases its shares and the timing of such repurchases will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations. The repurchase program does not obligate the Company to purchase any shares, and the program may be terminated, suspended, increased, or decreased by the Company’s Board of Directors in its discretion at any time.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in this Form 10-Q is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements, the accompanying notes, and the MD&A included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the “Form 10-K”). Unless otherwise specified, any description of “our”, “we”, and “us” in this MD&A refer to Lifeway Foods, Inc. and subsidiaries.

Cautionary Statement Regarding Forward-Looking Statements

In addition to historical information, this quarterly report contains “forward-looking” statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words such as "anticipate," "intend," "plan," "believe," "estimate," "expect," "future," "likely," "may," "should," "will" and similar terms or terminology, or the negative of such terms or other comparable terminology. Examples of forward-looking statements include, among others, statements we make regarding

	·	Expectations of the effect on our financial condition of claims, litigation, environmental costs, contingent liabilities and governmental and regulatory investigations and proceedings;
	·	Strategy for acquisitions, customer retention, growth, product development, market position, financial results and reserves; Estimates of the amounts of sales allowances and discounts to our customers and consumers;
	·	Our belief that we will maintain compliance with our loan agreements and have sufficient liquidity to fund our business operations;

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

	·	The impact of investigative and legal proceedings;
	·	Developments and changes in laws and regulations, including regulation of the dairy or food industries through legislative action and revised rules and standards applied by the Food & Drug Administration (FDA);
	·	Economic and financial conditions, including volatility in interest and exchange rates, commodity and equity prices, and the value of our assets;
	·	Changes in the price of milk and other key materials and disruptions in supply chains for these materials;
	·	Strategic actions, including acquisitions and dispositions and our success in launching new products;
	·	The impact on our competitive position if we do not maintain compliance with our loan agreements and/or sufficient liquidity to fund our business operations;
	·	Such other factors as discussed throughout Part I, Item 1 “Business”; Part I, Item 1A “Risk Factors”; and Part II, Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2016 and that are described from time to time in our filings with the SEC.

These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors could also have material adverse effects on future results. We intend these forward-looking statements to speak only at the date made. Except as otherwise required to be disclosed in periodic reports required to be filed by public companies with the SEC pursuant to the SEC's rules, we have no duty to update these statements, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

Results of Operations

	September 30,				Change
	2017		2016		$			%

Net sales	$	28,786	$	29,990	$	(1,204	)		(4.0%	)

Cost of goods sold	$	20,331	$	21,478	$	1,147
Depreciation expense		618		533		(85	)
Total cost of goods sold	$	20,949	$	22,011	$	1,062			4.8%

Gross profit	$	7,837	$	7,979	$	(142	)		(1.8%	)
Gross Profit % to net sales		27.2%		26.6%

Selling expenses	$	4,010	$	4,306	$	296			6.9%
Selling expenses % to net sales		13.9%		14.4%

General & administrative expenses	$	3,145	$	3,308	$	163			4.9%
General & administrative % to net sales		10.9%		11.0%

Amortization expense	$	168	$	176	$	8			4.5%

Total operating expenses	$	7,323	$	7,790	$	467			6.0%
Total operating expense % to net sales		25.4%		26.0%
Income from operations	$	514	$	189	$	325			172.0%
Income from operations % to net sales		1.8%		0.6%

Net Sales

Net sales decreased by $1,204 or 4.0% to $28,786. Volume / mix subtracted 7.0% from net sales; pricing added 0.8% to net sales and trade promotion and allowances added 2.2% to overall net sales. The 7.0% volume / mix decline was driven by lower volumes of our branded drinkable kefir partially offset by the impact of new item introductions (primarily cupped kefir) and an increase in sales of private label products.

Gross Profit

Gross profit as a percent of net sales increased to 27.2% during the three-month period ended September 30, 2017 from 26.6% during the same three-month period in 2016. The higher gross profit percent reflects lower trade promotion and lower delivery costs partially offset by the unfavorable impact of labor and overhead costs on lower net sales in the 2017 period.

Selling Expenses

Selling expenses decreased by $296 or 6.9% to $4,010 during the three-month period ended September 30, 2017 from $4,306 during the same period in 2016. The lower selling expenses reflects lower advertising costs, partially offset by higher salaries. During the third quarter of 2017 we ran our “Probiotic Billionaire” advertising campaign focused on the functional benefits of Lifeway’s kefir. During the third quarter of 2016 we ran a broad-based advertising campaign that featured our brand ambassador and Olympic athlete Carly Lloyd. The production costs of the 2016 campaign were more costly than the 2017 campaign. The increase in salaries reflects a headcount increase in our salesforce. Selling expenses as a percentage of net sales were 13.9% for the three-month period ended September 30, 2017 compared to 14.4% for the same period in 2016.

General and administrative expenses

General and administrative expenses decreased $163 or 4.9% to $3,145 during the three-month period ended September 30, 2017 from $3,308 during the same period in 2016. The decrease is primarily a result of lower professional fees.

Income from operations and net income

The company reported income from operations of $514 during the three months ended September 30, 2017, compared to $189 during the same period in 2016. Provision for income taxes was $175 during the three months ended September 30, 2017, compared to a provision for income taxes of $81 during the same period in 2016. Our effective tax rate (ETR) for the three months ended September 30, 2017 was 41.9% compared to an ETR which exceeded 100.0% in the same period last year. The ETR for the three months ended September 30, 2016 reflects a change in the estimated U.S. manufacturing deduction and the relatively small amount of income before provision for income taxes.

Income taxes are discussed in Note 9 in the Notes to the Consolidated Financial Statements.

We reported net income of $243 or $0.02 per basic and diluted common share for the three-month period ended September 30, 2017 compared to a net loss of $64 or $0.00 per basic and diluted common share in the same period in 2016.

Comparison of the nine-month period ended September 30, 2017 to the nine-month period ended September 30, 2016

Results of Operations

	September 30,				Change
	2017		2016		$			%

Net sales	$	92,636	$	93,691	$	(1,055	)		(1.1%	)

Cost of goods sold	$	65,262	$	65,480	$	218
Depreciation expense		1,801		1,797		(4	)
Total cost of goods sold	$	67,063	$	67,277	$	214			0.3%

Gross profit	$	25,573	$	26,414	$	(842	)		(3.2%	)
Gross Profit % to net sales		27.6%		28.2%

Selling expenses	$	11,648	$	10,733	$	(915	)		(8.5%	)
Selling expenses % to net sales		12.6%		11.5%

General & administrative expenses	$	10,743	$	10,300	$	(443	)		(4.3%	)
General & administrative % to net sales		11.6%		11.0%

Amortization expense	$	504	$	529	$	25			4.7%

Total operating expenses	$	22,895	$	21,562	$	(1,333	)		(6.2%	)
Total operating expense % to net sales		24.7%		23.0%
Income from operations	$	2,678	$	4,852	$	(2,174	)		(44.8%	)
Income from operations % to net sales		2.9%		5.2%

Net Sales

Net sales decreased by $1,055 or 1.1% to $92,636. Volume / mix subtracted 1.6% from net sales; pricing added 0.7% to net sales and trade promotion subtracted 0.2% from overall net sales. The 1.6% decline in volume / mix was driven by lower volumes of our branded drinkable kefir partially offset by the impact of new item introductions and an increase in sales of private label product.

Gross Profit

Gross profit as a percent of net sales decreased to 27.6% during the nine-month period ended September 30, 2017 from 28.2% during the same period in 2016. The lower gross profit percent was driven by higher milk costs and increased trade promotion partially offset by lower delivery costs.

Selling Expenses

Selling expenses increased by $915 or 8.5% to $11,648 during the nine-month period ended September 30, 2017 from $10,733 during the same period in 2016. The increased selling expenses reflects higher salaries partially offset by lower advertising and marketing related costs. The higher salaries was driven by a headcount increase in our salesforce. The lower advertising and marketing related costs were driven by the lower production costs of our 2017 advertising campaign. Selling expenses as a percentage of net sales were 12.6% for the nine-month period ended September 30, 2017 compared to 11.5% for the same period in 2016.

General and administrative expenses

General and administrative expenses increased $443 or 4.3% to $10,743 during the nine-month period ended September 30, 2017 from $10,300 during the same period in 2016. The increase is primarily a result of higher salaries partially offset by lower professional fees. The increase in salaries reflects higher levels of executive compensation for senior management driven by incentive compensation and an increase in the headcount of the overall management team.

Income from operations and net income

The company reported income from operations of $2,678 during the nine months ended September 30, 2017, compared to $4,852 during the same period in 2016. Provision for income taxes was $1,056, or a 42.9% effective tax rate (ETR) during the nine months ended September 30, 2017, compared to a provision for income taxes of $1,476 or a 33.0% effective tax rate, during the same period in 2016. During the nine months ended September 30, 2016 the Company recorded an income tax benefit of $265 as a result of the favorable settlement of uncertain tax positions, which reduced the ETR by 5.9%.

Income taxes are discussed in Note 9 in the Notes to the Consolidated Financial Statements.

We reported net income of $1,403 or $0.09 per basic and diluted common share for the nine-month period ended September 30, 2017 compared to $2,998 or $0.19 per basic and diluted common share in the same period in 2016.

Liquidity and Capital Resources

Sources and Uses of Cash

We anticipate being able to fund the Company's foreseeable liquidity requirements internally. We also have unused credit lines as discussed in Note 7 to the consolidated financial statements and we anticipate future compliance with our loan agreements. We continue to explore potential acquisition opportunities in our industry in order to boost sales while leveraging our distribution system to consolidate and lower costs.

Net cash provided by operating activities was $4,189 during the nine months ended September 30, 2017 compared to net cash provided by operating activities of $4,513 in the same period in 2016. The decline in cash provided by operating activities reflects relatively lower net income partially offset by an increase in non-cash charges primarily related to stock-based compensation and the favorable impact of relatively lower working capital during 2017. The favorable impact of working capital on operating cash flow was driven by the favorable timing of payments to suppliers and service providers and lower inventory levels in the 2017 period.

Net cash used in investing activities was $3,920 during the nine months ended September 30, 2017 compared to net cash provided by investing activities of $373 in the same period in 2016. The lower level of net cash used in investing activities in the 2016 period reflects liquidity provided from our investments in part to fund share repurchase activity. Capital spending was $3,932 during the nine months ended September 30, 2017 compared to $2,481 in the same period in 2016 reflecting our continuing investments in new production equipment.

Net cash used in financing activities was $1,817 during the nine months ended September 30, 2017 compared to net cash used in financing activities of $1,368 in the same period in 2016. We repurchased approximately 117 and 69 shares of common stock at a cost of $1,187 and $738 in the nine-month periods ended September 30, 2017 and September 30, 2016 respectively.

The Company had a net decrease in cash and cash equivalents of $1,548 during the nine-month period ended September 30, 2017 compared to a net increase in cash and cash equivalents of $3,518 in the same period in 2016.

At September 30, 2017, the Company had $3,292 of current maturities of notes payable. We intend to fund these maturities with available cash balances and / or new financing facilities. The Company also has a $5 million revolving credit facility. This facility expires in July 2018, remained unused at September 30, 2017 and is available for other general corporate purposes. The company is in compliance with the covenants contained in its loan agreements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

For information regarding our exposure to certain market risk, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Form 10-K. There have been no significant changes in our market risk exposures from the 2016 year-end.

ITEM 4. CONTROLS AND PROCEDURES.

(a)

Evaluation of Disclosure Controls and Procedures

Our evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act was performed under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer. The purpose of disclosure controls and procedures is to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

As previously disclosed under “Item 9A—Controls and Procedures” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, we concluded that our internal control over financial reporting was not effective based on the material weakness identified. Based on the material weakness, which we view as an integral part of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the quarter ended September 30, 2017, our disclosure controls and procedures were not effective. Nevertheless, based on a number of factors, including the performance of additional procedures by management designed to ensure the reliability of our financial reporting, we believe that the consolidated financial statements in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

(b)

Changes in Internal Control over Financial Reporting

Our remediation efforts were ongoing during the three months ended September 30, 2017. Remediation generally requires making changes to how controls are designed and implemented and then adhering to those changes for a sufficient period of time such that the effectiveness of those changes is demonstrated with an appropriate amount of consistency. We have taken certain remediation steps to address the material weaknesses referenced above and to improve our control over financial reporting. If not remediated these deficiencies could result in material misstatements to our consolidated financial statements.

In addition to the actions previously disclosed under “Item 9A—Controls and Procedures” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, our remediation initiatives summarized below, are intended to further address our specific material weaknesses and to continue to enhance our internal control over financial reporting.

Management’s Remediation Initiatives

During the nine months ended September 30, 2017 we took the following actions to improve our internal controls over financial reporting:

We have continued to emphasize the importance of, and monitor the sustained compliance with, the execution of our internal controls over financial reporting.

We have continued to work with our third-party service provider to ensure that our accounting and reporting for income taxes are timely and accurate.

We have increased the number of employees authorized to review and sign checks from two to three to improve timeliness and add redundancy to the internal controls over the cash disbursements process. We have also updated our invoice approval policy to clarify authority levels of company personnel submitting invoices to our accounts payable department for payment.

We have installed software and implemented new procedures designed to improve user provisioning and user access rights to our ERP system.

We have hired a senior staff accountant to increase the size of our controller’s department. We began on-boarding the senior staff accountant in connection with our third quarter reporting period.

There were no other material changes in our internal control over financial reporting that occurred during the nine months ended September 30, 2017 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

We are a party to various lawsuits, proceedings, and other matters arising out of the conduct of our business. Currently, it is management’s opinion that the ultimate resolution of these matters will not have a material adverse effect on our business, financial condition, results of operation, or cash flows.

ITEM 1A. RISK FACTORS.

There have been no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Issuer Purchases of Equity Securities

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURE.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

10.1	Thirteenth Modification to Loan and Security Agreement effective July 6, 2017, by and among The PrivateBank and Trust Company, Lifeway Foods, Inc., Fresh Made, Inc., Helios Nutrition Limited, The Lifeway Kefir Shop, LLC and Lifeway Wisconsin, Inc.
10.2	Fourteenth Modification to Loan and Security Agreement effective July 20, 2017, by and among The PrivateBank and Trust Company, Lifeway Foods, Inc., Fresh Made, Inc., Helios Nutrition Limited, The Lifeway Kefir Shop, LLC and Lifeway Wisconsin, Inc.
10.3	Fifteenth Modification to Loan and Security Agreement effective November 1, 2017, by and among CIBC Bank USA f/k/a The PrivateBank and Trust Company, Lifeway Foods, Inc., Fresh Made, Inc., Helios Nutrition Limited, The Lifeway Kefir Shop, LLC and Lifeway Wisconsin, Inc.
31.1	Officer’s Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Officer’s Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1*	Press release dated November 14, 2017 reporting the Company's financial results for the three and nine months ended September 30, 2017.
101	Interactive Data Files.

* This exhibit is furnished and will not be deemed "filed.”

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	LIFEWAY FOODS, INC.



Date: November 14, 2017	By:	/s/ Julie Smolyansky
		Julie Smolyansky
		Chief Executive Officer, President, and Director
		(Principal Executive Officer)



Date: November 14, 2017	By:	/s/ John P. Waldron
		John P. Waldron
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

INDEX OF EXHIBITS

10.1	Thirteenth Modification to Loan and Security Agreement effective July 6, 2017, by and among The PrivateBank and Trust Company, Lifeway Foods, Inc., Fresh Made, Inc., Helios Nutrition Limited, The Lifeway Kefir Shop, LLC and Lifeway Wisconsin, Inc.

10.2	Fourteenth Modification to Loan and Security Agreement effective July 20, 2017, by and among The PrivateBank and Trust Company, Lifeway Foods, Inc., Fresh Made, Inc., Helios Nutrition Limited, The Lifeway Kefir Shop, LLC and Lifeway Wisconsin, Inc .

10.3	Fifteenth Modification to Loan and Security Agreement effective November 1, 2017, by and among CIBC Bank USA f/k/a The PrivateBank and Trust Company, Lifeway Foods, Inc., Fresh Made, Inc., Helios Nutrition Limited, The Lifeway Kefir Shop, LLC and Lifeway Wisconsin, Inc.

31.1	Officer’s Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Officer’s Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1*	Press release dated November 14, 2017 reporting the Company's financial results for the three and nine months ended September 30, 2017.

101	Interactive Data Files.

* This exhibit is furnished and will not be deemed "filed.”

Exhibit 10.1

THIRTEENTH MODIFICATION TO

LOAN AND SECURITY AGREEMENT

This Thirteenth Modification to Loan and Security Agreement (this “ Amendment ”) is entered into as of July 6, 2017 by and among THE PRIVATEBANK AND TRUST COMPANY (the “ Bank ”), LIFEWAY FOODS, INC., an Illinois corporation (“ Lifeway ”), FRESH MADE, INC., a Pennsylvania corporation (“ FMI ”), HELIOS NUTRITION LIMITED, a Minnesota corporation (“ Helios ”), THE LIFEWAY KEFIR SHOP LLC, an Illinois limited liability company formerly known as STARFRUIT, LLC (“ LKS ”), and LIFEWAY WISCONSIN, INC., an Illinois corporation (“ LWI ” and together with Lifeway, FMI, Helios, and LKS being sometimes collectively referred to as the “ Borrowers ”).

RECITALS

WHEREAS, the Bank and the Borrowers (other than LWI which subsequently became a Borrower) previously entered into a Loan and Security Agreement dated February 6, 2009, as amended by that certain First Modification to Loan and Security Agreement dated as of August 13, 2009, by that certain Second Modification to Loan and Security Agreement dated November 12, 2009, by that certain Third Modification to Loan and Security Agreement dated February 6, 2010, by that certain Fourth Modification to Loan and Security Agreement dated as of April 20, 2011, by that certain Fifth Modification to Loan and Security Agreement dated as of June 20, 2011 and by that certain Sixth Modification to Loan and Security Agreement dated as of June 13, 2012, by that certain Seventh Modification to Loan and Security Agreement dated as of May 14, 2013, by that certain Eighth Modification to Loan and Security Agreement dated as of September 4, 2013, by that certain Ninth Modification to Loan and Security Agreement dated as of June 24, 2014, by that certain Tenth Modification to Loan and Security Agreement dated as of August 28, 2014, by that certain Eleventh Modification to Loan and Security Agreement dated as of August 11, 2015 and by that certain Twelfth Modification to Loan and Security Agreement entered into as of September 12, 2016 with an effective date of July 31, 2016 (as modified, the “ Loan Agreement ”), pursuant to which the Bank made available to the Borrowers a credit facility.

WHEREAS, the Borrowers desire, and the Bank is willing, to amend the Loan Agreement to permit Lifeway to redeem a portion of its issued and outstanding Capital Securities, all upon and subject to the terms and conditions set forth in this Amendment; and

WHEREAS, this Amendment shall constitute a Loan Document and these Recitals shall be construed as part of this Amendment.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto hereby agree as follows:

1. Definitions . (a) Undefined Terms . Unless the context otherwise provides or requires, capitalized terms used herein which are not defined herein shall have the meanings ascribed to them in the Loan Agreement; provided , however , that all references in the Loan Agreement to (a) “Obligations” shall, in addition to the definition set forth in the Loan Agreement include, but not be limited to, the duties and obligations of the Borrowers under this Amendment, and (b) “Loan Documents” shall, in addition to the definition set forth in the Loan Agreement include, but not be limited to, this Amendment and the documents and instruments to be delivered pursuant to this Amendment.

(b) Additional Defined Term . A definition of “ Permitted 2017 Redemption Transaction ” is hereby added to Section 1.1 of the Loan Agreement as follows:

“ Permitted 2017 Redemption Transaction ” shall mean the redemption by Lifeway of issued and outstanding Capital Securities of Lifeway provided that (a) the aggregate dollar amount of Capital Securities so redeemed shall not exceed $6,500,000 and (b) such redemption transaction shall have been consummated no later than July 31, 2017.

2 Amendments .

(a) Section 9.6 of the Loan Agreement is amended and restated as follows:

9.6. Distributions . The Borrowers shall not and shall not permit any Subsidiary to, (a) make any distribution or dividend (other than stock dividends), whether in cash or otherwise, to any of its equity holders, (b) other than the Permitted 2017 Redemption Transaction, purchase or redeem any of its equity interests or any warrants, options or other rights in respect thereof, (c) pay any management fees or similar fees to any of its equity holders or any Affiliate thereof, (d) pay or prepay interest on, principal of, premium, if any, redemption, conversion, exchange, purchase, retirement, defeasance, sinking fund or any other payment in respect of any Subordinated Debt, or (e) set aside funds for any of the foregoing. Notwithstanding the foregoing, (i) any Subsidiary may pay dividends or make other distributions to the Borrowers or to a domestic Wholly-Owned Subsidiary; and (ii) so long as no Event of Default or Unmatured Event of Default exists or would result therefrom (including, but not limited to, any Event of Default or Unmatured Event of Default under Section 10 hereof), the Borrowers may make regularly scheduled payments of interest in respect of Subordinated Debt to the extent permitted under the subordination provisions thereof, (iii) the applicable Borrowers may make payments to the extent permitted under the Subordination Agreement(s); and (iv) so long as no Event of Default or Unmatured Event of Default exists or would result therefrom (including, but not limited to, any Event of Default or Unmatured Event of Default under Section 10 hereof), Lifeway may declare and pay cash distributions or dividends on its outstanding capital stock and purchase or redeem any of its equity interests or any warrants, options or other rights in respect thereof.

(b) Commencing the fiscal quarter ending June 30, 2017, Section 10.2 of the Loan Agreement is amended and restated as follows:

10.2 Fixed Charge Coverage . As of the end of each of its fiscal quarters, the Borrowers and their Subsidiaries shall maintain a ratio of (a) the total for the four fiscal quarters then ending of consolidated EBITDA minus , in respect of such four fiscal quarters, the sum of (i) all income taxes paid in cash by the Borrowers and their Subsidiaries, (ii) all Capital Expenditures which are not financed with Funded Debt (excluding (x) up to $2,400,000 of Capital Expenditures made during the fiscal quarter ended September 30, 2013 which were not financed with Funded Debt and were made in connection with the GGD Acquisition, (y) up to $1,750,000 of Capital Expenditures made to GGD’s facility in Waukesha, Wisconsin during the two fiscal quarters ended June 30, 2014 which were not financed with Funded Debt and (z) up to $1,000,000 of Capital Expenditures made to GGD’s facility in Waukesha, Wisconsin during the two fiscal quarters ended December 31, 2014 which were not financed with Funded Debt), (iii) cash distributions or dividends and (iv) amounts paid to repurchase or redeem stock or equity (excluding amounts paid to repurchase or redeem stock or equity in connection with the Permitted 2017 Redemption Transaction), to (b) the sum for such four fiscal quarters of (i) Interest Charges plus (ii) required payments of principal of Funded Debt (including the Term Loan and 2013 Term Loan, but excluding the (x) Revolving Loans, (y) Seller Note and (z) Amani-Helios Note), of not less than 1.10 to 1.

3. Representations and Warranties of Borrowers.

(a) The Recitals in this Amendment are true and correct in all respects.

(b) All representations and warranties of each Borrower in the Loan Agreement and in the other Loan Documents to which each Borrower is a party are incorporated herein in full by this reference and are true and correct in all material respects as of the date hereof, except to the extent that any such representation or warranty expressly relates to an earlier date.

(d) Each Borrower has the power, and has been duly authorized by all requisite action, to execute and deliver this Amendment. This Amendment has been duly executed by each Borrower.

(e) This Amendment is the legal, valid and binding obligation of each Borrower, enforceable against each Borrower and each of the other Borrowers in accordance with their respective terms, except as such enforceability may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium, or similar law affecting creditors’ rights generally.

(f) The execution, delivery and performance of this Amendment do not and will not (i) violate any law, rule, regulation or court order to which any of the Borrowers is subject; (ii) conflict with or result in a breach of the certificate of formation or incorporation, bylaws, limited liability company agreement or other organizational documents of any of the Borrowers or any other agreement or instrument to which it is party or by which the properties of any of the Borrowers is bound; or (iii) result in the creation or imposition of any Lien on any property of any of the Borrowers, whether now owned or hereafter acquired, other than Liens in favor of the Bank.

(g) No consent or authorization of, filing with or other act by or in respect of any Person is required in connection with the execution, delivery or performance by each of the Borrowers, or the validity or enforceability, of this Amendment, or the consummation of the transactions contemplated hereby.

4. Conditions Precedent to Effectiveness . This Amendment shall be effective on the date when each of the following conditions shall have been satisfied in the sole discretion of the Bank:

(a) Amendment . Each of the Borrowers and the Bank shall have delivered to the Bank executed counterparts of this Amendment; and

(b) Other Documents . The Borrowers shall have delivered to the Bank such other agreements, certificates, instruments and other documents as the Bank may reasonably request to accomplish the purposes of this Amendment.

5. Reference to and Effect on Loan Documents .

(a) Ratification . Except as specifically provided in this Amendment, the Loan Agreement and the other Loan Documents shall remain in full force and effect and each Borrower hereby ratifies and confirms each such Loan Document.

(b) No Waiver . Except as expressly provided herein, the execution, delivery and effectiveness of this Amendment shall not operate as a waiver or forbearance of any right, power or remedy of either party under the Loan Agreement or any of the other Loan Documents, or, except as expressly provided in herein, constitute a consent, waiver or modification with respect to any provision of the Loan Agreement or any of the other Loan Documents. Upon the effectiveness of this Amendment each reference in (a) the Loan Agreement to “this Agreement,” “hereunder,” “hereof,” or words of similar import and (b) any other Loan Document to “the Agreement” shall, in each case and except as otherwise specifically stated therein, mean and be a reference to the Loan Agreement as amended and modified hereby.

6. Entire Agreement . This Amendment, including all annexes, exhibits, schedules and other documents incorporated by reference herein or delivered in connection herewith, constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all other understandings, oral or written, with respect to the subject matter hereof.

7. Fees and Expenses . As provided in the Loan Agreement, the Borrowers agree to pay on demand all reasonable fees, costs and expenses incurred by the Bank in connection with the preparation, execution and delivery of this Amendment.

8. Severability . Wherever possible, each provision of this Amendment shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Amendment shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Amendment.

9. Conflict of Terms . Except as otherwise provided in this Amendment, if any provision contained in this Amendment is in conflict with, or inconsistent with, any provision in any of the other Loan Documents, the provision contained in this Amendment shall govern and control.

10. Successors and Assigns . This Amendment shall inure to the benefit of and be binding upon the successors and permitted assigns of the Bank and shall be binding upon the successors and assigns of each Borrower.

11. Counterparts . This Amendment may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall be one and the same instrument. Signature pages may be detached from multiple separate counterparts and attached to a single counterpart. Delivery of an executed signature page of this Amendment by facsimile transmission or electronic transmission (such as fax or e-mail) shall be as effective as delivery of a manually executed counterpart thereof.

12. Headings . The paragraph headings used in this Amendment are for convenience only and shall not affect the interpretation of any of the provisions hereof.

13. Applicable Law . THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS SET FORTH IN THE CREDIT AGREEMENT, OR, IF NO JURISDICTION IS SET FORTH THEREIN, BY THE INTERNAL LAWS (AS OPPOSED TO CONFLICT OF LAWS PROVISIONS) OF THE STATE OF ILLINOIS.

14. Forum Selection and Consent to Jurisdiction . ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AMENDMENT OR ANY OTHER LOAN DOCUMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS; PROVIDED THAT NOTHING IN THIS AMENDMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE THE BANK FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION. THE PARTIES HEREBY EXPRESSLY AND IRREVOCABLY SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. EACH OF THE PARTIES FURTHER CONSENTS TO THE SERVICE OF PROCESS IN THE MANNER SET FORTH IN THE LOAN AGREEMENT. EACH OF THE PARTIES HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

15. Waiver of Jury Trial . THE BANK AND EACH OF THE BORROWERS, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL, EACH KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE IRREVOCABLY, ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AMENDMENT, ANY NOTE, ANY OTHER LOAN DOCUMENT, ANY OF THE OTHER OBLIGATIONS, THE COLLATERAL, OR ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY LENDING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, OR ANY COURSE OF CONDUCT OR COURSE OF DEALING IN WHICH THE BANK AND ANY OF THE BORROWERS ARE ADVERSE PARTIES, AND EACH AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK ENTERING INTO THIS AMENDMENT.

16. Release of Claims . In consideration for entering into this agreement, the sufficiency of which is acknowledged, and excepting only the contractual obligations respecting future performance by the Bank arising under the Loan Agreement and the Loan Documents, each of the Borrowers hereby irrevocably releases and forever discharges the Bank and each of its affiliates, subsidiaries, successors, assigns, directors, officers, employees, agents, representatives and attorneys (each, a “ Released Person ”) of and from all damages, losses, claims, demands, liabilities, obligations, actions and causes of action whatsoever which such Borrowers may now have or claim to have on and as of the date hereof against any Released Person, whether presently known or unknown, liquidated or unliquidated, suspected or unsuspected, contingent or non-contingent, and of every nature and extent whatsoever (collectively, “ Claims ”). Each Borrower jointly and severally represents and warrants to the Bank that it has not granted or purported to grant to any other Person any interest whatsoever in any Claim, as security or otherwise. The Borrowers shall jointly and severally indemnify, defend and hold harmless each Released Person from and against any and all Claims and any loss, cost, liability, damage or expense (including reasonable attorneys’ fees and expenses) incurred by any Released Person in investigating, preparing for, defending against, providing evidence or producing documents in connection with or taking other action in respect of any commenced or threatened Claim.

EACH BORROWER AGREES TO ASSUME THE RISK OF ANY AND ALL UNKNOWN, UNANTICIPATED OR MISUNDERSTOOD DEFENSES, CLAIMS, CONTRACTS, LIABILITIES, INDEBTEDNESS AND OBLIGATIONS WHICH ARE RELEASED, WAIVED AND DISCHARGED BY THIS AMENDMENT. EACH BORROWER HEREBY WAIVES AND RELINQUISHES ALL RIGHTS AND BENEFITS WHICH IT MIGHT OTHERWISE HAVE UNDER ANY CIVIL CODE OR ANY SIMILAR LAW, TO THE EXTENT SUCH LAW MAY BE APPLICABLE, WITH REGARD TO THE RELEASE OF SUCH UNKNOWN, UNANTICIPATED OR MISUNDERSTOOD DEFENSES, CLAIMS, CONTRACTS, LIABILITIES, INDEBTEDNESS AND OBLIGATIONS. TO THE EXTENT THAT SUCH LAWS MAY BE APPLICABLE, EACH BORROWER WAIVES AND RELEASES ANY RIGHT OR DEFENSE WHICH IT MIGHT OTHERWISE HAVE UNDER ANY OTHER LAW OR ANY APPLICABLE JURISDICTION WHICH MIGHT LIMIT OR RESTRICT THE EFFECTIVENESS OR SCOPE OF ANY OF THEIR WAIVERS OR RELEASES HEREUNDER.

[Signature page follows]

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first written above.

	THE BANK :

	THE PRIVATEBANK AND TRUST COMPANY

	By: /s/Christopher Trimbach
	Authorized Officer

THE BORROWERS:

Lifeway Foods, Inc.

By: /s/Edward Smolyansky

Title: Chief Operating Officer

Fresh Made, Inc.

By: /s/Edward Smolyansky

Title: Chief Operating Officer

Helios Nutrition Limited

By: /s/Edward Smolyansky

Title: Chief Operating Officer

THE LIFEWAY KEFIR SHOP LLC

By: /s/Edward Smolyansky

Title: Manager

LIFEWAY WISCONSIN, INC.

By: /s/Edward Smolyansky

Title: Chief Operating Officer

Exhibit 10.2

FOURTHEENTH MODIFICATION TO

LOAN AND SECURITY AGREEMENT

This Fourteenth Modification to Loan and Security Agreement (this “ Amendment ”) is entered into as of July 20, 2017 (the “ Effective Date ”) by and among THE PRIVATEBANK AND TRUST COMPANY (the “ Bank ”), LIFEWAY FOODS, INC., an Illinois corporation (“ Lifeway ”), FRESH MADE, INC., a Pennsylvania corporation (“ FMI ”), HELIOS NUTRITION LIMITED, a Minnesota corporation (“ Helios ”), THE LIFEWAY KEFIR SHOP LLC, an Illinois limited liability company formerly known as STARFRUIT, LLC (“ LKS ”), and LIFEWAY WISCONSIN, INC., an Illinois corporation (“ LWI ” and together with Lifeway, FMI, Helios and LKS being sometimes collectively referred to as the “ Borrowers ”).

RECITALS

WHEREAS, the Bank, Pride of Main Street Dairy, LLC, a Minnesota limited liability company (“ Pride ”), and the Borrowers (other than LWI which subsequently became a Borrower) previously entered into a Loan and Security Agreement dated February 6, 2009, as amended by that certain First Modification to Loan and Security Agreement dated as of August 13, 2009, by that certain Second Modification to Loan and Security Agreement dated November 12, 2009, by that certain Third Modification to Loan and Security Agreement dated February 6, 2010, by that certain Fourth Modification to Loan and Security Agreement dated as of April 20, 2011, by that certain Fifth Modification to Loan and Security Agreement dated as of June 20, 2011 and by that certain Sixth Modification to Loan and Security Agreement dated as of June 13, 2012, by that certain Seventh Modification to Loan and Security Agreement dated as of May 14, 2013, by that certain Eighth Modification to Loan and Security Agreement dated as of September 4, 2013, by that certain Ninth Modification to Loan and Security Agreement dated as of June 24, 2014, by that certain Tenth Modification to Loan and Security Agreement dated as of August 28, 2014, by that certain Eleventh Modification to Loan and Security Agreement dated as of August 11, 2015, by that certain Twelfth Modification to Loan and Security Agreement entered into as of September 12, 2016 with an effective date of July 31, 2016 and by that certain Thirteen Modification to Loan and Security Agreement dated as of June 30, 2017 (as modified, the “ Loan Agreement ”), pursuant to which the Bank made available to the Borrowers a credit facility.

WHEREAS, an Event of Default (the “ Subject Default ”) has occurred under Section 8.2 and Section 11.3 of the Loan Agreement as a result of Borrowers causing Pride to be liquidated and dissolved;

WHEREAS, the Bank and Borrowers desire to amend the Loan Agreement, among other things, to (a) extend the Revolving Loan Maturity Date and (b) waive the Subject Default , all upon and subject to the terms and conditions set forth in this Amendment; and

WHEREAS, this Amendment shall constitute a Loan Document and these Recitals shall be construed as part of this Amendment.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto hereby agree as follows:

1. Definitions . (a) Undefined Terms. Unless the context otherwise provides or requires, capitalized terms used herein which are not defined herein shall have the meanings ascribed to them in the Loan Agreement; provided , however , that all references in the Loan Agreement to (a) “Obligations” shall, in addition to the definition set forth in the Loan Agreement include, but not be limited to, the duties and obligations of the Borrowers under this Amendment, and (b) “Loan Documents” shall, in addition to the definition set forth in the Loan Agreement include, but not be limited to, this Amendment and the documents and instruments to be delivered pursuant to this Amendment.

(b) Amended and Restated Defined Term . When used herein and in the Loan Agreement, the following term shall have the following amended and restated meaning:

“ Revolving Loan Maturity Date ” shall mean July 31, 2018, unless extended by the Bank pursuant to any modification, extension or renewal note executed by the Borrowers and accepted by the Bank in its sole and absolute discretion in substitution for the Revolving Note.”

2 Amendments .

(a) The Revolving Loan is hereby extended to the Revolving Loan Maturity Date. The Revolving Note is hereby amended by deleting all references to February 6, 2010 (subsequently amended to July 31, 2017) and replacing such references with July 31, 2018.

(b) Except as specifically set forth herein, the Revolving Note (as hereby amended by this Fourteenth Modification), the Term Note, 2013 Term Loan Note and the Loan Documents previously delivered by the Borrowers shall remain in full force and effect and are hereby ratified and confirmed in all respects. The indebtedness evidenced by the Revolving Note (as hereby amended by this Twelfth Modification), Term Note and 2013 Term Loan Note is continuing indebtedness of the Borrowers and nothing herein shall be deemed to constitute a payment, settlement or novation of the Revolving Note, Term Note or 2013 Term Loan Note, or to release or otherwise adversely affect any lien or security interest securing such indebtedness or any rights of the Bank against any party primarily or secondarily liable for such indebtedness.

3. Representations and Warranties of Borrowers.

(a) The Recitals in this Amendment are true and correct in all respects.

(d) Each Borrower has the power, and has been duly authorized by all requisite action, to execute and deliver this Amendment. This Amendment has been duly executed by each Borrower.

4. Conditions Precedent to Effectiveness . This Amendment shall be effective on the date when each of the following conditions shall have been satisfied in the sole discretion of the Bank:

(a) Amendment . Each of the Borrowers and the Bank shall have delivered to the Bank executed counterparts of this Amendment;

(b) Evidence of Dissolution of Pride . Borrowers shall have delivered to the Bank evidence of the dissolution and liquidation of Pride in form and substance acceptable to the Bank.

(c) Secretary and Manager Certificates . With respect to each Borrower (i) good standing certificates in its state of incorporation (or formation) and in each other state requested by the Bank; and (ii) certification that the certificates delivered by such Borrower on or about April 20, 2011 (June 26, 2013 in the case of LWI and August 19, 2016, in the case of LKS), remain in full force and effect (it being understood that the Bank may conclusively rely on each such certificate until formally advised by a like certificate of any changes therein), all certified by its secretary or an assistant secretary or manager (or similar officer) as being in full force and effect without modification; and

(d) Other Documents . The Borrowers shall have delivered to the Bank such other agreements, certificates, instruments and other documents as the Bank may reasonably request to accomplish the purposes of this Amendment.

5. W aiver of Subject Default and Consent .

From and after the Effective Date, the Bank hereby waives (a) the occurrence of the Subject Default, (b) its right to pursue its remedies on account of the Subject Default, and (c) its right to charge interest at the Default Rate on account of the Subject Default. Such waiver (a) shall not be deemed to extend to any other Event of Default which has arisen or may hereafter arise, (b) shall not be deemed to effect any amendment of the Loan Agreement or any of the other Loan Documents, all of which shall remain in full force and effect in accordance with their respective terms except as expressly amended hereby and (c) shall not be deemed to establish a custom or course of dealing between Borrower and the Bank. As a condition to the Bank’s waiver set forth in this Section 5, Borrowers covenant and agree to deliver to the Bank, within ten (10) Business Days from the Effective Date, evidence of the liquidation and dissolution of Pride. For the avoidance of doubt, Pride shall no longer be a Borrower under the Loan Agreement or any of the other Loan Documents.

6. Reference to and Effect on Loan Documents .

7. Entire Agreement . This Amendment, including all annexes, exhibits, schedules and other documents incorporated by reference herein or delivered in connection herewith, constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all other understandings, oral or written, with respect to the subject matter hereof.

8. Fees and Expenses . As provided in the Loan Agreement, the Borrowers agree to pay on demand all reasonable fees, costs and expenses incurred by the Bank in connection with the preparation, execution and delivery of this Amendment.

9. Severability . Wherever possible, each provision of this Amendment shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Amendment shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Amendment.

10. Conflict of Terms . Except as otherwise provided in this Amendment, if any provision contained in this Amendment is in conflict with, or inconsistent with, any provision in any of the other Loan Documents, the provision contained in this Amendment shall govern and control.

11. Successors and Assigns . This Amendment shall inure to the benefit of and be binding upon the successors and permitted assigns of the Bank and shall be binding upon the successors and assigns of each Borrower.

12. Counterparts . This Amendment may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall be one and the same instrument. Signature pages may be detached from multiple separate counterparts and attached to a single counterpart. Delivery of an executed signature page of this Amendment by facsimile transmission or electronic transmission (such as fax or e-mail) shall be as effective as delivery of a manually executed counterpart thereof.

13. Headings . The paragraph headings used in this Amendment are for convenience only and shall not affect the interpretation of any of the provisions hereof.

14. Applicable Law . THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS SET FORTH IN THE CREDIT AGREEMENT, OR, IF NO JURISDICTION IS SET FORTH THEREIN, BY THE INTERNAL LAWS (AS OPPOSED TO CONFLICT OF LAWS PROVISIONS) OF THE STATE OF ILLINOIS.

15. Forum Selection and Consent to Jurisdiction . ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AMENDMENT OR ANY OTHER LOAN DOCUMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS; PROVIDED THAT NOTHING IN THIS AMENDMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE THE BANK FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION. THE PARTIES HEREBY EXPRESSLY AND IRREVOCABLY SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. EACH OF THE PARTIES FURTHER CONSENTS TO THE SERVICE OF PROCESS IN THE MANNER SET FORTH IN THE LOAN AGREEMENT. EACH OF THE PARTIES HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

16. Waiver of Jury Trial . THE BANK AND EACH OF THE BORROWERS, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL, EACH KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE IRREVOCABLY, ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AMENDMENT, ANY NOTE, ANY OTHER LOAN DOCUMENT, ANY OF THE OTHER OBLIGATIONS, THE COLLATERAL, OR ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY LENDING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, OR ANY COURSE OF CONDUCT OR COURSE OF DEALING IN WHICH THE BANK AND ANY OF THE BORROWERS ARE ADVERSE PARTIES, AND EACH AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK ENTERING INTO THIS AMENDMENT.

17. Release of Claims . In consideration for entering into this agreement, the sufficiency of which is acknowledged, and excepting only the contractual obligations respecting future performance by the Bank arising under the Loan Agreement and the Loan Documents, each of the Borrowers hereby irrevocably releases and forever discharges the Bank and each of its affiliates, subsidiaries, successors, assigns, directors, officers, employees, agents, representatives and attorneys (each, a “ Released Person ”) of and from all damages, losses, claims, demands, liabilities, obligations, actions and causes of action whatsoever which such Borrowers may now have or claim to have on and as of the date hereof against any Released Person, whether presently known or unknown, liquidated or unliquidated, suspected or unsuspected, contingent or non-contingent, and of every nature and extent whatsoever (collectively, “ Claims ”). Each Borrower jointly and severally represents and warrants to the Bank that it has not granted or purported to grant to any other Person any interest whatsoever in any Claim, as security or otherwise. The Borrowers shall jointly and severally indemnify, defend and hold harmless each Released Person from and against any and all Claims and any loss, cost, liability, damage or expense (including reasonable attorneys’ fees and expenses) incurred by any Released Person in investigating, preparing for, defending against, providing evidence or producing documents in connection with or taking other action in respect of any commenced or threatened Claim.

[Signature page follows]

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first written above.

	THE BANK :

	THE PRIVATEBANK AND TRUST COMPANY

	By: /s/Christopher Trimbach
	Authorized Officer

THE BORROWERS:

Lifeway Foods, Inc.

By: /s/Edward Smolyansky

Title: Chief Operating Officer

Fresh Made, Inc.

By: /s/Edward Smolyansky

Title: Chief Operating Officer

Helios Nutrition Limited

By: /s/Edward Smolyansky

Title: Chief Operating Officer

THE LIFEWAY KEFIR SHOP LLC

By: /s/Edward Smolyansky

Title: Manager

LIFEWAY WISCONSIN, INC.

By: /s/Edward Smolyansky

Title: Chief Operating Officer

Exhibit 10.3

FIFTEENTH MODIFICATION TO

LOAN AND SECURITY AGREEMENT

This Fifteenth Modification to Loan and Security Agreement (this “ Amendment ”) is entered into as of November 1, 2017 (the “ Effective Date ”) by and among CIBC BANK USA, formerly known as THE PRIVATEBANK AND TRUST COMPANY (the “ Bank ”), LIFEWAY FOODS, INC., an Illinois corporation (“ Lifeway ”), FRESH MADE, INC., a Pennsylvania corporation (“ FMI ”), HELIOS NUTRITION LIMITED, a Minnesota corporation (“ Helios ”), THE LIFEWAY KEFIR SHOP LLC, an Illinois limited liability company formerly known as STARFRUIT, LLC (“ LKS ”), and LIFEWAY WISCONSIN, INC., an Illinois corporation (“ LWI ” and together with Lifeway, FMI, Helios and LKS being sometimes collectively referred to as the “ Borrowers ”).

RECITALS

WHEREAS, the Bank, Pride of Main Street Dairy, LLC, a Minnesota limited liability company (“ Pride ”), and the Borrowers (other than LWI which subsequently became a Borrower) previously entered into a Loan and Security Agreement dated February 6, 2009, as amended by that certain First Modification to Loan and Security Agreement dated as of August 13, 2009, by that certain Second Modification to Loan and Security Agreement dated November 12, 2009, by that certain Third Modification to Loan and Security Agreement dated February 6, 2010, by that certain Fourth Modification to Loan and Security Agreement dated as of April 20, 2011, by that certain Fifth Modification to Loan and Security Agreement dated as of June 20, 2011 and by that certain Sixth Modification to Loan and Security Agreement dated as of June 13, 2012 but effective May 31, 2012, by that certain Seventh Modification to Loan and Security Agreement dated as of May 14, 2013, by that certain Eighth Modification to Loan and Security Agreement dated as of September 4, 2013, by that certain Ninth Modification to Loan and Security Agreement dated as of June 24, 2014, by that certain Tenth Modification to Loan and Security Agreement dated as of August 28, 2014, by that certain Eleventh Modification to Loan and Security Agreement dated as of August 11, 2015, by that certain Twelfth Modification to Loan and Security Agreement entered into as of September 12, 2016 with an effective date of July 31, 2016, by that certain Thirteen Modification to Loan and Security Agreement dated as of June 30, 2017 and by that certain Fourteenth Modification to Loan and Security Agreement dated as of July 20, 2017 (as modified, the “ Loan Agreement ”), pursuant to which the Bank made available to the Borrowers a credit facility.

WHEREAS, the Bank and Borrowers desire to amend the Loan Agreement, among other things, to (a) extend the period of time to complete the Permitted 2017 Redemption Transaction to May 31, 2018 and (b) reflect the Bank’s consent to Borrower making an investment in Brandless, Inc., a Delaware corporation ; and

WHEREAS, this Amendment shall constitute a Loan Document and these Recitals shall be construed as part of this Amendment.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto hereby agree as follows:

1. Definitions . (a) Undefined Terms. Unless the context otherwise provides or requires, capitalized terms used herein which are not defined herein shall have the meanings ascribed to them in the Loan Agreement; provided , however , that all references in the Loan Agreement to (a) “Obligations” shall, in addition to the definition set forth in the Loan Agreement include, but not be limited to, the duties and obligations of the Borrowers under this Amendment, and (b) “Loan Documents” shall, in addition to the definition set forth in the Loan Agreement include, but not be limited to, this Amendment and the documents and instruments to be delivered pursuant to this Amendment.

(b) Amended and Restated Defined Term . When used herein and in the Loan Agreement, the following term shall have the following amended and restated meaning:

2. Consent .

Notwithstanding the provisions of Section 9.3 of the Loan Agreement, the Bank hereby consents to Lifeway making an Investment in Series B Preferred Stock in Brandless, Inc., a Delaware corporation; provided that (i) such Investment shall not exceed $25,000 in the aggregate and (ii) such Investment is made by Lifeway on or before September 30, 2017. The Bank granting such consent shall not be deemed to establish a custom or course of dealing between the Borrowers and the Bank.

3. Representations and Warranties of Borrowers.

(a) The Recitals in this Amendment are true and correct in all respects.

(d) Each Borrower has the power, and has been duly authorized by all requisite action, to execute and deliver this Amendment. This Amendment has been duly executed by each Borrower.

4. Conditions Precedent to Effectiveness . This Amendment shall be effective on the date when each of the following conditions shall have been satisfied in the sole discretion of the Bank:

(a) Amendment . Each of the Borrowers and the Bank shall have delivered to the Bank executed counterparts of this Amendment;

(b) Evidence of Dissolution of Pride . Borrowers shall have delivered to the Bank evidence of the dissolution and liquidation of Pride in form and substance acceptable to the Bank.

5. Reference to and Effect on Loan Documents .

12. Headings . The paragraph headings used in this Amendment are for convenience only and shall not affect the interpretation of any of the provisions hereof.

[Signature page follows]

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first written above.

	THE BANK :

	CIBC BANK USA FORMERLY KNOWN AS THE PRIVATE BANK AND TRUST COMPANY

	By: /s/Christopher Trimbach
	Authorized Officer

THE BORROWERS:

Lifeway Foods, Inc.

By: /s/Edward Smolyansky

Title: Chief Operating Officer

Fresh Made, Inc.

By: /s/Edward Smolyansky

Title: Chief Operating Officer

Helios Nutrition Limited

By: /s/Edward Smolyansky

Title: Chief Operating Officer

THE LIFEWAY KEFIR SHOP LLC

By: /s/Edward Smolyansky

Title: Manager

LIFEWAY WISCONSIN, INC.

By: /s/Edward Smolyansky

Title: Chief Operating Officer

EXHIBIT 31.1

SECTION 302 CERTIFICATION OF C.E.O.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Julie Smolyansky, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Lifeway Foods, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2017	By: /s/ Julie Smolyansky
	Julie Smolyansky
	Chief Executive Officer, President and Director
	(Principal Executive Officer)

EXHIBIT 31.2

SECTION 302 CERTIFICATION OF C.F.O.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John P. Waldron, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Lifeway Foods, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(a)

(b)

(c)

(d)

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2017	By: /s/ John P. Waldron
	John P. Waldron
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

EXHIBIT 32.1

SECTION 906 CERTIFICATION OF C.E.O.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Lifeway Foods, Inc. (the “Company”) for the period ended September 30, 2017 as filed with the SEC (the “Report”), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to her knowledge:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 14, 2017	By: /s/ Julie Smolyansky
	Julie Smolyansky
	Chief Executive Officer, President and Director
	(Principal Executive Officer)

EXHIBIT 32.2

SECTION 906 CERTIFICATION OF C.F.O.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 14, 2017	By: /s/ John P. Waldron
	John P. Waldron
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

Exhibit 99.1

Lifeway Foods, Inc. Announces Results for the Third Quarter Ended September 30, 2017

Morton Grove, IL — November 14, 2017 — Lifeway Foods, Inc. (Nasdaq: LWAY), the leading U.S. supplier of kefir cultured dairy products, today reported financial results for the third quarter ended September 30, 2017.

“Overall, Lifeway performed well in what continues to be a challenging business climate,” said CEO Julie Smolyansky. “While sales declined 4% in the quarter, we continue to shape our product offering responsive to today’s consumer and invest in organizational capabilities that enables our strategic framework. In addition to the changes we implemented in our sales organization earlier in the year, our innovation and commercialization teams have been delivering new, on-trend solutions … both inside and outside of dairy. As I look forward to 2018 and beyond, I remain confident that our team will drive profitable growth from both our flagship drinkable kefir business and our category-expanding innovation.”

Third Quarter Results

Third quarter net sales decreased by $1,204 or 4.0% to $28,786. Lower volumes of our branded drinkable kefir were partially offset by the incremental impact of our new cupped kefir product line, an increase in the volume of our private label products and lower trade promotion.

Gross profit as a percent of net sales increased to 27.2% during the three-month period ended September 30, 2017 from 26.6% during the same three-month period in 2016. The higher gross profit percent reflects lower delivery costs and reduced trade promotion partially offset by the deleveraging impact of lower net sales relative to fixed costs.

Selling expenses decreased by $296 or 6.9% to $4,010 during the three-month period ended September 30, 2017 from $4,306 during the same period in 2016. The decline in selling expenses was driven by lower advertising costs and partially offset by higher sales salaries. We lowered our advertising costs through lower production costs of our Probiotic Billionaire campaign in the third quarter compared to the production costs of the campaign we ran in the year ago period. The higher sales salaries reflect our strategic initiative launched in the first quarter of 2017 to elevate customer focus and improve selling effectiveness with an augmented in-house sales team. Selling expenses as a percentage of net sales were 13.9% for the three-month period ended September 30, 2017 compared to 14.4% for the same period in 2016.

Our effective tax rate for the three months ended September 30, 2017 was 41.9% compared to an effective tax rate that exceeded 100% in the same period last year. We reported net income of $243 or $0.02 per basic and diluted common share for the three-month period ended September 30, 2017 compared to a net loss of $64 or $0.00 per basic and diluted common share in the same period in 2016.

First Nine Months of Fiscal 2017

Year to date net sales decreased by $1,055 or 1.1% to $92,636 during the nine-month period ended September 30, 2017 from $93,691 during the same nine-month period in 2016. Lower volumes of our branded drinkable kefir were partially offset by the incremental impact of our new cupped kefir product line and an increase in the volume of our private label products.

Gross profit as a percent of net sales decreased to 27.6% from 28.2% in the same period last year. The lower gross profit percent reflects higher milk costs and increased trade promotion partially offset by lower delivery costs.

Selling expenses increased by $915 or 8.5% to $11,648 during the first nine months of 2017 from $10,733 in the first nine months of 2016 reflecting higher sales salaries partially offset by lower advertising costs. As a percentage of net sales, selling expenses increased to 12.6% compared to 11.5% in the same period last year.

General and administrative expenses increased $443 or 4.3% to $10,743 during the nine-month period ended September 30, 2017 from $10,300 during the same period in 2016. The increase reflects higher compensation expense driven by increased headcount and incentive compensation partially offset by lower professional fees.

Our effective tax rate for the nine months ended September 30, 2017 was 42.9% compared to an effective tax rate of 33.0% in the same period last year. We reported net income of $1,403 or $0.09 per basic and diluted common share for the nine-month period ended September 30, 2017 compared to net income of $2,998 or $0.19 per basic and diluted common share in the same period in 2016.

Balance Sheet

Cash and cash equivalents decreased $1.5 million to $7.3 million during the nine months ended September 30, 2017. As of September 30, 2017, the Company had outstanding borrowings of approximately $6.5 million, of which $3.3 million becomes due in May of 2018. The Company had additional borrowing capacity of $5 million under its line of credit as of September 30, 2017.

Share Repurchase Program

About Lifeway Foods, Inc.

Lifeway Foods, Inc. (LWAY), recently named one of Forbes’ Best Small Companies, is America’s leading supplier of the probiotic, fermented beverage known as kefir. In addition to its line of drinkable kefir, the company also produces frozen kefir, specialty cheeses and a ProBugs line for kids. Lifeway’s tart and tangy cultured dairy products are available throughout the United States and on a small, but growing basis in Canada, Latin America, Ireland, and the United Kingdom. Learn how Lifeway is good for more than just you at www.lifewaykefir.com.

Forward-Looking Statements

All statements in this release (and oral statements made regarding the subjects of this release) contains “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 regarding, among other things, future operating and financial performance, product development, market position, business strategy and objectives. These statements use words, and variations of words, such as “will,” “invest,” “drive,” “confident,” “forward,” “innovate,” “continue,” “expand,” and “grow.” Other examples of forward looking statements may include, but are not limited to, (i) statements of Company plans and objectives, including the introduction of new products, or estimates or predictions of actions by customers or suppliers, (ii) statements of future economic performance, and (III) statements of assumptions underlying other statements and statements about Lifeway or its business. You are cautioned not to rely on these forward-looking statements. These statements are based on current expectations of future events and thus are inherently subject to uncertainty. If underlying assumptions prove inaccurate or known or unknown risks or uncertainties materialize, actual results could vary materially from Lifeway’s expectations and projections. These risks, uncertainties, and other factors include: price competition; the decisions of customers or consumers; the actions of competitors; changes in the pricing of commodities; the effects of government regulation; possible delays in the introduction of new products; and customer acceptance of products and services. A further list and description of these risks, uncertainties, and other factors can be found in Lifeway’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, and the Company’s subsequent filings with the SEC. Copies of these filings are available online at https://www.sec.gov, http://lifewaykefir.com/investor-relations/, or on request from Lifeway. Information in this release is as of the dates and time periods indicated herein, and Lifeway does not undertake to update any of the information contained in these materials, except as required by law. Accordingly, YOU SHOULD NOT RELY ON THE ACCURACY OF ANY OF THE STATEMENTS OR OTHER INFORMATION CONTAINED IN ANY ARCHIVED PRESS RELEASE.

Contact:

Lifeway Foods, Inc.

Phone: 847-967-1010

Email: info@Lifeway.net

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2017 and December 31, 2016
(In thousands)

	September 30, 2017 (Unaudited)			December 31, 2016
Current assets
Cash and cash equivalents	$	7,264		$	8,812
Accounts receivable, net of allowance for doubtful accounts and discounts and allowances of $1,160 and $1,600 at September 30, 2017 and
December 31, 2016 respectively		10,408			9,594
Inventories, net		8,050			8,042
Prepaid expenses and other current assets		1,016			785
Refundable income taxes		771			309
Total current assets		27,509			27,542

Property, plant and equipment, net		23,888			21,832

Intangible assets
Goodwill and other indefinite-lived intangibles		14,068			14,068
Other intangible assets, net		1,143			1,647
Total intangible assets		15,211			15,715

Other Assets		150			125
Total assets	$	66,758		$	65,214

Current liabilities
Current maturities of notes payable	$	3,292		$	840
Accounts payable		7,104			5,718
Accrued expenses		2,866			2,169
Accrued income taxes		74			654
Total current liabilities		13,336			9,381

Notes payable		3,197			6,279
Deferred income taxes, net		1,192			1,192
Other long-term liabilities		406			–
Total liabilities		18,131			16,852

Stockholders' equity
Common stock, no par value; 40,000,000 shares authorized; 17,274 shares issued; 16,037 and 16,154 outstanding at September 30, 2017 and
December 31, 2016, respectively		6,509			6,509
Paid-in-capital		2,247			2,198
Treasury stock, at cost		(11,527	)		(10,340	)
Retained earnings		51,398			49,995
Total stockholders' equity		48,627			48,362

Total liabilities and stockholders' equity	$	66,758		$	65,214

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
For the three and nine months ended September 30, 2017 and 2016
(Unaudited)
(In thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016

Net sales	$	28,786		$	29,990		$	92,636		$	93,691
Cost of goods sold		20,331			21,478			65,262			65,480
Depreciation expense		618			533			1,801			1,797
Total cost of goods sold		20,949			22,011			67,063			67,277

Gross profit		7,837			7,979			25,573			26,414
Selling expense		4,010			4,306			11,648			10,733
General and administrative expense		3,145			3,308			10,743			10,300
Amortization expense		168			176			504			529
Total operating expenses		7,323			7,790			22,895			21,562

Income from operations		514			189			2,678			4,852

Other income (expense):
Interest expense		(62	)		(56	)		(180	)		(161	)
Loss on sale of investments, net reclassified from OCI		–			12			–			(15	)
Loss on sale of equipment		(34	)		(156	)		(39	)		(307	)
Other income, net		–			28			–			105
Total other income (expense)		(96	)		(172	)		(219	)		(378	)

Income before provision for income taxes		418			17			2,459			4,474

Provision for income taxes		175			81			1,056			1,476

Net income (loss)	$	243		$	(64	)	$	1,403		$	2,998

Earnings per common share:
Basic	$	0.02		$	(0.00	)	$	0.09		$	0.19
Diluted	$	0.02		$	(0.00	)	$	0.09		$	0.19

Weighted average common shares:
Basic		16,093			16,141			16,133			16,159
Diluted		16,168			16,161			16,218			16,181

COMPREHENSIVE INCOME (LOSS)
Net income (loss)	$	243		$	(64	)	$	1,403		$	2,998
Other comprehensive income (loss), net of tax:
Unrealized gains on investments, net of taxes		–			6			–			62
Reclassifications to earnings:
Realized (gains) losses on investments, net of taxes		–			(8	)		–			9
Comprehensive income (loss)	$	243		$	(66	)	$	1,403		$	3,069

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2017 and 2016
(Unaudited)
(In thousands)

	2017			2016
Cash flows from operating activities:
Net Income		1,403			2,998
Adjustments to reconcile net income to operating cash flow:
Depreciation and amortization		2,305			2,326
Loss on sale of investments, net		–			15
Reserve for inventory obsolescence		320			89
Stock-based compensation		901			100
Deferred income taxes		–			444
Loss on sale of property and equipment		39			307
(Increase) decrease in operating assets:
Accounts receivable		(814	)		(823	)
Inventories		(328	)		(1,611	)
Refundable income taxes		(462	)		(72	)
Prepaid expenses and other current assets		(231	)		(310	)
Increase (decrease) in operating liabilities:
Accounts payable		1,384			370
Accrued expenses		252			465
Accrued income taxes		(580	)		215
Net cash provided by operating activities		4,189			4,513

Cash flows from investing activities:
Purchases of investments		(25	)		(559	)
Proceeds from sale of investments		–			2,751
Redemption of certificates of deposits		–			513
Purchases of property and equipment		(3,932	)		(2,481	)
Proceeds from sale of property and equipment		37			149
Net cash (used in) provided by investing activities		(3,920	)		373

Cash flows from financing activities:
Purchase of treasury stock		(1,187	)		(738	)
Repayment of notes payable		(630	)		(630	)
Net cash used in financing activities		(1,817	)		(1,368	)

Net (decrease) increase in cash and cash equivalents		(1,548	)		3,518

Cash and cash equivalents at the beginning of the period		8,812			5,646

Cash and cash equivalents at the end of the period	$	7,264		$	9,164

Supplemental cash flow information:
Cash paid for income taxes, net of refunds	$	2,098		$	886
Cash paid for interest	$	180		$	162