Lifeway Foods (LWAY) 10-Q 2011 Q2 Quarterly report

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:  June 30, 2011

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) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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, or a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o	Accelerated filer o	Non-accelerated filer  o	Smaller reporting company x

 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 June 30, 2011, the issuer had 16,430,809 shares of common stock, no par value, outstanding.

LIFEWAY FOODS, INC.

CONTENTS TO FORM 10-Q

		Page(s)
PART I —	FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS.	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	19
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	21
ITEM 4.	CONTROLS AND PROCEDURES.	21
PART II —	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS.	21
ITEM 1A.	RISK FACTORS.	21
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	22
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.	22
ITEM 4.	REMOVED AND RESERVED.	22
ITEM 5.	OTHER INFORMATION.	22
ITEM 6.	EXHIBITS.	22
SIGNATURES		23
EXHIBIT INDEX		24

2

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

June 30, 2011 and 2010 (unaudited) and December 31, 2010

	(unaudited) June 30,						December 31,
	2011			2010			2010
ASSETS
Current assets
Cash and cash equivalents	$	1,398,523		$	858,490		$	3,229,939
Investments		1,172,193			3,411,804			1,079,232
Certificates of deposits in financial institutions		300,000			550,000			250,000
Inventories		5,608,151			4,154,719			3,985,374
Accounts receivable, net of allowance for doubtful accounts and discounts		8,891,068			7,780,512			6,793,276
Prepaid expenses and other current assets		199,866			70,130			158,315
Other receivables		9,825			142,389			104,680
Deferred income taxes		394,376			389,249			328,470
Refundable income taxes					---			906,748
Total current assets		17,974,002			17,357,293			16,836,034
Property and equipment, net		15,237,279			14,890,327			15,152,713
Intangible assets
Goodwill and other non amortizable brand assets		14,068,091			13,806,091			14,068,091
Other intangible assets, net of accumulated amortization of $2,696,023 and $1,931,091 at June 30, 2011 and 2010 and $2,304,107 at December 31, 2010, respectively		5,609,977			5,907,909			6,001,893
Total intangible assets		19,678,068			19,714,000			20,069,984
Other assets		---			500,000			---
Total assets	$	52,889,349		$	52,461,620		$	52,058,731
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Checks written in excess of bank balances	$	1,709,050		$	847,374		$	1,341,210
Current maturities of notes payable		1,892,042			4,431,873			2,851,610
Accounts payable		4,174,835			2,259,236			4,183,481
Accrued expenses		552,058			531,553			509,459
Accrued income taxes		378,482			604,323			---
Total current liabilities		8,706,467			8,674,359			8,885,760
Notes payable		5,957,795			6,397,780			6,122,225
Deferred income taxes		3,329,537			3,262,795			3,401,728
Total liabilities		17,993,799			18,334,934			18,409,713
Stockholders' equity
Common stock, no par value; 20,000,000 shares authorized; 17,273,776 shares issued; 16,430,809 shares outstanding at June 30, 2011; 17,273,776 shares issued; 16,657,478 shares outstanding at June 30, 2010; 17,273,776 shares issued; 16,536,657 shares outstanding at December 31, 2010		6,509,267			6,509,267			6,509,267
Paid-in-capital		2,032,516			2,018,727			2,032,516
Treasury stock, at cost		( 7,397,344	)		( 5,256,054	)		( 6,425,546	)
Retained earnings		33,767,188			30,906,602			31,575,875
Accumulated other comprehensive income (loss), net of taxes		( 16,077	)		( 51,856	)		( 43,094	)
Total stockholders' equity		34,895,550			34,126,686			33,649,018
Total liabilities and stockholders' equity	$	52,889,349		$	52,461,620		$	52,058,731

See accompanying notes to financial statements

3

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Income and Comprehensive Income

For the Three and Six Months Ended June 30, 2011 and 2010 (unaudited) 

and for the Year Ended December 31, 2010

	(unaudited) Three Months Ended June 30,												(unaudited) Six Months Ended June 30,												December 31,
	2011						2010						2011						2010						2010
Sales	$	19,913,003						15,546,556						38,960,269					$	31,510,715					$	63,543,445
Less: discounts and allowances		(1,715,085	)					(1,261,195	)					(3,458,448	)					(2,336,208	)					(5,043,552	)
Net Sales		18,197,918			18,197,918			14,285,361			14,285,361			35,501,821			35,501,821			29,174,507			29,174,507			58,499,893			58,499,893
Cost of goods sold					12,535,368						8,454,095						22,186,640						16,530,707						36,926,973
Depreciation expense					390,694						281,220						767,207						684,595						1,393,745
Total cost of goods sold					12,926,062						8,735,315						22,953,847						17,215,302						38,320,718
Gross profit					5,271,856						5,550,046						12,547,974						11,959,205						20,179,175
Selling expenses					2,790,507						1,741,886						5,012,315						3,736,733						7,603,098
General and administrative					1,585,178						1,478,062						3,177,907						2,968,219						5,576,908
Amortization expense					195,957						175,761						391,916						351,521						724,537
Total Operating Expenses					4,571,642						3,395,709						8,582,138						7,056,473						13,904,543
Income from operations					700,214						2,154,337						3,965,836						4,902,732						6,274,632
Other income (expense):
Interest and dividend income					17,094						53,176						34,687						107,684						260,552
Rental income					650						2,800						650						4,035						11,785
Interest expense					(72,298	)					(80,164	)					(134,428	)					(176,106	)					(350,997	)
Gain (loss) on sale of investments, net					541						84,043						(2,056	)					54,784						250,480
Total other income (expense)					(54,013	)					59,855						(101,147	)					(9,603	)					171,820
Income before provision for income taxes					646,201						2,214,192						3,864,689						4,893,129						6,446,452
Provision for income taxes					380,659						1,029,688						1,673,376						1,939,936						2,823,986
Net income				$	265,542					$	1,184,504					$	2,191,313					$	2,953,193					$	3,622,466
Basic and diluted earnings per common share					0.02						0.07						0.13						0.18						0.22
Weighted average number of shares outstanding					16,434,314						16,701,539						16,461,981						16,731,549						16,663,557
COMPREHENSIVE INCOME
Net income				$	265,542					$	1,184,504					$	2,191,313					$	2,953,193					$	3,622,466
Other comprehensive income (loss), net of tax:
Unrealized gains on investments (net of tax)					10,404						(55,842	)					25,855						(9,339	)					114,297
Less reclassification adjustment for (gains) losses included in net income (net of taxes)					(305	)					(49,333	)					1,162						(32,158	)					(147,032	)
Comprehensive income				$	275,641					$	1,079,329					$	2,218,330					$	2,911,696					$	3,589,731

See accompanying notes to financial statements

4

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders' Equity

For the Six Months Ended June 30, 2011 and 2010 (unaudited)

and for the Year Ended December 31, 2010

	Common Stock, No Par Value																	Accumulated
	20,000,000 Shares					# of Shares												Other
	Authorized					of												Comprehensive
	# of Shares		# of Shares			Treasury			Common		Paid In		Treasury			Retained		Income (Loss),
	Issued		Outstanding			Stock			Stock		Capital		Stock			Earnings		Net of Tax			Total
Balances at December 31, 2009		17,273,776		16,778,555			495,221		$	6,509,267	$	1,965,786	$	(3,846,773	)	$	27,953,409	$	(10,359	)		32,571,330
Redemption of stock		---		(252,398	)		252,398			---		---		(2,666,288	)		---		---			(2,666,288	)
Issuance of treasury stock for compensation		---		10,500			(10,500	)		---		66,730		87,515			---		---			154,245
Issuance of treasury stock for Fresh Made acquisition		---								---							---		---			---
Other comprehensive income (loss):
Unrealized gains on securities, net of taxes and reclassification adjustment		---		---			---			---		---		---			---		(32,735	)		(32,735	)
Net income for the year ended December 31, 2010		---		---			---			---		---		---			3,622,466		---			3,622,466
Balances at December 31, 2010		17,273,776		16,536,657			737,119		$	6,509,267	$	2,032,516	$	(6,425,546	)	$	31,575,875	$	(43,094	)	$	33,649,018
Balances at January 1, 2010		17,273,776		16,778,555			495,221		$	6,509,267	$	1,965,786	$	(3,846,773	)	$	27,953,409	$	(10,359	)		32,571,330
Redemption of stock		---		(129,841	)		129,841			---		---		(1,418,657	)		---		---			(1,418,657	)
Issuance of treasury stock for compensation		---		8,764			(8,764	)		---		52,941		9,376			---		---			62,317
Other comprehensive income (loss):
Unrealized gains on securities, net of taxes and reclassification adjustment		---		---			---			---		---		---			---		(41,497	)		(41,497	)
Net income for the six months ended June 30, 2010		---		---			---			---		---		---			2,953,193		---			2,953,193
Balances at June 30, 2010		17,273,776		16,657,478			616,298		$	6,509,267	$	2,018,727	$	(5,256,054	)	$	30,906,602	$	(51,856	)	$	34,126,686
Balances at January 1, 2011		17,273,776		16,536,657			737,119		$	6,509,267	$	2,032,516	$	(6,425,546	)	$	31,575,875	$	(43,094	)	$	33,649,018
Redemption of stock		---		(105,848	)		105,848			---		---		(971,798	)		---		---			(971,798	)
Other comprehensive income (loss):
Unrealized gains on securities, net of taxes and reclassification adjustment		---		---			---			---		---		---			---		27,017			27,017
Net income for the six months ended June 30, 2011		---		---			---			---		---		---			2,191,313		---			2,191,313
Balances at June 30, 2011		17,273,776		16,430,809			842,967		$	6,509,267	$	2,032,516	$	(7,397,344	)	$	33,767,188	$	(16,077	)	$	34,895,550

See accompanying notes to financial statements

5

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2011 and 2010 (unaudited)

and for the Year Ended December 31, 2010

	(unaudited) June 30,						December 31,
	2011			2010			2010
Cash flows from operating activities:
Net income	$	2,191,313		$	2,953,193		$	3,622,466
Adjustments to reconcile net income to net
cash flows from operating activities, net of acquisition:
Depreciation and amortization		1,159,123			1,036,116			2,118,282
Loss (Gain) on sale of investments, net		2,056			( 54,784	)		( 250,480	)
Deferred income taxes		( 156,040	)		( 290,465	)		( 96,918	)
Treasury stock issued for compensation		---			62,317			154,245
Increase in allowance for doubtful accounts		20,000			---			17,754
(Increase) decrease in operating assets:
Accounts receivable		( 2,117,792	)		( 1,780,774	)		( 811,292	)
Other receivables		94,855			( 92,631	)		( 54,922	)
Inventories		( 1,622,777	)		( 857,743	)		( 682,398	)
Refundable income taxes		906,748			1,308,978			402,230
Prepaid expenses and other current assets		(41,551	)		( 29,433	)		( 117,618	)
Increase (decrease) in operating liabilities:
Accounts payable		( 8,646	)		( 504,764	)		1,419,479
Accrued expenses		42,599			( 82,791	)		( 104,885	)
Income taxes payable		378,482			604,323			---
Net cash provided by operating activities		848,370			2,271,542			5,615,943
Cash flows from investing activities:
Purchases of investments		( 582,697	)		( 538,852	)		( 2,161,552	)
Proceeds from sale of investments		532,640			1,502,724			5,669,158
Investments in certificates of deposits		( 50,000	)
Proceeds from redemption of certificates of deposit		---			102,545			402,005
Purchases of property and equipment		( 747,250	)		( 1,292,741	)		( 2,229,274	)
Acquisition of the assets of First Juice		---			---			( 270,000	)
Net cash provided by (used in) investing activities		( 847,307	)		( 226,324	)		1,410,337
Cash flows from financing activities:
Proceeds of note payable		250,000			250,000			250,000
Checks written in excess of bank balances		367,840			504,398			998,234
Purchases of treasury stock		( 971,798	)		( 1,418,657	)		( 2,666,288	)
Repayment of notes payable		( 1,478,521	)		( 1,152,876	)		( 3,008,694	)
Net cash used in financing activities		( 1,832,479	)		( 1,817,135	)		( 4,426,748	)
Net (decrease) increase in cash and cash equivalents		( 1,831,416	)		228,083			2,599,532
Cash and cash equivalents at the beginning of the period		3,229,939			630,407			630,407
Cash and cash equivalents at the end of the period	$	1,398,523		$	858,490		$	3,229,939

See accompanying notes to financial statements

6

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2011 and 2010

and December 31, 2010

Note 1 – NATURE OF BUSINESS

Lifeway Foods, Inc. (The “Company”) commenced operations in February 1986 and incorporated under the laws of the state of Illinois on May 19, 1986. The Company’s principal business activity is the production of dairy products. Specifically, the Company produces Kefir, a drinkable product which is similar to but distinct from yogurt, in several flavors sold under the name “Lifeway’s Kefir;” a plain farmer’s cheese sold under the name “Lifeway’s Farmer’s Cheese;” a fruit sugar-flavored product similar in consistency to cream cheese sold under the name of “Sweet Kiss;” and a dairy beverage, similar to Kefir, with increased protein and calcium, sold under the name “Basics Plus.”  The Company also produces a vegetable-based seasoning under the name “Golden Zesta.” The Company currently distributes its products throughout the Chicago Metropolitan area and various cities in the East Coast through local food stores.  In addition, the products are sold throughout the United States and Ontario, Canada by distributors. The Company also distributes some of its products to Eastern Europe.

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows:

Basis of presentation

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  However, such information reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of Management, necessary for fair statement of results for the interim periods.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, LFI Enterprises, Inc., Helios Nutrition, Ltd., Pride of Main Street, L.L.C., Starfruit, L.L.C., Fresh Made, Inc. and Starfruit Franchisor, L.L.C.  In 2010, the Company acquired the assets of First Juice, Inc. (“First Juice”) and consolidated the operations into the operations of the Company.  All significant intercompany accounts and transactions have been eliminated.  The financial statements include the results of operations from the acquisition of the assets of First Juice from October 14, 2010 through the end of the period (see Note 3).

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 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 allowance for doubtful accounts and discounts, the valuation of investment securities, the valuation of goodwill, intangible assets, and deferred taxes.

Revenue Recognition

Sales of Company produced dairy products are recorded at the time of shipment and 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 cost in cost of sales.  Discounts and allowances are reported as a reduction of gross sales unless the allowance is attributable to an identifiable benefit separable from the purchase of the product, the value of which can be reasonably estimated, which would be charged to the appropriate expense account.

7

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2011 and 2010

and December 31, 2010

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Cash and cash equivalents

All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents.

The Company maintains cash deposits at several institutions located in the greater Chicago, Illinois and Philadelphia, Pennsylvania metropolitan areas.

Investments

All investment securities are classified as available-for-sale and are carried at fair value. Unrealized gains and losses on available-for-sale securities are reported as a separate component of stockholders’ equity. Amortization, accretion, interest and dividends, realized gains and losses, and declines in value judged to be other-than-temporary on available-for-sale securities are recorded in other income. All of the Company's securities are subject to a periodic impairment evaluation. This evaluation depends on the specific facts and circumstances. Factors that we consider in determining whether an other-than-temporary decline in value has occurred include: the market value of the security in relation to its cost basis; the financial condition of the investee; and the intent and ability to retain the investment for a sufficient period of time to allow for possible recovery in the market value of the investment.

Accounts receivable

Credit terms are extended to customers in the normal course of business.  The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral.

Accounts receivable are recorded at invoice amounts, and reduced to their estimated net realizable value by recognition of an allowance for doubtful accounts and anticipated discounts.  The Company’s estimate of the allowances for doubtful accounts and anticipated discounts are based upon historical experience, its evaluation of the current status and contract terms of specific receivables, and unusual circumstances, if any.  Accounts are considered past due if payment is not made on a timely basis in accordance with the Company’s credit terms.  Accounts considered uncollectible are charged against the allowance.

Inventories

Inventories are stated at the lower of cost or market, cost being determined by the first-in, first-out method.

Property and equipment

Property and equipment is stated at depreciated cost or fair value where depreciated cost is not recoverable.  Depreciation is computed using the straight-line method.  When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period.  The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized.

Property and equipment is being depreciated over the following useful lives:

Category	Years
Buildings and improvements	31 and 39
Machinery and equipment	5 – 12
Office equipment	5 – 7
Vehicles	5

8

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2011 and 2010

and December 31, 2010

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

Intangible assets acquired in business combinations

The Company accounts for intangible assets at historical cost.  Intangible assets acquired in a business combination are recorded under the purchase method of accounting at their estimated fair values at the date of acquisition.  Goodwill represents the excess purchase price over the fair value of the net tangible and other identifiable intangible assets acquired.  Goodwill is not amortized, but is reviewed for impairment at least annually.  Brand assets represent the fair value of brands acquired.  Brand assets have an indefinite life and therefore are not amortized, rather are reviewed periodically for impairment.  The Company amortizes other intangible assets over their estimated useful lives, as disclosed in the table below.

The Company reviews intangible assets and their related useful lives at least once per year to determine if any adverse conditions exist that would indicate the carrying value of these assets may not be recoverable.   The Company conducts more frequent impairment assessments if certain conditions exist, including:  a change in the competitive landscape, any internal decisions to pursue new or different strategies, a loss of a significant customer, or a significant change in the market place including changes in the prices paid for the Company’s products or changes in the size of the market for the Company’s products.

If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life.

Intangible assets are being amortized over the following useful lives:

Category	Years
Recipes	4
Customer lists and other customer related intangibles	7-10
Lease agreement	7
Trade names	15
Formula	10
Customer relationships	12

Income taxes

Deferred income taxes are the result of temporary differences that arise from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of the assets and liabilities to which they relate.  Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.

The principal sources of temporary differences are different depreciation and amortization methods for financial statement and tax purposes, unrealized gains or losses related to investments, capitalization of indirect costs for tax purposes, purchase price adjustments, and the recognition of an allowance for doubtful accounts for financial statement purposes.

9

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2011 and 2010

and December 31, 2010

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The only periods subject to examination for the Company’s federal return are the 2009 and 2010 tax years. The Company believes that its income tax filing positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded.

During the year ended December 31, 2010, the IRS completed a review of the Company’s 2007 and 2008 federal tax return filings, resulting in a liability of approximately $220,000 being recognized and paid during 2010.  The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income before taxes. There were no such items during the periods covered in this report.

Treasury stock

Treasury stock is recorded using the cost method.

Advertising and promotional costs

The Company expenses advertising costs as incurred.  For the year ended December 31, 2010 and for the six months ended June 30, 2011 and 2010 total advertising costs and promotional discounts and allowances were $7,433,554, $5,363,466 and $3,634,684, respectively.  Of these totals, $2,390,002, $1,905,018, and $1,298,476 were classified as advertising expenses and $5,043,552, $3,458,448, and $2,336,208 were considered to be promotional discounts and allowances and were classified as reductions of sales for the year ended December 31, 2010 and the six months ended June 30, 2011 and 2010, respectively.

Earnings per common share

Earnings per common share were computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period.  For the six months ended June 30, 2011 and 2010 and for the year ended December 31, 2010, diluted and basic earnings per share were the same, as the effect of dilutive securities options outstanding was not significant.

Reclassification

Certain 2010 balance sheet amounts have been reclassified to conform to the 2011 presentation.

 Note 3 – ACQUISITIONS

On October 14, 2010, Lifeway purchased certain assets of First Juice, Inc.,a producer of organic fruit and vegetable juice beverages designed for children.  The consideration for substantially all of the assets was an aggregate of $770,000, consisting of a $500,000 previous investment in preferred stock and an additional $270,000 cash paid in 2010.  Production was moved to Lifeway facilities upon closing of the acquisition.  The acquisition was consummated to expand the Company’s presence in the children’s market, increase distribution channels for existing Lifeway products, and increase diversification of the Company’s products.  There were no significant liabilities assumed.  Acquisition costs for legal and professional fees have been included in General and Administrative costs and were not significant.  The entire amount of goodwill resulting from the acquisition is tax deductible.

10

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2011 and 2010

and December 31, 2010

The estimated fair value of assets acquired, including the real property, and liabilities assumed consisted of the following:

Trade names	$	268,000
Other current assets		6,000
Customer lists		199,000
Fixed assets		35,000
Non amortizable goodwill and brand asset		262,000
Total fair value of assets acquired and liabilities assumed	$	770,000

Had the acquisition occurred on January 1, 2010, the impact on the gross revenue and net income of the Company would not have been significant and would have had no impact on earnings per share for the full year ended December 31, 2010.

Note 4 – INTANGIBLE ASSETS

Intangible assets, and the related accumulated amortization, consist of the following:

	June 30, 2011				June 30, 2010				December 31, 2010
	Cost		Accumulated Amortization		Cost		Accumulated Amortization		Cost		Accumulated Amortization
Recipes	$	43,600	$	43,600	$	43,600	$	43,600	$	43,600	$	43,600
Customer lists and other customer related intangibles		4,504,200		1,292,997		4,305,200		803,744		4,504,200		1,039,323
Lease acquisition		87,200		83,559		87,200		73,707		87,200		79,941
Customer relationship		985,000		403,586		985,000		321,490		985,000		362,526
Trade names		2,248,000		656,931		1,980,000		517,000		2,248,000		585,267
Formula		438,000		215,350		438,000		171,550		438,000		193,450
	$	8,306,000	$	2,696,023	$	7,839,000	$	1,931,091	$	8,306,000	$	2,304,107

Amortization expense is expected to be as follows for the 12 months ending June 30:

2012	$	780,200
2013		722,217
2014		711,367
2015		711,367
2016		711,367
Thereafter		1,973,459
	$	5,609,977

Amortization expense during the six months ended June 30, 2011 and 2010 and the year ended December 31, 2010 was $391,916, $351,521 and $724,537, respectively.

11

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2011 and 2010

and December 31, 2010

Note 5 – INVESTMENTS

The cost and fair value of investments classified as available for sale are as follows:

June 30, 2011	Cost		Unrealized Gains		Unrealized Losses			Fair Value
Equities	$	211,831	$	3,034	$	( 35,930	)	$	178,934
Mutual Funds		114,362		2,022		( 798	)		115,586
Preferred Securities		203,514		---		( 5,719	)		197,795
Corporate Bonds		670,941		12,251		( 3,315	)		679,877
Total	$	1,200,648	$	17,307	$	( 45,762	)	$	1,172,193

June 30, 2010	Cost		Unrealized Gains		Unrealized Losses			Fair Value
Equities	$	653,068	$	26,400	$	( 117,892	)	$	561,576
Mutual Funds		206,961		3,056		( 7,853	)		202,164
Preferred Securities		272,629		6,650		( 64,789	)		214,490
Corporate Bonds		1,751,719		89,355		( 30,140	)		1,810,934
Government Agency Obligations		615,767		8,625		( 1,752	)		622,640
Total	$	3,500,144	$	134,086	$	( 222,426	)	$	3,411,804

December 31, 2010	Cost		Unrealized Gains		Unrealized Losses			Fair Value
Equities	$	225,573	$	16,173	$	( 68,974	)	$	172,772
Mutual Funds		202,108		4,661		( 2,017	)		204,752
Preferred Securities		228,514		—		( 18,329	)		210,185
Corporate Bonds		496,451		843		( 5,771	)		491,523
Total	$	1,152,646	$	21,677	$	( 95,091	)	$	1,079,232

Proceeds from the sale of investments were $5,669,158, $532,640 and $1,502,724 during the year ended December 31, 2010 and for the six months ended June 30, 2011 and 2010, respectively.

Gross gains of $451,420, $27,622 and $120,850 and gross losses of $200,940, $29,678 and $66,066 were realized on these sales during the year ended December 31, 2010 and for the six months ended June 30, 2011 and 2010, respectively.

12

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2011 and 2010

and December 31, 2010

Note 5 – INVESTMENTS - Continued

The following table shows the gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2011 and 2010 and at December 31, 2010:

	Less Than 12 Months					12 Months or Greater					Total
June 30, 2011	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Equities	$	103,939	$	(4,791	)	$	41,845	$	(31,139	)	$	145,784	$	(35,930	)
Mutual Funds		30,350		(541	)		22,165		(257	)		52,515		(798	)
Preferred Securities		—		—			197,795		(5,719	)		197,795		(5,719	)
Corporate Bonds		148,812		(3,315	)		—		—			148,812		(3,315	)
	$	283,101	$	(8,647	)	$	261,805	$	(37,115	)	$	544,906	$	(45,762	)

	Less Than 12 Months					12 Months or Greater					Total
June 30, 2010	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Equities	$	58,222	$	(10,953	)	$	154,154	$	(106,939	)	$	212,376	$	(117,892	)
Mutual Funds		278		(4	)		99,486		(7,849	)		99,764		(7,853	)
Preferred Securities		—		—			193,090		(64,789	)		193,090		(64,789	)
Corporate Bonds		499,285		(26,989	)		181,076		(3,151	)		680,361		(30,140	)
Government Agency    Obligations		—		—			84,775		(1,752	)		84,775		(1,752	)
	$	557,785	$	(37,946	)	$	712,581	$	(184,480	)	$	1,270,366	$	(222,426	)

	Less Than 12 Months					12 Months or Greater					Total
December 31, 2010	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Equities	$	48,202	$	(11,675	)	$	101,467	$	(57,299	)	$	149,669	$	(68,974	)
Mutual Funds		—		—			85,061		(2,017	)		85,061		(2,017	)
Preferred Securities		—		—			210,185		(18,329	)		210,185		(18,329	)
Corporate Bonds		146,710		(2,296	)		122,532		(3,475	)		269,242		(5,771	)
	$	194,912	$	(13,971	)	$	519,245	$	(81,120	)	$	714,157	$	(95,091	)

Equities, Mutual Funds, Preferred Securities, Corporate Bonds and Government Agency Obligations -The Company's investments in equity securities, mutual funds, corporate bonds and government agency obligations consist of investments in common stock, preferred stock and debt securities of companies in various industries.  As of June 30, 2011, there were eleven equity securities, fifteen mutual fund securities, two preferred securities, and two corporate bond securities that had unrealized losses. The Company evaluated the near-term prospects of the issuer in relation to the severity and duration of the impairment. Based on that evaluation and the Company's ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider any material investments to be other-than-temporarily impaired at June 30, 2011.

13

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2011 and 2010

and December 31, 2010

Note 6 – INVENTORIES

Inventories consist of the following:

	June 30,				December 31,
	2011		2010		2010
Finished goods	$	2,320,692	$	1,405,538	$	1,636,988
Production supplies		1,944,159		1,657,546		1,527,064
Raw materials		1,343,300		1,091,635		821,322
Total inventories	$	5,608,151	$	4,154,719	$	3,985,374

Note 7 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

	June 30,				December 31,
	2011		2010		2010
Land	$	1,178,160	$	1,178,160	$	1,178,160
Buildings and improvements		11,477,053		11,051,821		11,328,860
Machinery and equipment		14,112,020		13,182,669		13,713,649
Vehicles		1,211,760		963,245		976,745
Office equipment		366,064		299,110		352,135
Construction in process		153,255		---		96,990
		28,498,312		26,675,005		27,646,539
Less accumulated depreciation		13,261,033		11,784,678		12,493,826
Total property and equipment	$	15,237,279	$	14,890,327	$	15,152,713

Depreciation expense during the six months ended June 30, 2011 and 2010 and for the year ended December 31, 2010 was $767,207, $684,595 and $1,393,745, respectively.

Note 8 – ACCRUED EXPENSES

Accrued expenses consist of the following:

	June 30,				December 31,
	2011		2010		2010
Accrued payroll and payroll taxes	$	252,592	$	161,175	$	181,274
Accrued property tax		274,374		299,254		273,876
Other		25,092		71,124		54,309
	$	552,058	$	531,553	$	509,459

14

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2011 and 2010

and December 31, 2010

Note 9 – NOTES PAYABLE

Notes payable consist of the following:

	June 30,				December 31,
	2011		2010		2010
Note payable to Private Bank in monthly installments of $42,222, plus variable interest rate, currently at 2.761%, with a balloon payment of $5,066,667 due February 6, 2014.  Collateralized by substantially all assets of the Company.	$	6,375,556	$	6,904,444		6,628,889
Line of credit with Private Bank at variable interest rate, currently at 2.761%.  The agreement has been extended with terms allowing borrowings up to $2.0 million, maturing on May 31, 2012.  Collateralized by substantially all assets of the Company.		---		750,000		—
Line of credit with Morgan Stanley for borrowings up to $2.8 million at variable interest rate, currently at 2.94% due on demand.  Collateralized by investments with a fair value of $877,623, and cash and CD’s totaling $1,253,446 at June 30, 2011.		1,370,695		2,303,090		2,344,946
Notes payable to Ilya Mandel & Michael Edelson, subordinated to Private Bank, payable in quarterly installments of $341,875, plus interest at the floating rate per annum (3.25% at June 30, 2010).  This balance was paid in full during August, 2010.				872,119		—
Note payable to Fletcher Jones of Chicago, Ltd LLC in monthly installments of $1,768.57 at 6.653%, due May 24, 2017, secured by transportation equipment		103,586		---		---
Total notes payable		7,849,837		10,829,653		8,973,835
Less current maturities		1,892,042		4,431,873		2,851,610
Total long-term portion	$	5,957,795	$	6,397,780		6,122,225

In accordance with the Private Bank agreements referenced above, the Company is subject to minimum fixed charged ratio and tangible net worth thresholds.  At June 30, 2011, the Company was in compliance with these covenants.

Maturities of notes payables are as follows:

For the Period Ended June 30,
2012	$	1,892,042
2013		522,384
2014		5,379,031
Thereafter		56,380
Total	$	7,849,837

15

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2011 and 2010

and December 31, 2010

Note 10 – PROVISION FOR INCOME TAXES

The provision for income taxes consists of the following:

	For the Six Months Ended						For the Year Ended
	June 30,						December 31,
	2011			2010			2010
Current:
Federal	$	1,173,349		$	1,759,484			2,269,819
State and local		656,067			470,917			651,085
Total current		1,829,416			2,230,401			2,920,904
Deferred		( 156,040	)		( 290,465	)		( 96,918	)
Provision for income taxes	$	1,673,376		$	1,939,936			2,823,986

A reconciliation of the provision for income taxes and the income tax computed at the statutory rate is as follows:

	For the Six Months Ended						For the Year Ended
	June 30,						December 31,
	2011			2010			2010
Federal income tax expense computed at the statutory rate	$	1,313,994		$	1,663,664		$	2,180,228
State and local tax expense, net		367,146			234,870			651,085
Permanent differences		(73,711	)		( 92,868	)		( 117,247	)
Tax credits and other		65,947			134,270			109,920
Provision for income taxes	$	1,673,376		$	1,939,936		$	2,823,986

Amounts for deferred tax assets and liabilities are as follows:

	June 30,						December 31,
	2011			2010			2010
Non-current deferred tax assets (liabilities) arising from: Temporary differences -
Accumulated depreciation and amortization from purchase accounting adjustments	$	(3,601,105	)	$	(3,599,811	)	$	(3,673,296	)
Capital loss carry-forwards		271,568			337,016			271,568
Total non-current net deferred tax liabilities		(3,329,537	)		(3,262,795	)		(3,401,728	)
Current deferred tax assets arising from:
Unrealized losses on investments		12,377			95,488			30,320
Impairment of investments		---			---			4,232
Inventory		250,297			176,051			168,875
Allowance for doubtful accounts and discounts		131,702			117,710			125,043
Total current deferred tax assets		394,376			389,249			328,470
Net deferred tax liability	$	(2,935,161	)	$	(2,873,546	)	$	(3,073,258	)

16

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2011 and 2010

and December 31, 2010

Note 11 – SUPPLEMENTAL CASH FLOW INFORMATION

The Company applied a previous investment in First Juice, Inc. of $500,000 toward the acquisition during 2010.  The impact on the acquisition and intangible assets has been omitted from the investing section of the cash flow statement.

Cash paid for interest and income taxes are as follows:

					For the Year
	For the Six Months Ended				Ended
	June 30,				December 31,
	2011		2010		2010
Interest	$	131,172	$	211,836	$	375,347
Income taxes	$	669,334	$	317,346	$	2,824,824

 Note 12 – STOCK AWARD AND STOCK OPTION PLANS

The Company has a registration statement filed with the Securities and Exchange Commission in connection with a Consulting Service Compensation Plan covering up to 1,200,000 of the Company’s common stock shares. Pursuant to such Plan, the Company may issue common stock or options to purchase common stock to certain consultants, service providers, and employees of the Company.  The option price, number of shares, grant date, and vesting terms are determined at the discretion of the Company’s Board of Directors.

As of December 31, 2010 and at June 30, 2011 and 2010, there were no stock options outstanding or exercisable.  There were approximately 940,000 shares available for issuance under the Plan at June 30, 2011.

On May 28, 2009, Lifeway's Board of Directors approved awards of an aggregate amount of 18,000 shares to be awarded under its Employee and Consulting Services and Compensation Plan to certain key employees and consultants for services rendered to the Company.  The stock awards were made on May 28, 2009 and have vesting periods of one year. The expense for the awards is measured as of July 14, 2009 at $14.69 per share for 18,000 shares, or a total stock award expense of $264,420. This expense was recognized as the stock awards vested in 12 equal portions of $22,035, or 1,500 shares per month for one year.

Note 13 – FAIR VALUE MEASUREMENTS

Generally accepted accounting principles define fair value as the exchange price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date.  The standards emphasize that fair value is a market-based measurement, not an entity-specific measurement and establish the following fair value hierarchy used in fair value measurements:

17

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2011 and 2010

and December 31, 2010

Note 13 – FAIR VALUE MEASUREMENTS - Continued

Level 1 – Inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2 – Inputs use other inputs that are observable, either directly or indirectly.  These inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 – Inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation.  The Company’s assessment of the significance of particular inputs to these fair measurements requires judgment and considers factors specific to each asset or liability.

The Company has available for sale investment securities measured at fair value on a recurring basis.  All categories of investment securities noted in Note 5 were valued using Level 1 inputs as described above, in 2011 and 2010.  There were no other assets or liabilities measured at fair value on a recurring or non-recurring basis as of June 30, 2011, June 30, 2010 or December 31, 2010.

Note 14 – RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures.   FASB ASU 2010-06 amends the fair value disclosure guidance to include new disclosures and changes to clarify existing disclosure requirements.  ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements of Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The impact of ASU 2010-06 on the Company’s disclosures was not significant to the consolidated financial statements.

18

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

Comparison of Quarter Ended June 30, 2011 to Quarter Ended June 30, 2010

The following analysis should be read in conjunction with the unaudited financial statements of the Company and related notes included elsewhere in this quarterly report and the audited financial statements and Management’s Discussion and Analysis contained in our Form 10-K, for the fiscal year ended December 31, 2010, and in the Management’s Discussion and Analysis contained in our Form 10-Q, for the fiscal quarter ended March 31, 2011.

Results of Operations

Total consolidated gross sales increased by $4,366,447 (approximately 28%) to $19,913,003 during the three- month period ended June 30, 2011 from $15,546,556 during the same three- month period in 2010.  This increase is primarily attributable to increased sales and awareness of flagship line, Kefir, as well as ProBugs® Organic Kefir for kids and BioKefir™.  In addition, Lifeway Frozen Kefir line, which was launched in April 2011, contributed to approximately $250,000 to revenue during the second quarter 2011.

Total consolidated net sales increased by $3,912,557 (approximately 27%) to $18,197,918 during the three -month period ended June 30, 2011 from $14,285,361 during the same three- month period in 2010.  Net sales are recorded as gross sales less promotional activities such as slotting fees paid, couponing, spoilage and promotional allowances as well as early payment terms given to customers.

Cost of goods sold as a percentage of net sales, excluding depreciation expense, were approximately 69% during the second quarter of 2011, compared to approximately 59% during the same period in 2010. The increase was primarily attributable to the cost of transportation and other petroleum based production supplies, as well as the increased cost of conventional milk, our largest raw material.  The cost of milk was approximately 35%-45% higher during the second quarter 2011 when compared to the same period in 2010.

Operating expenses as a percentage of net sales were approximately 25% during the second quarter of 2011 compared to approximately 24% during the same period in 2010.   This increase was primarily attributable to increased selling expenses as compared to the same period in 2010.  Selling related expenses increased by $1,048,621, (approximately 60%) to $2,790,507 during the second quarter of 2011, from $1,741,886 during the same period in 2010.  This increase is directly attributable to the company recording an approximate $700,000 expense related its 25th Anniversary Cross Country Mobile tour, which occurred in the second quarter and was expensed during the second quarter.  The Company views this as a non-recurring advertising expense.

Total operating income decreased by $1,454,123 (approximately 67%) to $700,214 during the second quarter of 2011, from $2,154,337 during the same period in 2010.

Provision for income taxes was $380,659, or a 59% effective tax rate, for the 2011 second quarter compared with $1,029,688, or a 47% tax rate, during the same period in 2010.  In addition to the higher rate, the Company’s tax expense was higher due to a Minnesota State Department of Revenue audit from tax years 2006-2009, which resulted in approximately $89,000 in additional taxes being paid in the 2011 second quarter.  Income taxes are discussed in Note 10 of the Notes to Consolidated Financial Statements.  The difference in rates was due to a lower level of permanent tax differences in relation to pre-tax net income.

Total net income was $265,542 or $0.02 per share for the three-month period ended June 30, 2011 compared to $1,184,504 or $0.07 per share in the same period in 2010.

Comparison of Six- Month Period Ended June 30, 2011 to Quarter Ended June 30, 2010

Total consolidated gross sales increased by $7,449,554 (approximately 24%) to $38,960,269 during the six- month period ended June 30, 2011 from $31,510,715 during the same six-month period in 2010.  This increase is primarily attributable to increased sales and awareness of flagship line, Kefir, as well as ProBugs® Organic Kefir for kids and BioKefir™.  In addition, Lifeway Frozen Kefir line, which was launched in April 2011, contributed to approximately $250,000 to revenue during the second quarter 2011.

Total consolidated net sales increased by $6,327,314 (approximately 22%) to $35,501,821 during the six -month period ended June 30, 2011 from $29,174,507 during the same six- month period in 2010.  Net sales are recorded as gross sales less promotional activities such as slotting fees paid, couponing, spoilage and promotional allowances as well as early payment terms given to customers.

Cost of goods sold as a percentage of net sales, excluding depreciation expense, were approximately 62% during the six- month period ended June 30, 2011, compared to approximately 57% during the same period in 2010. The increase was primarily attributable to the cost of transportation and other petroleum based production supplies, as well as the increased cost of conventional milk, our largest raw material.  The cost of milk was approximately 20%-25% higher during the six month period ended June 30, 2011 when compared to the same period in 2010.

19

Operating expenses as a percentage of net sales were approximately 24% during the six -month period ended June 30, 2011 compared to approximately 24% during the same period in 2010.  Selling related expenses increased by $1,275,582, (approximately 34%) to $5,012,315 during the six-month period ended June 30, 2011, from $3,736,733 during the same period in 2010.  This increase is directly attributable to the company recording an approximate $700,000 expense related its 25th Anniversary Cross Country Mobile tour, which occurred in the second quarter of 2011 and was expensed during the second quarter of 2011.  The Company views this as a non-recurring advertising expense.

Total operating income decreased by $936,896 (approximately 19%) to $3,965,836 during the six -month period ended June 30, 2011, from $4,902,732 during the same period in 2010.

Provision for income taxes was $1,673,376, or a 43% effective tax rate, for the six -month period ended June 30, 2011 compared with $1,939,936, or a 40% tax rate, during the same period in 2010.  In addition to the higher rate, the Company’s tax expense was higher due to a Minnesota State Department of Revenue audit from tax years 2006-2009, which resulted in approximately $89,000 in additional taxes being paid in the six -month period ended June 30, 2011.  Income taxes are discussed in Note 10 of the Notes to Consolidated Financial Statements.  The difference in rates was due to a lower level of permanent tax differences in relation to pre-tax net income.

Total net income was $2,191,313 or $0.13 per share for the six -month period ended June 30, 2011 compared to $2,953,193 or $0.18 per share in the same period in 2010.

Liquidity and Capital Resources

Sources and Uses of Cash

Net cash provided by operating activities was $848,370 during the six months ended June 30, 2011 which is a decrease of $1,423,172 when compared to the same period in 2010.  This decrease is primarily attributable to the decrease in net income of $761,880.

Net cash used in investing activities was $847,307 during the six months ended June 30, 2011 which is an increase of $620,983 compared to the same period in 2010.  This increase is primarily due to a decrease in proceeds from sale of investments of $970,084 compared to 2010.  The Company also repurchased 105,848 shares of its common stock at a cost of $971,798 during the six-month period ending June 30, 2011.

The Company had a net increase in cash and cash equivalents of $540,033 during the second quarter of 2011 compared to the same period in 2010.  The Company had cash and cash equivalents of $1,398,523 as of June 30, 2011 compared with cash and cash equivalents of $858,490 as of June 30, 2010.

Assets and Liabilities

Total assets were $52,889,349 as of June 30, 2011, which is an increase of $830,618 when compared to December 31, 2010, and an increase of $427,729 when compared to June 30, 2010.  This is primarily due to an increase in cash and cash equivalents of $540,033 as of June 30, 2011, when compared with June 30, 2010.

Total current liabilities were $8,706,467 as of June 30, 2011, which is a decrease of $179,293 when compared to December 31, 2010. Total current liabilities increased by $32,108 when compared to June 30, 2010.  This is primarily due a $2,539,831 decrease in current maturities of notes payable partially offset by a $1,915,599 increase in accounts payable as of June 30, 2011, when compared to June 30, 2010.

Long term notes payables decreased by $164,430 as of June 30, 2011, when compared to December 31, 2010 and decreased by $439,985 when compared to June 30, 2010.  The balance of the long term notes payable as of June 30, 2011 was $5,957,795.

Total stockholder’s equity was $34,895,550 as of June 30, 2011, which is an increase of $1,246,532 when compared to December 31, 2010.  This is primarily due the increase in retained earnings of $2,191,313 when compared to December 31, 2010.  Total stockholder’s equity increased by $768,864 when compared to June 30, 2010.  This is primarily due the increase in retained earnings by $2,860,586  as of June 30, 2011, when compared to June 30, 2010.

We previously held significant portions of our assets in marketable securities. During the fourth quarter of 2010, we converted certain securities to cash and cash equivalents in order to ensure we had easy access to capital to capitalize on the opportunities we see ahead for our business.  All of our marketable securities are classified as available-for-sale on our balance sheet.  All of these securities are stated thereon at market value as of the end of the applicable period. Gains and losses on the portfolio are determined by the specific identification method.

We anticipate being able to fund the Company’s foreseeable liquidity requirements internally. 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.

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4.    CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

As of June 30, 2011, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial and Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial and Accounting Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of June 30, 2011 in ensuring that information required to be disclosed by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the Exchange Act rules and forms due to the material weaknesses described in our Form 10-K filed on March 31, 2011.   As a result, we performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management believes the consolidated financial statements included in this Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  

PART II — OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS.

None.

ITEM 1A.    RISK FACTORS.

Not applicable.

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

(c)           PURCHASES OF THE COMPANY’S SECURITIES

Period	(a) Total Numbers of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)	(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs*	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs*
April 1, 2011 to April 30, 2011	6,000	9.82	6,000	198,754
May 1, 2011 to May 31, 2011	7,000	9.37	7,000	191,754
June 1, 2011 to June 30, 2011	0	—	0	191,754
Total	13,000	9.60	13,000	191,754

*On January 1, 2011, the Company approved a new share repurchase program for up to 250,000 shares with a plan expiration date of one year from the date of the first purchase. 

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.    REMOVED AND RESERVED.

ITEM 5.    OTHER INFORMATION.

None.

ITEM 6.    EXHIBITS.

Exhibit Number	Description of Document
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.
101	Interactive Data Files.

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SIGNATURES

In accordance with 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.
	(Registrant)
Date:  August 15,  2011	By:	/s/ Julie Smolyansky
		Julie Smolyansky
		Chief Executive Officer, President  and Director
Date: August 15, 2011	By:	/s/ Edward P. Smolyansky
		Edward P. Smolyansky
		Chief Financial and Accounting  Officer and Treasurer

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EXHIBIT INDEX

Exhibit Number	Description of Document
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.
101	Interactive Data Files.

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