Lifeway Foods Reports Record Sales Increase of 7%

Lifeway Foods, Inc. (LWAY 11.14, +0.14, +1.27%), makers of the nutritious, probiotic dairy beverage, Kefir, has reported financial results for the second quarter ended June 30, 2010. In addition, the company announced an exclusive, nationwide distribution agreement with Whole Foods to bring three flavors of their new BioKefir(TM) drink to all store locations.

Financial Highlights for Second Quarter 2010

Sales increased more than 7% to $15,546,556

Increased marketing fueling organic growth

Working capital increased more than 11% to $8,682,934

Other Recent Highlights

Signed a 90-day exclusive distribution agreement with Whole Foods to bring three flavors of new BioKefir to store locations nationwide

Paid outstanding debt notes totaling approximately $850,000 on August 5th, six months ahead of schedule, due to strong cash flow

Purchased 101,476 shares during the second quarter, due to strong cash flow

For the quarter, ended June 30, 2010, total sales increased more than seven percent to $15,546,556 from $14,479,429 during the same period a year ago. Total net income was $1,184,504, or $0.07 per share, compared to $2,531,905, or $0.15 per share, in the same period in 2009. This decrease in net income, of approximately 53 percent, is due largely to disallowed research and development credits from 2007 and 2008 that resulted in approximately $220,000 in additional taxes that were paid in the 2010-second quarter and represent a non-recurring expense.

Sales increased by $3,295,206, (approximately 12%) to $31,510,715 during the six-month period ended June 30, 2010 from $28,215,509 during the same six-month period in 2009. This increase is primarily attributable to increased sales and awareness of Lifeway's flagship line, Kefir, as well as Lifeway's kids Kefir drink, ProBugs(R).

"We are pleased with our continued growth in sales as it was purely organic and not the result of new distribution," said Edward Smolyansky, Lifeway Food Inc.'s chief financial officer. "The decrease in net income was primarily driven by three factors including higher conventional milk prices, which rose about 45% from last years second quarter record lows, the payment of past taxes from disallowed R&D unit credits, and our increased advertising and marketing initiatives. We believe our marketing program is building greater awareness of the health benefits of Kefir, and is driving demand for Lifeway's flagship line, as well as ProBugs(TM) Organic Kefir for kids."

Cost of goods sold as a percentage of sales was approximately 61 percent, compared to approximately 58 percent during the same period in 2009. The increase was primarily due to a 45 percent rise in the costs for conventional milk, our largest raw material, when compared to the second quarter 2009. However, the increase represents a return to more normalized levels from the historically low prices a year ago. Gross profit decreased approximately two percent during the second quarter compared with the same period in 2009.

Operating expenses as a percentage of sales were approximately 25 percent, compared to about 21 percent during the same period in 2009. This increase is primarily attributable to increased advertising and marketing expenditures. The company also had expenses of approximately $100,000 related tot the development of it's new BioKefir(TM) product line.

Total operating income decreased by $1,000,310 (approximately 32 percent) to $2,154,337, from $3,154,647 during the same period a year ago.

Net cash provided by operating activities was $2,271,542 during the six months ended June 30, 2010, which is a decrease of $1,119,173 when compared to the same period in 2009.

Interest expense during the second quarter 2010 decreased to $80,164 compared to $110,090 during the same period a year ago. This lower interest expense is primarily due to a reduction of principal in the note payable related to the February 6, 2009 Fresh Made acquisition.

Provision for income taxes for the second quarter 2010 was $1,029,688, or a 47 percent effective tax rate, compared to $623,918, or a 20 percent effective tax rate, during the same period in 2009. In addition to the higher rate, the company's tax expense was higher due to disallowed research and development credits from 2007 and 2008 that resulted in approximately $220,000 in additional taxes being paid in the 2010-second quarter.

During the second quarter 2010, Lifeway Foods continued to strengthen its balance sheet. The company's working capital increased more than 11 percent to $8,682,934, from $7,800,056 during the same period a year ago. The company's current ratio remains strong at 2.0 to 1. In addition, the company reported that it paid off approximately $850,000 of its notes payable from its strong cash flow, six months ahead of schedule on August 5, 2010.

Additionally, the company reported that it repurchased 101,476 shares during the 2010-second quarter and has approximately 170,000 shares remaining in its current buy-back program. The stock buy-backs were made because of the company's strong cash flow.

"We are encouraged about our progress in the third quarter, especially given the tough economic environment. To that end, we are excited about our exclusive product launch with Whole Foods as they begin to carry three flavors of our BioKefir in their stores nationwide. Whole Foods will have a 90-day exclusive to this product, and we expect to begin shipping by the end of August," Smolyansky said.

About Lifeway Foods

Lifeway, recently named Fortune Small Business' 97th Fastest Growing Small Business, and one of only 4 companies to ever be named to the list four straight years in a row, is America's leading supplier of the cultured dairy product known as kefir, and now America's only supplier of Organic Kefir. Lifeway Kefir is a dairy beverage that contains Lifeway's exclusive 10 Live and Active probiotic cultures. While most regular yogurt only contains two or three of these "friendly" cultures, Lifeway kefir products offer more nutritional benefits. Lifeway offers 12 different flavors of its Kefir beverage, Organic Kefir and SoyTreat (a soy based kefir). Lifeway recently introduced a series of innovative new products such as pomegranate kefir, Greek-style kefir, a children's line of organic kefir products called ProBugs (TM) in a no-spill pouch in kid-friendly flavors like Orange Creamy Crawler and Sublime Slime Lime, and a line of organic whole milk kefir. Lifeway also produces a line of products marketed in US Hispanic communities, called La Fruta, Drinkable Yogurt (yogurt drinks distinct from kefir). In addition to its line of Kefir products, the company produces a variety of cheese products and recently introduced a line of organic pudding called It's Pudding!

Live conference calls will now be on an annual basis to discuss fiscal full year results. For more information, contact Lifeway Foods, Inc. at (847) 967-1010 or e-mail at [email protected] and visit .

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