10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:  March 31, 2012

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 preceeding 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 or a smaller reporting company. See the definitions 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  May 8, 2012, the issuer had  16,379,417 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.	20
ITEM 4.	CONTROLS AND PROCEDURES.	20
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.	21
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

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

March 31, 2012 and 2011 (Unaudited) and December 31, 2011

	(Unaudited)
	March 31,						December 31,
	2012			2011			2011
ASSETS
Current assets
Cash and cash equivalents	$	1,156,539		$	2,075,791		$	1,115,150
Investments		1,723,836			1,314,382			1,695,044
Certificates of deposits in financial institutions		300,000			250,000			300,000
Inventories		5,205,457			4,752,054			4,954,475
Accounts receivable, net of allowance for doubtful accounts and discounts		8,484,371			8,346,560			7,950,276
Prepaid expenses and other current assets		39,880			126,919			79,630
Other receivables		155,937			74,879			224,204
Deferred income taxes		357,963			368,176			338,690
Refundable income taxes		---			---			41,316
Total current assets		17,423,983			17,308,761			16,698,785
Property and equipment, net		15,031,364			15,129,655			15,198,822
Intangible assets
Goodwill and other non amortizable brand assets		14,068,091			14,068,091			14,068,091
Other intangible assets, net of accumulated amortization of $3,276,645 and $2,500,066 at March 31, 2012 and 2011 and 3,087,940 at December 31, 2011, respectively		5,029,355			5,805,934			5,218,060
Total intangible assets		19,097,446			19,874,025			19,286,151
Other Assets
Long-term accounts receivable net of current portion		276,050			---			289,550
	$	51,828,843		$	52,312,441		$	51,473,308
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Checks written in excess of bank balances	$	333,446		$	1,067,073		$	592,040
Current maturities of notes payable		789,933			2,364,774			1,540,716
Accounts payable		4,597,466			3,781,059			4,386,239
Accrued expenses		755,187			595,841			553,725
Accrued income taxes		279,402			430,246			---
Total current liabilities		6,755,434			8,238,993			7,072,720
Notes payable		5,363,750			5,995,558			5,539,836
Deferred income taxes		3,394,957			3,332,473			3,503,595
Total liabilities		15,514,141			17,567,024			16,116,151
Stockholders' equity
Common stock, no par value; 20,000,000 shares authorized; 17,273,776 shares issued; 16,390,417 shares outstanding at March 31, 2012; 17,273,776 shares issued; 16,443,809 shares outstanding at March 31, 2011; 17,273,776 shares issued; 16,409,317 shares outstanding at December 31, 2011		6,509,267			6,509,267			6,509,267
Paid-in-capital		2,032,516			2,032,516			2,032,516
Treasury stock, at cost		( 7,783,580	)		( 7,271,836	)		( 7,606,974	)
Retained earnings		35,526,285			33,501,646			34,431,296
Accumulated other comprehensive loss, net of taxes		30,214			( 26,176	)		( 8,948	)
Total stockholders' equity		36,314,702			34,745,417			35,357,157
Total liabilities and stockholders' equity	$	51,828,843		$	52,312,441		$	51,473,308

See accompanying notes to financial statements

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LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Income and Comprehensive Income

For the Years Three Months Ended March 31, 2012 and 2011 (Unaudited)

	(Unaudited)
	March 31,
	2012						2011
Sales	$	21,545,896					$	19,047,266
Less: discounts and allowances		( 2,148,699	)					( 1,743,363	)
Net sales		19,397,197			19,397,197			17,303,903			17,303,903
Cost of goods sold					12,238,341						9,345,717
Depreciation expense					399,045						376,513
Total cost of goods sold					12,637,386						9,722,230
Gross profit					6,759,811						7,581,673
Selling expenses					2,721,973						2,282,470
General and administrative					1,976,603						1,837,622
Amortization expense					188,705						195,959
Total operating expenses					4,887,281						4,316,051
Income from operations					1,872,530						3,265,622
Other income (expense):
Interest and dividend income					11,573						17,593
Rental income					3,000						---
Interest expense					( 50,186	)					(62,130	)
Gain (loss) on sale of investments, net					17,985						( 2,597	)
Loss on disposition of equipment											---
Other expense											---
Total other income (expense)					( 17,628	)					( 47,134	)
Income before provision for
income taxes					1,854,902						3,218,488
Provision for income taxes					759,913						1,292,717
Net income				$	1,094,989					$	1,925,771
Basic and diluted earnings
per common share					0.07						0.12
Weighted average number of
shares outstanding					16,397,998						16,489,954
COMPREHENSIVE INCOME
Net income				$	1,094,989					$	1,925,771
Other comprehensive income
(loss), net of tax:
Unrealized gains on
investments (net of tax)					29,000						15,451
Less reclassification adjustment
for (gains) losses included in
net income (net of taxes)					10,162						1,467
Comprehensive income				$	1,134,151					$	1,942,689

See accompanying notes to financial statements

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LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders' Equity

For the Three Months Ended March 31, 2012 and 2011 (Unaudited)

and for the Year Ended December 31, 2011

	Common Stock, No Par Value 20,000,000 Shares Authorized					# of Shares of											Accumulated Other 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, 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
Redemption of stock		---		( 127,340	)		127,340		---		---		( 1,181,428	)		---		---			( 1,181,428	)
Issuance of treasury stock for compensation		---		---			---		---		---		---			---		---			---
Other comprehensive income (loss):
Unrealized gains on securities, net of taxes		---		---			---		---		---		---			---		34,146			34,146
Net income for the year ended December 31, 2011		---		---			---		---		---		---			2,855,421		---			2,855,421
Balances at December 31, 2011		17,273,776		16,409,317			864,459	$	6,509,267	$	2,032,516	$	(7,606,974	)	$	34,431,296	$	(8,948	)	$	35,357,157
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		---		(92,848	)		92,848		---		---		(846,290	)		---		---			( 846,290	)
Issuance of treasury stock for compensation		---		---			---		---		---		---			---		---			---
Other comprehensive income (loss):
Unrealized gains on securities, net of taxes		---		---			---		---		---		---			---		16,918			16,918
Net income for the three months ended March 31, 2011		---		---			---		---		---		---			1,925,771		---			1,925,771
Balances at March 31, 2011		17,273,776		16,443,809			829,967	$	6,509,267	$	2,032,516	$	(7,271,836	)	$	33,501,646	$	(26,176	)	$	34,745,417
Balances at January 1, 2012		17,273,776		16,409,317			864,459		6,509,267		2,032,516		(7,606,974	)		34,431,296		(8,948	)	$	35,357,157
Redemption of stock		---		(18,900	)		18,900		---		---		(176,606	)		---		---			(176,606	)
Other comprehensive income (loss):
Unrealized gains on securities, net of taxes		---		---			---		---		---		---			---		39,162			39,162
Net income for the three months ended March 31, 2012		---		---			---		---		---		---			1,094,989		---			1,094,989
Balances at March 31, 2012		17,273,776		16,390,417			883,359	$	6,509,267	$	2,032,516	$	(7,783,580	)	$	35,526,285	$	30,214		$	36,314,702

See accompanying notes to financial statements

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LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2012 and 2011 (Unaudited)

	March 31,
	2012			2011
Cash flows from operating activities:
Net income	$	1,094,989		$	1,925,771
Adjustments to reconcile net income to net
cash flows from operating activities, net of acquisition:
Depreciation and amortization		587,750			572,472
Loss (gain) on sale of investments, net		( 17,985	)		2,597
Loss on disposition of equipment					---
Impairment of investments					---
Deferred income taxes		( 185,805	)		( 119,129	)
Treasury stock issued for compensation					---
Bad Debt Expense		6,384			20,000
(Increase) decrease in operating assets:
Accounts receivable		( 526,979	)		( 1,573,284	)
Other receivables		68,267			29,801
Inventories		( 250,982	)		( 766,680	)
Refundable income taxes		41,316			906,748
Prepaid expenses and other current assets		39,750			31,396
Increase (decrease) in operating liabilities:
Accounts payable		211,227			( 402,422	)
Accrued expenses		201,462			86,382
Income taxes payable		279402			430,246
Net cash provided by operating activities		1,548,796			1,143,898
Cash flows from investing activities:
Purchases of investments		( 318,123	)		( 445,049	)
Proceeds from sale of investments		404,028			234,388
Investments in certificates of deposits					---
Proceeds from redemption of certificates of deposit					---
Purchases of property and equipment		( 231,243	)		( 353,455	)
Net cash (used in) provided by investing activities		(145,338	)		( 564,116	)
Cash flows from financing activities:
Proceeds of note payable					---
Checks written in excess of bank balances		( 258,594	)		( 274,137	)
Purchases of treasury stock		( 176,606	)		( 846,290	)
Repayment of notes payable		( 926,869	)		( 613,503	)
Net cash used in financing activities		(1,362,069	)		(1,733,930	)
Net (decrease) increase in cash and cash equivalents		41,389			(1,154,148	)
Cash and cash equivalents at the beginning of the period		1,115,150			3,229,939
Cash and cash equivalents at the end of the period	$	1,156,539		$	2,075,791

See accompanying notes to financial statements

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LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

March 31, 2012 and 2011

and December 31, 2011

Note 1 – NATURE OF BUSINESS

Lifeway Foods, Inc. (the “Company” or “Lifeway”) 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 on the East Coast through local food stores.

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, 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.

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.

Customer Concentration

Sales are predominately to companies in the retail food industry, located within the United States of America. Two major customers accounted for approximately 31 percent and 29 percent of gross sales for the three months ended March 31, 2012 and 2011, respectively. These customers accounted for approximately 30 percent, 27 percent and 20 percent of accounts receivable as of March 31, 2012, March 31, 2011 and December 31, 2011, respectively.

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LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

March 31, 2012 and 2011

and December 31, 2011

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. Balances expected to be paid beyond one year are classified as long-term.

Accounts receivable are recorded at invoice amounts, and reduced to their estimated net realizable value by recognition of an allowance for doubtful accounts and discounts. The Company’s estimate of the allowances for doubtful accounts and 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

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LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

March 31, 2012 and 2011

and December 31, 2011

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 and discounts for financial statement purposes.

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 and 2011 when filed. 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.

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LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

March 31, 2012 and 2011

and December 31, 2011

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

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 three months ended March 31, 2012 and 2011 total advertising expenses were $755,666 and $829,345, 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 three months ended March 31, 2012 and 2011, diluted and basic earnings per share were the same, as the effect of dilutive securities options outstanding was not significant.

Reclassification

Certain amounts in the 2011 quarter financial statements have been reclassified to conform with the current quarter presentation which have no effect on net income or stockholder's equity.

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LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

March 31, 2012 and 2011

and December 31, 2011

Note 3 – INTANGIBLE ASSETS

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

	March 31, 2012				March 31, 2011				December 31, 2011
	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		1,666,438		4,504,200		1,166,160		4,504,200		1,546,671
Lease acquisition		87,200		87,200		87,200		81,750		87,200		87,200
Customer relationship		985,000		465,135		985,000		383,056		985,000		444,618
Trade names		2,248,000		766,068		2,248,000		621,100		2,248,000		728,601
Formula		438,000		248,200		438,000		204,400		438,000		237,250
	$	8,306,000	$	3,276,645	$	8,306,000	$	2,500,066	$	8,306,000	$	3,087,940

Amortization expense is expected to be approximately the following for the 12 months ending March 31:

2013	$	743,954
2014		711,367
2015		711,367
2016		711,367
2017		682,167
Thereafter		1,469,133
	$	5,029,355

Amortization expense during the three months ended March 31, 2012 and 2011 was $188,705 and 195,959, respectively.

Note 4 – INVESTMENTS

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

March 31, 2012	Cost		Unrealized Gains		Unrealized Losses		Fair Value
Equities	$	525,657	$	77,348	$	(3,519)	$	599,486
Mutual Funds		56,840		959		(105)		57,694
Preferred Securities		189,452		10,950		(5,152)		195,250
Corporate Bonds		870,671		11,312		(10,577)		871,406
Total	$	1,642,620	$	100,569	$	(19,353)	$	1,723,836

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LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

March 31, 2012 and 2011

and December 31, 2011

Note 4 – INVESTMENTS – Continued

March 31, 2011	Cost		Unrealized Gains		Unrealized Losses		Fair Value
Equities	$	261,472	$	6,227	$	(37,440)	$	230,259
Mutual Funds		103,346		1,902		(798)		104,450
Preferred Securities		203,514		---		(12,984)		190,530
Corporate Bonds		792,379		3,941		(7,177)		789,143
Total	$	1,360,711	$	12,070	$	(58,399)	$	1,314,382

December 31, 2011	Cost		Unrealized Gains		Unrealized Losses		Fair Value
Equities	$	682,569	$	55,244	$	(23,211)	$	714,602
Mutual Funds		64,563		3,275		(713)		67,125
Preferred Securities		64,452		---		(17,702)		46,750
Corporate Bonds		899,298		1,019		(33,750)		866,567
Total	$	1,710,882	$	59,538	$	(75,376)	$	1,695,044

Proceeds from the sale of investments were $400,268 and $234,388 for the three months ended March 31, 2012 and 2011, respectively.

Gross gains of $22,349 and $15,652 and gross losses of $4,364 and $18,249 were realized on these sales during the three months ended March 31, 2012 and 2011 respectively.

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 March 31, 2012 and 2011 December 31, 2011:

	Less Than 12 Months				12 Months or Greater				Total
March 31, 2012	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Equities	$	20,346	$	(1,535)	$	3,184	$	(1,984)	$	23,530	$	(3,519)
Mutual Funds		---		---		3,073		(105)		3,073		(105)
Preferred Securities		---		---		59,300		(5,152)		59,300		(5,152)
Corporate Bonds		262,923		(10,577)		---		---		262,923		(10,577)
	$	283,269	$	(12,112)	$	65,557	$	(7,241)	$	348,826	$	(19,353)

	Less Than 12 Months				12 Months or Greater				Total
March 31, 2011	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Equities	$	163,063	$	(7,801)	$	25,270	$	(29,639)	$	188,333	$	(37,440)
Mutual Funds		20,124		(680)		5,824		(118)		25,948		(798)
Preferred Securities		---		---		190,530		(12,984)		190,530		(12,984)
Corporate Bonds		409,750		(7,177)		---		---		409,750		(7,177)
	$	592,937	$	(15,658)	$	221,624	$	(42,741)	$	814,561	$	(58,399)

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LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

March 31, 2012 and 2011

and December 31, 2011

Note 4 – INVESTMENTS – Continued

	Less Than 12 Months				12 Months or Greater				Total
December 31, 2011	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Equities	$	176,966	$	(23,211)		—		—	$	176,966	$	(23,211)
Mutual Funds		—		—		10,585		(713)		10,585		(713)
Preferred Securities		—		—		46,750		(17,702)		46,750		(17,702)
Corporate Bonds		626,292		(24,000)		90,250		(9,750)		716,542		(33,750)
	$	803,258	$	(47,211)	$	147,585	$	(28,165)	$	950,843	$	(75,376)

Equities, Mutual Funds, Preferred Securities, and Corporate Bonds -The Company's investments in equity securities, mutual funds, preferred securities, and corporate bonds consist of investments in common stock, preferred stock and debt securities of companies in various industries. As of March 31, 2012, there were six equity securities, two mutual fund securities, one preferred security, and four 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 did not consider any material investments to be other-than-temporarily impaired at March 31, 2012.

Note 5 – INVENTORIES

Inventories consist of the following:

	March 31,				December 31,
	2012		2011		2011
Finished goods	$	2,091,004	$	1,959,323	$	1,976,050
Production supplies		2,082,194		1,637,602		2,042,611
Raw materials		1,032,259		1,155,129		935,814
Total inventories	$	5,205,457	$	4,752,054	$	4,954,475

Note 6 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

	March 31,				December 31,
	2012		2011		2011
Land	$	1,178,160	$	1,178,160	$	1,178,160
Buildings and improvements		11,656,233		11,367,274		11,633,077
Machinery and equipment		14,777,420		14,006,251		14,697,024
Vehicles		1,347,228		1,073,745		1,334,628
Office equipment		404,905		374,564		383,099
Construction in process		111,039		---		17,410
		29,474,985		27,999,994		29,243,398
Less accumulated depreciation		14,443,621		12,870,339		14,044,576
Total property and equipment	$	15,031,364	$	15,129,655	$	15,198,822

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LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

March 31, 2012 and 2011

and December 31, 2011

Note 6 – PROPERTY AND EQUIPMENT - Continued

Depreciation expense during the three months ended March 31, 2012 and 2011 was $399,045 and $376,513, respectively.

Note 7 – ACCRUED EXPENSES

Accrued expenses consist of the following:

	March 31,				December 31,
	2012		2011		2011
Accrued payroll and payroll taxes	$	490,137	$	350,531	$	209,395
Accrued property tax		250,342		203,933		323,885
Other		14,708		71,377		20,445
	$	755,187	$	595,841	$	553,725

Note 8 – NOTES PAYABLE

Notes payable consist of the following:

	March 31,				December
	2012		2011		2011
Note payable to Private Bank in monthly installments of $42,222, plus variable interest rate, currently at 2.7963%, with a balloon payment of $5,066,667 due February 6, 2014. Collateralized by substantially all assets of the Company.	$	5,745,556	$	6,502,222	$	5,914,445
Line of credit with Private Bank at variable interest rate, currently at 3.25%. 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.		250,000		---		1,000,000
Line of credit with Morgan Stanley for borrowings up to $2.8 million at variable interest rate, currently at 3.00% due on demand. Collateralized by investments, cash and CD’s.		---		1,858,110		---
Notes payable to Ford Credit Corp. payable in monthly installments of $1,778.23 at 5.99%, due July 2015, secured by transportation equipment.		64,200		---		68,509
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.		93,927		---		97,598
Total notes payable		6,153,683		8,360,332		7,080,552
Less current maturities		789,933		2,364,774		1,540,716
Total long-term portion	$	5,363,750	$	5,995,558	$	5,539,836

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LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

March 31, 2012 and 2011

and December 31, 2011

Note 8 – NOTES PAYABLE – Continued

In accordance with the Private Bank agreements referenced above, the Company is subject to minimum fixed charged ratio and tangible net worth thresholds. At March 31, 2012, the Company was in compliance with these covenants.

Maturities of notes payables are as follows:

For the Period Ended March 31,
2013	$	789,933
2014		5,274,365
2015		37,815
2016		25,826
2017		20,103
Thereafter		5,641
Total	$	6,153,683

Note 9 – COMMITMENTS AND CONTINGENCIES

The Company leases four stores for its Starfruit subsidiary. Total expense for these leases was approximately $58,264, $58,039 and $240,723 for three months ended March 31, 2012, 2011, respectively. The Company is also responsible for additional rent equal to real estate taxes and other operating expenses. Future annual minimum base rental payments for the leases as of March 31, 2012 are approximately as follows:

	$	---
2013		182,812
2014		100,969
2015		44,468
2016		45,802
2017		48,590
Thereafter		95,062
Total	$	517,703

Note 10 – PROVISION FOR INCOME TAXES

The provision for income taxes consists of the following:

	For the Three Months Ended
	March 31,
	2012			2011
Current:
Federal	$	633,372		$	1,005,605
State and local		312,346			406,241
Total current		945,718			1,411,846
Deferred		(185,805	)		(119,129	)
Provision for income taxes	$	759,913		$	1,292,717

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LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

March 31, 2012 and 2011

and December 31, 2011

Note 10 – PROVISION FOR INCOME TAXES - Continued

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

	For the Three Months Ended March 31,
	2012				2011
	Amount		Percentage		Amount		Percentage
Federal income tax expense computed at the statutory rate	$	630,667		34.0%	$	1,094,286		34.0%
State and local tax expense, net		215,169		11.6%		305,756		9.5%
Permanent differences		(52,493)		(2.8%)		(58,415)		(1.8%)
Change in tax estimate		(33,430)		(1.8%)		(48,910)		(1.5%)
Provision for income taxes	$	759,913		41.0%	$	1,292,717		40.2%

Amounts for deferred tax assets and liabilities are as follows:

	March 31,						December 31,
	2012			2011			2011
Non-current deferred tax assets (liabilities) arising from:
Temporary differences -
Accumulated depreciation and amortization from purchase accounting adjustments	$	(3,562,647	)	$	(3,604,041	)	$	(3,671,285	)
Capital loss carry-forwards		167,690			271,568			167,690
Total non-current net deferred tax liabilities		(3,394,957	)		(3,332,473	)		(3,503,595	)
Current deferred tax assets arising from:
Unrealized losses (gain) on investments		(35,329	)		24,384			6,890
Impairment of investments		---			---			15,673
Inventory		232,324			212,089			220,408
Allowance for doubtful accounts and discounts		4,350			131,703			4,350
Allowance for promotions		65,249
Capital  loss carry-back		91,369			---			91,369
Total current deferred tax assets		357,963			368,176			338,690
Net deferred tax liability	$	(3,036,994	)	$	(2,964,297	)	$	(3,164,905	)

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LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

March 31, 2012 and 2011

and December 31, 2011

Note 11 – SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest and income taxes are as follows:

	For the Three Months Ended March 31,
	2012		2011
Interest	$	64,172	$	58,624
Income taxes	$	625,055	$	200,000

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, 2011 and at March 31, 2012 and 2011, there were no stock options outstanding or exercisable. There were approximately 940,000 shares available for issuance under the Plan at March 31, 2012.

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:

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.

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LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

March 31, 2012 and 2011

and December 31, 2011

Note 13 – FAIR VALUE MEASUREMENTS - Continued

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 2012 and 2011. There were no other assets or liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2012, March 31, 2011 or December 31, 2011.

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.

In September 2011 the FASB issued ASC Topic 350, Intangibles – Goodwill and Other. FASB ASC Topic 250 amends the existing standards related to annual and interim goodwill impairment tests by allowing companies to consider qualitative factors to determine whether it is more likely or not that the fair value of a reporting unit is less than its carrying amount before performing the two step impairment review process. It also amends the examples of events or circumstances that would be considered in a goodwill impairment evaluation. The amendment is effective for interim periods and fiscal years beginning after December 15, 2011; however, early adoption is permitted. The adoption of this new accounting guidance is not expected to have a material effect on the Company’s financial statements or results of operations.

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

Comparison of Quarter Ended March 31, 2012 to Quarter Ended March 31, 2011

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, 2011.

Results of Operations

Total consolidated gross sales increased by $2,498,630 (approximately 13%) to $21,545,896 during the three-month period ended March 31, 2012 from $19,047,266 during the same three-month period in 2011.  This increase is primarily attributable to increased sales and awareness of the Company’s flagship line, Kefir, as well as ProBugs®Organic Kefir for kids and BioKefir™.  In addition, Lifeway’s Frozen Kefir line, which was launched in April 2011, contributed approximately $700,000 to sales during the first quarter of 2012.

Total consolidated net sales increased by $2,093,294 (approximately 12%) to $19,397,197 during the three-month period ended March 31, 2012 from $17,303,903 during the same three-month period in 2011.  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 63% during the first quarter of 2012, compared to approximately 54% during the same period in 2011. The increase was primarily attributable to a 30% increase in freight expense and higher fuel costs during the first quarter of 2012 when compared to the same period in 2011 and the increased cost of conventional and organic milk, the Company’s largest raw material.  The total cost of milk was approximately 20% higher during the first quarter 2012 when compared to the same period in 2011.

Total operating expenses increased $571,230 (approximately 13%) to $4,887,281  during the first quarter of 2012, from $4,316,051 during the same period in 2011. This increase was primarily attributable to increased selling expenses of $439,503 and partially offset by a decrease in amortization expenses of $7,254. This increase is directly attributable to increases in marketing and advertising of the Company’s flagship line, Kefir, as well as ProBugsOrganic Kefir for kids, BioKefir and Lifeway’s Frozen Kefir.

Total operating income decreased by $1,393,092 (approximately 43%) to $1,872,530 during the first quarter of 2012, from $3,265,622 during the same period in 2011.

Income tax expense was $759,913, or a 41% effective tax rate for the first quarter of 2012 compared to an income tax expense of $1,292,717, or a 40% effective tax rate during the same period in 2011.

Total net income was $1,094,989 or $0.07 per diluted share for the three-month period ended March 31, 2012 compared to $1,925,771 or $0.12 per diluted share in the same period in 2011.

Liquidity and Capital Resources

Sources and Uses of Cash

Net cash provided by operating activities was $1,548,796 during the three-months ended March 31, 2012 compared to net cash provided by operating activities of $1,143,898 during the same period in 2011.  This increase is primarily attributable to the increase in operating assets of $1,046,305.

Net cash used in investing activities was $145,338 during the three-months ended March 31, 2012 compared to net cash used in investing activities of $564,116 in the same period in 2011. This decrease is primarily due to a increase in proceeds from sale of investments of $169,640compared to 2011.

The Company had a net increase in cash and cash equivalents of $41,389 during the three month period ended March 31, 2012 compared to a net decrease in cash and cash equivalents of $1,154,148 during the same period in 2011.  The Company had cash and cash equivalents of $1,156,539 as of March 31, 2012 compared to cash and cash equivalents of $2,075,791 as of March 31, 2011.

Assets and Liabilities

Total assets were $51,828,844 as of March 31, 2012, which is a decrease of $483,597 when compared to March 31, 2011.  This is primarily due to a decrease in intangible assets of $776,579 as of March 31, 2012 when compared to March 21, 2011.

Total current liabilities were $6,755,434 as of March 31, 2011, which is a decrease of $1,483,559 when compared to March 31, 2011. This is primarily due to a $1,574,841 decrease in current maturities of notes payable.

Notes payable decreased by $631,808 as of March 31, 2012, when compared to March 31, 2011.  The balance of the notes payable as of December 31, 2011 was $5,363,750.

- 19 -

Total stockholder’s equity was $36,314,702 as of March 31, 2012, which is an increase of $1,569,285 when compared to March 31, 2011.  This is primarily due to an increase in retained earnings of $2,024,639 when compared to March 31, 2012.

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.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4.    CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure material information required to be disclosed in our reports that 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 our management, including our Chief Executive Officer and Chief Financial and Accounting Officer, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, we recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

As of March 31, 2012, 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 March 31, 2012 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 weakness previously described in the Company’s Annual Report on Form 10-K for the period ended December 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.

Remediation of Material Weakness

In the Company’s Form 10-K for the period ended December 31, 2011, management identified the following a material weakness relating to incomplete and undocumented systems for tracking current programs for advertising and sales promotional discounts with current customers.

The Company, in an ongoing effort to continue to improve its control environment, began a search in the fourth quarter of 2011 for a controller with the appropriate skills, training and experience around whom the Company plans to build additional controls, including among other things further segregation of duties and additional monitoring controls. An appropriate candidate was hired in March 2012. As of the filing of this Form 10-Q, the controller has been integrated  into the business of the Company and the Company’s internal controls over financial reporting.  The resulting changes to the Company’s internal controls over financial reporting include (i) increasing the frequency of general ledger activities to a current and real time basis, and (ii) adopting and implementing monthly reconciliations.  The Company believes that these changes will remediate the material weakness identified above.

Management is committed to continuous improvement of the Company’s internal control processes. Under the direction of the Audit Committee, management will continue to review and make changes it deems necessary to the overall design of the Company’s internal control over financial reporting, including implementing further improvements in policies and procedures and taking additional measures to address any control deficiencies.

Changes in Internal Control over Financial Reporting

Except as described above, there have been no changes during the quarter ended March 31, 2012 in the Company’s internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rules 13a-15(d) and 15d-15(d) that have material affected, or are reasonably likely to materially affect, our internal controls over our financial reporting.

- 20 -

PART II — OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS.

Lifeway is not party to any material pending legal proceedings.  Lifeway is from time to time engaged in litigation matters arising in the ordinary course of business none of which presently is expected to have a material adverse effect on its business results or operations.

ITEM 1A.    RISK FACTORS.

Not applicable. 

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

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

January 1 to January 31, 2012	9,500	$9.08	9,500	160,754
February 1 to February 29, 2012	2,500	$9.33	2,500	197,500
March 1 to March 31, 2012	6,900	$9.39	6,900	190,600
Total	18,900	$9.27	18,900	190,600

On May 7, 2010, the Company established a share repurchase program for up to 200,000 shares with a plan expiration date of one year from the date of the first purchase.  On January 20, 2011, the Company approved a share repurchase program for up to 250,000 shares with a plan expiration date of one year from the date of the first purchase. Lifeway repurchased 127,348 shares of the Company’s securities in 2011 pursuant to these programs at a total cost of $1,181,428.  As of the date of this filing these plans were both expired.  On February 6, 2012, the Company approved a new share repurchase program for up to 200,000 shares with a plan expiration date of one year from the date of the first purchase.

- 21 -

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.

- 22 -

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:  May 15, 2012	By:	/s/ Julie Smolyansky
		Julie Smolyansky
		Chief Executive Officer, President  and Director
Date:  May 15, 2012	By:	/s/ Edward P. Smolyansky
		Edward P. Smolyansky
		Chief Financial and Accounting  Officer and Treasurer

- 23 -

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.

- 24 -

EX-31.1

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;

4. The registrant’s other certifying officer(s) 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(s) 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 (or persons performing the equivalent functions):

(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:	May 15, 2012	By:	/s/ Julie Smolyansky
			Julie Smolyansky Chief Executive Officer, President and Director

EX-31.2

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, Edward P. 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;

4. The registrant’s other certifying officer(s) 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(s) 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 (or persons performing the equivalent functions):

(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:	May 15, 2012	By:	/s/ Edward P. Smolyansky
			Edward P. Smolyansky Chief Financial and Accounting Officer and Treasurer

EX-32.1

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 March 31, 2012 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:

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

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

Date:	May 15, 2012	By:	/s/ Julie Smolyansky
			Julie Smolyanky Chief Executive Officer, President and Director

EX-32.2

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

In connection with the Quarterly Report on Form 10-Q of Lifeway Foods, Inc. (the “Company”) for the period ended March 310, 2012 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 his knowledge:

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

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

Date:	May 15, 2012	By:	/s/ Edward P. Smolyansky
			Edward P. Smolyansky Chief Financial and Accounting Officer and Treasurer

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Intangible Assets

3 Months Ended

Mar. 31, 2012

Intangible Assets [Abstract]

Intangible Assets

Note 3 – INTANGIBLE ASSETS

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

	March 31, 2012				March 31, 2011				December 31, 2011
	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		1,666,438		4,504,200		1,166,160		4,504,200		1,546,671
Lease acquisition		87,200		87,200		87,200		81,750		87,200		87,200
Customer relationship		985,000		465,135		985,000		383,056		985,000		444,618
Trade names		2,248,000		766,068		2,248,000		621,100		2,248,000		728,601
Formula		438,000		248,200		438,000		204,400		438,000		237,250
	$	8,306,000	$	3,276,645	$	8,306,000	$	2,500,066	$	8,306,000	$	3,087,940

Amortization expense is expected to be approximately the following for the 12 months ending March 31:

2013	$	743,954
2014		711,367
2015		711,367
2016		711,367
2017		682,167
Thereafter		1,469,133
	$	5,029,355

Amortization expense during the three months ended March 31, 2012 and 2011 was $188,705 and 195,959, respectively.

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Summary Of Significant Accounting Policies

3 Months Ended

Mar. 31, 2012

Summary Of Significant Accounting Policies [Abstract]

Summary Of Significant Accounting Policies

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, 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.

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.

Customer Concentration

Sales are predominately to companies in the retail food industry, located within the United States of America. Two major customers accounted for approximately 31 percent and 29 percent of gross sales for the three months ended March 31, 2012 and 2011, respectively. These customers accounted for approximately 30 percent, 27 percent and 20 percent of accounts receivable as of March 31, 2012, March 31, 2011 and December 31, 2011, respectively.

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. Balances expected to be paid beyond one year are classified as long-term.

Accounts receivable are recorded at invoice amounts, and reduced to their estimated net realizable value by recognition of an allowance for doubtful accounts and discounts. The Company's estimate of the allowances for doubtful accounts and 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

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 and discounts for financial statement purposes.

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 and 2011 when filed. 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 three months ended March 31, 2012 and 2011 total advertising expenses were $755,666 and $829,345, 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 three months ended March 31, 2012 and 2011, diluted and basic earnings per share were the same, as the effect of dilutive securities options outstanding was not significant.

Reclassification

Certain amounts in the 2011 quarter financial statements have been reclassified to conform with the current quarter presentation which have no effect on net income or stockholder's equity.

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Consolidated Statements Of Financial Condition (USD $)	Mar. 31, 2012	Dec. 31, 2011	Mar. 31, 2011
ASSETS
Cash and cash equivalents	$ 1,156,539	$ 1,115,150	$ 2,075,791
Investments	1,723,836	1,695,044	1,314,382
Certificates of deposits in financial institutions	300,000	300,000	250,000
Inventories	5,205,457	4,954,475	4,752,054
Accounts receivable, net of allowance for doubtful accounts and discounts	8,484,371	7,950,276	8,346,560
Prepaid expenses and other current assets	39,880	79,630	126,919
Other receivables	155,937	224,204	74,879
Deferred income taxes	357,963	338,690	368,176
Refundable income taxes		41,316
Total current assets	17,423,983	16,698,785	17,308,761
Property and equipment, net	15,031,364	15,198,822	15,129,655
Intangible assets
Goodwill and other non amortizable brand assets	14,068,091	14,068,091	14,068,091
Other intangible assets, net of accumulated amortization of $3,276,645 and $2,500,066 at March 31, 2012 and 2011 and 3,087,940 at December 31, 2011, respectively	5,029,355	5,218,060	5,805,934
Total intangible assets	19,097,446	19,286,151	19,874,025
Other Assets
Long-term accounts receivable net of current portion	276,050	289,550
Total assets	51,828,843	51,473,308	52,312,441
LIABILITIES AND STOCKHOLDERS' EQUITY
Checks written in excess of bank balances	333,446	592,040	1,067,073
Current maturities of notes payable	789,933	1,540,716	2,364,774
Accounts payable	4,597,466	4,386,239	3,781,059
Accrued expenses	755,187	553,725	595,841
Accrued income taxes	279,402		430,246
Total current liabilities	6,755,434	7,072,720	8,238,993
Notes payable	5,363,750	5,539,836	5,995,558
Deferred income taxes	3,394,957	3,503,595	3,332,473
Total liabilities	15,514,141	16,116,151	17,567,024
Stockholders' equity
Common stock, no par value; 20,000,000 shares authorized; 17,273,776 shares issued; 16,390,417 shares outstanding at March 31, 2012; 17,273,776 shares issued; 16,443,809 shares outstanding at March 31, 2011; 17,273,776 shares issued; 16,409,317 shares outstanding at December 31, 2011	6,509,267	6,509,267	6,509,267
Paid-in-capital	2,032,516	2,032,516	2,032,516
Treasury stock, at cost	(7,783,580)	(7,606,974)	(7,271,836)
Retained earnings	35,526,285	34,431,296	33,501,646
Accumulated other comprehensive loss, net of taxes	30,214	(8,948)	(26,176)
Total stockholders' equity	36,314,702	35,357,157	34,745,417
Total liabilities and stockholders' equity	$ 51,828,843	$ 51,473,308	$ 52,312,441

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Consolidated Statements Of Cash Flows (USD $)	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Cash flows from operating activities:
Net income	$ 1,094,989	$ 1,925,771
Adjustments to reconcile net income to net cash flows from operating activities, net of acquisition:
Depreciation and amortization	587,750	572,472
Loss (gain) on sale of investments, net	(17,985)	2,597
Deferred income taxes	(185,805)	(119,129)
Bad Debt Expense	6,384	20,000
(Increase) decrease in operating assets:
Accounts receivable	(526,979)	(1,573,284)
Other receivables	68,267	29,801
Inventories	(250,982)	(766,680)
Refundable income taxes	41,316	906,748
Prepaid expenses and other current assets	39,750	31,396
Increase (decrease) in operating liabilities:
Accounts payable	211,227	(402,422)
Accrued expenses	201,462	86,382
Income taxes payable	279,402	430,246
Net cash provided by operating activities	1,548,796	1,143,898
Cash flows from investing activities:
Purchases of investments	(318,123)	(445,049)
Proceeds from sale of investments	404,028	234,388
Purchases of property and equipment	(231,243)	(353,455)
Net cash (used in) provided by investing activities	(145,338)	(564,116)
Cash flows from financing activities:
Checks written in excess of bank balances	(258,594)	(274,137)
Purchases of treasury stock	(176,606)	(846,290)
Repayment of notes payable	(926,869)	(613,503)
Net cash used in financing activities	(1,362,069)	(1,733,930)
Net (decrease) increase in cash and cash equivalents	41,389	(1,154,148)
Cash and cash equivalents at the beginning of the period	1,115,150	3,229,939
Cash and cash equivalents at the end of the period	$ 1,156,539	$ 2,075,791

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Nature Of Business

3 Months Ended

Mar. 31, 2012

Nature Of Business [Abstract]

Nature Of Business

Note 1 – NATURE OF BUSINESS

Lifeway Foods, Inc. (the "Company" or "Lifeway") 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 on the East Coast through local food stores.

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Consolidated Statements Of Financial Condition (Parenthetical) (USD $)	Mar. 31, 2012	Dec. 31, 2011	Mar. 31, 2011
Consolidated Statements Of Financial Condition [Abstract]
Accumulated amortization	$ 3,276,645	$ 3,087,940	$ 2,500,066
Common stock, no par value
Common stock, shares authorized	20,000,000	20,000,000	20,000,000
Common stock, shares issued	17,273,776	17,273,776	17,273,776
Common stock, shares outstanding	16,390,417	16,409,317	16,443,809

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Supplemental Cash Flow Information

3 Months Ended

Mar. 31, 2012

Supplemental Cash Flow Information [Abstract]

Supplemental Cash Flow Information

Note 11 – SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest and income taxes are as follows:

	For the Three Months Ended March 31,
	2012		2011
Interest	$	64,172	$	58,624
Income taxes	$	625,055	$	200,000

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Document And Entity Information	3 Months Ended
	Mar. 31, 2012	May 08, 2012
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2012
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q1
Entity Registrant Name	LIFEWAY FOODS INC
Entity Central Index Key	0000814586
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		16,379,417

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Stock Award And Stock Option Plans

3 Months Ended

Mar. 31, 2012

Stock Award And Stock Option Plans [Abstract]

Stock Award And Stock Option Plans

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, 2011 and at March 31, 2012 and 2011, there were no stock options outstanding or exercisable. There were approximately 940,000 shares available for issuance under the Plan at March 31, 2012.

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Consolidated Statements Of Income And Comprehensive Income (USD $)	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Consolidated Statements Of Income And Comprehensive Income [Abstract]
Sales	$ 21,545,896	$ 19,047,266
Less: discounts and allowances	(2,148,699)	(1,743,363)
Net sales	19,397,197	17,303,903
Cost of goods sold	12,238,341	9,345,717
Depreciation expense	399,045	376,513
Total cost of goods sold	12,637,386	9,722,230
Gross profit	6,759,811	7,581,673
Selling expenses	2,721,973	2,282,470
General and administrative	1,976,603	1,837,622
Amortization expense	188,705	195,959
Total operating expenses	4,887,281	4,316,051
Income from operations	1,872,530	3,265,622
Other income (expense):
Interest and dividend income	11,573	17,593
Rental income	3,000
Interest expense	(50,186)	(62,130)
Gain (loss) on sale of investments, net	17,985	(2,597)
Total other income (expense)	(17,628)	(47,134)
Income before provision for income taxes	1,854,902	3,218,488
Provision for income taxes	759,913	1,292,717
Net income	1,094,989	1,925,771
Basic and diluted earnings per common share	$ 0.07	$ 0.12
Weighted average number of shares outstanding	16,397,998	16,489,954
COMPREHENSIVE INCOME
Net income	1,094,989	1,925,771
Other comprehensive income (loss), net of tax:
Unrealized gains on investments (net of tax)	29,000	15,451
Less reclassification adjustment for (gains) losses included in net income (net of taxes)	10,162	1,467
Comprehensive income	$ 1,134,151	$ 1,942,689

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Property And Equipment

3 Months Ended

Mar. 31, 2012

Property And Equipment [Abstract]

Property And Equipment

Note 6 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

	March 31,				December 31,
	2012		2011		2011
Land	$	1,178,160	$	1,178,160	$	1,178,160
Buildings and improvements		11,656,233		11,367,274		11,633,077
Machinery and equipment		14,777,420		14,006,251		14,697,024
Vehicles		1,347,228		1,073,745		1,334,628
Office equipment		404,905		374,564		383,099
Construction in process		111,039		---		17,410
		29,474,985		27,999,994		29,243,398
Less accumulated depreciation		14,443,621		12,870,339		14,044,576
Total property and equipment	$	15,031,364	$	15,129,655	$	15,198,822

Depreciation expense during the three months ended March 31, 2012 and 2011 was $399,045 and $376,513, respectively.

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Inventories

3 Months Ended

Mar. 31, 2012

Inventories [Abstract]

Inventories

Note 5 – INVENTORIES

Inventories consist of the following:

	March 31,				December 31,
	2012		2011		2011
Finished goods	$	2,091,004	$	1,959,323	$	1,976,050
Production supplies		2,082,194		1,637,602		2,042,611
Raw materials		1,032,259		1,155,129		935,814
Total inventories	$	5,205,457	$	4,752,054	$	4,954,475

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Fair Value Measurements

3 Months Ended

Mar. 31, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

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:

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 2012 and 2011. There were no other assets or liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2012, March 31, 2011 or December 31, 2011.

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Commitments And Contingencies

3 Months Ended

Mar. 31, 2012

Commitments And Contingencies [Abstract]

Commitments And Contingencies

Note 9 – COMMITMENTS AND CONTINGENCIES

The Company leases four stores for its Starfruit subsidiary. Total expense for these leases was approximately $58,264, $58,039 and $240,723 for three months ended March 31, 2012, 2011, respectively. The Company is also responsible for additional rent equal to real estate taxes and other operating expenses. Future annual minimum base rental payments for the leases as of March 31, 2012 are approximately as follows:

	$	---
2013		182,812
2014		100,969
2015		44,468
2016		45,802
2017		48,590
Thereafter		95,062
Total	$	517,703

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Accrued Expenses

3 Months Ended

Mar. 31, 2012

Accrued Expenses [Abstract]

Accrued Expenses

Note 7 – ACCRUED EXPENSES

Accrued expenses consist of the following:

	March 31,				December 31,
	2012		2011		2011
Accrued payroll and payroll taxes	$	490,137	$	350,531	$	209,395
Accrued property tax		250,342		203,933		323,885
Other		14,708		71,377		20,445
	$	755,187	$	595,841	$	553,725

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Notes Payable

3 Months Ended

Mar. 31, 2012

Notes Payable [Abstract]

Notes Payable

Note 8 – NOTES PAYABLE

Notes payable consist of the following:

	March 31,				December
	2012		2011		2011
Note payable to Private Bank in monthly installments of $42,222, plus variable interest rate, currently at 2.7963%, with a balloon payment of $5,066,667 due February 6, 2014. Collateralized by substantially all assets of the Company.	$	5,745,556	$	6,502,222	$	5,914,445
Line of credit with Private Bank at variable interest rate, currently at 3.25%. 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.		250,000		---		1,000,000
Line of credit with Morgan Stanley for borrowings up to $2.8 million at variable interest rate, currently at 3.00% due on demand. Collateralized by investments, cash and CD's.		---		1,858,110		---
Notes payable to Ford Credit Corp. payable in monthly installments of $1,778.23 at 5.99%, due July 2015, secured by transportation equipment.		64,200		---		68,509
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.		93,927		---		97,598
Total notes payable		6,153,683		8,360,332		7,080,552
Less current maturities		789,933		2,364,774		1,540,716
Total long-term portion	$	5,363,750	$	5,995,558	$	5,539,836

In accordance with the Private Bank agreements referenced above, the Company is subject to minimum fixed charged ratio and tangible net worth thresholds. At March 31, 2012, the Company was in compliance with these covenants.

Maturities of notes payables are as follows:

For the Period Ended March 31,
2013	$	789,933
2014		5,274,365
2015		37,815
2016		25,826
2017		20,103
Thereafter		5,641
Total	$	6,153,683

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Provision For Income Taxes

3 Months Ended

Mar. 31, 2012

Provision For Income Taxes [Abstract]

Provision For Income Taxes

Note 10 – PROVISION FOR INCOME TAXES

The provision for income taxes consists of the following:

	For the Three Months Ended
	March 31,
	2012			2011
Current:
Federal	$	633,372		$	1,005,605
State and local		312,346			406,241
Total current		945,718			1,411,846
Deferred		(185,805	)		(119,129	)
Provision for income taxes	$	759,913		$	1,292,717

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

	For the Three Months Ended March 31,
	2012				2011
	Amount		Percentage		Amount		Percentage
Federal income tax expense computed at the statutory rate	$	630,667		34.0%	$	1,094,286		34.0%
State and local tax expense, net		215,169		11.6%		305,756		9.5%
Permanent differences		(52,493)		(2.8%)		(58,415)		(1.8%)
Change in tax estimate		(33,430)		(1.8%)		(48,910)		(1.5%)
Provision for income taxes	$	759,913		41.0%	$	1,292,717		40.2%

Amounts for deferred tax assets and liabilities are as follows:

	March 31,						December 31,
	2012			2011			2011
Non-current deferred tax assets (liabilities) arising from:
Temporary differences -
Accumulated depreciation and amortization from purchase accounting adjustments	$	(3,562,647	)	$	(3,604,041	)	$	(3,671,285	)
Capital loss carry-forwards		167,690			271,568			167,690
Total non-current net deferred tax liabilities		(3,394,957	)		(3,332,473	)		(3,503,595	)
Current deferred tax assets arising from:
Unrealized losses (gain) on investments		(35,329	)		24,384			6,890
Impairment of investments		---			---			15,673
Inventory		232,324			212,089			220,408
Allowance for doubtful accounts and discounts		4,350			131,703			4,350
Allowance for promotions		65,249
Capital  loss carry-back		91,369			---			91,369
Total current deferred tax assets		357,963			368,176			338,690
Net deferred tax liability	$	(3,036,994	)	$	(2,964,297	)	$	(3,164,905	)

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Consolidated Statements Of Changes In Stockholders' Equity (USD $)	Common Stock [Member]	Paid In Capital [Member]	Treasury Stock [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income (Loss), Net Of Tax [Member]	Total
Balance at Dec. 31, 2010	$ 6,509,267	$ 2,032,516	$ (6,425,546)	$ 31,575,875	$ (43,094)	$ 33,649,018
Balance, treasury stock, shares at Dec. 31, 2010			737,119
Balance, shares outstanding at Dec. 31, 2010	16,536,657
Balance, shares issued at Dec. 31, 2010	17,273,776
Redemption of stock, shares	(92,848)		92,848
Redemption of stock			(846,290)			(846,290)
Unrealized gains on securities, net of taxes					16,918	16,918
Net income				1,925,771		1,925,771
Balance at Mar. 31, 2011	6,509,267	2,032,516	(7,271,836)	33,501,646	(26,176)	34,745,417
Balance, treasury stock, shares at Mar. 31, 2011			829,967
Balance, shares issued at Mar. 31, 2011	17,273,776					17,273,776
Balance, shares outstanding at Mar. 31, 2011	16,443,809					16,443,809
Balance at Dec. 31, 2010	6,509,267	2,032,516	(6,425,546)	31,575,875	(43,094)	33,649,018
Balance, treasury stock, shares at Dec. 31, 2010			737,119
Balance, shares outstanding at Dec. 31, 2010	16,536,657
Balance, shares issued at Dec. 31, 2010	17,273,776
Redemption of stock, shares	(127,340)		127,340
Redemption of stock			(1,181,428)			(1,181,428)
Unrealized gains on securities, net of taxes					34,146	34,146
Net income				2,855,421		2,855,421
Balance at Dec. 31, 2011	6,509,267	2,032,516	(7,606,974)	34,431,296	(8,948)	35,357,157
Balance, treasury stock, shares at Dec. 31, 2011			864,459
Balance, shares issued at Dec. 31, 2011	17,273,776					17,273,776
Balance, shares outstanding at Dec. 31, 2011	16,409,317					16,409,317
Redemption of stock, shares	(18,900)		18,900
Redemption of stock			(176,606)			(176,606)
Unrealized gains on securities, net of taxes					39,162	39,162
Net income				1,094,989		1,094,989
Balance at Mar. 31, 2012	$ 6,509,267	$ 2,032,516	$ (7,783,580)	$ 35,526,285	$ 30,214	$ 36,314,702
Balance, treasury stock, shares at Mar. 31, 2012			883,359
Balance, shares issued at Mar. 31, 2012	17,273,776					17,273,776
Balance, shares outstanding at Mar. 31, 2012	16,390,417					16,390,417

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Investments

3 Months Ended

Mar. 31, 2012

Investments [Abstract]

Investments

Note 4 – INVESTMENTS

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

March 31, 2012	Cost		Unrealized Gains		Unrealized Losses		Fair Value
Equities	$	525,657	$	77,348	$	(3,519)	$	599,486
Mutual Funds		56,840		959		(105)		57,694
Preferred Securities		189,452		10,950		(5,152)		195,250
Corporate Bonds		870,671		11,312		(10,577)		871,406
Total	$	1,642,620	$	100,569	$	(19,353)	$	1,723,836

March 31, 2011	Cost		Unrealized Gains		Unrealized Losses		Fair Value
Equities	$	261,472	$	6,227	$	(37,440)	$	230,259
Mutual Funds		103,346		1,902		(798)		104,450
Preferred Securities		203,514		---		(12,984)		190,530
Corporate Bonds		792,379		3,941		(7,177)		789,143
Total	$	1,360,711	$	12,070	$	(58,399)	$	1,314,382

December 31, 2011	Cost		Unrealized Gains		Unrealized Losses		Fair Value
Equities	$	682,569	$	55,244	$	(23,211)	$	714,602
Mutual Funds		64,563		3,275		(713)		67,125
Preferred Securities		64,452		---		(17,702)		46,750
Corporate Bonds		899,298		1,019		(33,750)		866,567
Total	$	1,710,882	$	59,538	$	(75,376)	$	1,695,044

Proceeds from the sale of investments were $400,268 and $234,388 for the three months ended March 31, 2012 and 2011, respectively.

Gross gains of $22,349 and $15,652 and gross losses of $4,364 and $18,249 were realized on these sales during the three months ended March 31, 2012 and 2011 respectively.

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 March 31, 2012 and 2011 December 31, 2011:

	Less Than 12 Months				12 Months or Greater				Total
March 31, 2012	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Equities	$	20,346	$	(1,535)	$	3,184	$	(1,984)	$	23,530	$	(3,519)
Mutual Funds		---		---		3,073		(105)		3,073		(105)
Preferred Securities		---		---		59,300		(5,152)		59,300		(5,152)
Corporate Bonds		262,923		(10,577)		---		---		262,923		(10,577)
	$	283,269	$	(12,112)	$	65,557	$	(7,241)	$	348,826	$	(19,353)

	Less Than 12 Months				12 Months or Greater				Total
March 31, 2011	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Equities	$	163,063	$	(7,801)	$	25,270	$	(29,639)	$	188,333	$	(37,440)
Mutual Funds		20,124		(680)		5,824		(118)		25,948		(798)
Preferred Securities		---		---		190,530		(12,984)		190,530		(12,984)
Corporate Bonds		409,750		(7,177)		---		---		409,750		(7,177)
	$	592,937	$	(15,658)	$	221,624	$	(42,741)	$	814,561	$	(58,399)

	Less Than 12 Months				12 Months or Greater				Total
December 31, 2011	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Equities	$	176,966	$	(23,211)		—		—	$	176,966	$	(23,211)
Mutual Funds		—		—		10,585		(713)		10,585		(713)
Preferred Securities		—		—		46,750		(17,702)		46,750		(17,702)
Corporate Bonds		626,292		(24,000)		90,250		(9,750)		716,542		(33,750)
	$	803,258	$	(47,211)	$	147,585	$	(28,165)	$	950,843	$	(75,376)

Equities, Mutual Funds, Preferred Securities, and Corporate Bonds -The Company's investments in equity securities, mutual funds, preferred securities, and corporate bonds consist of investments in common stock, preferred stock and debt securities of companies in various industries. As of March 31, 2012, there were six equity securities, two mutual fund securities, one preferred security, and four 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 did not consider any material investments to be other-than-temporarily impaired at March 31, 2012.

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Recent Accounting Pronouncements

3 Months Ended

Mar. 31, 2012

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

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.

In September 2011 the FASB issued ASC Topic 350, Intangibles – Goodwill and Other. FASB ASC Topic 250 amends the existing standards related to annual and interim goodwill impairment tests by allowing companies to consider qualitative factors to determine whether it is more likely or not that the fair value of a reporting unit is less than its carrying amount before performing the two step impairment review process. It also amends the examples of events or circumstances that would be considered in a goodwill impairment evaluation. The amendment is effective for interim periods and fiscal years beginning after December 15, 2011; however, early adoption is permitted. The adoption of this new accounting guidance is not expected to have a material effect on the Company's financial statements or results of operations.