Notes to Consolidated
Financial Statements
March 31, 2019 and December 31, 2018
(Unaudited)
(In thousands, except per share data)
Note 1 – Basis of Presentation
Basis of presentation
The accompanying unaudited consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”)
for interim financial information, and do not include all of the information and disclosures required for complete, audited financial
statements. In the opinion of management, these statements include all adjustments necessary for a fair presentation of the results
of all interim periods reported herein. The consolidated financial statements and related notes should be read in conjunction with
the consolidated financial statements and related notes included in our Annual Report on Form 10-K as of and for the year ended
December 31, 2018. Results of operations for interim periods are not necessarily indicative of the results to be expected for other
interim periods or the full year.
A detailed description of our significant
accounting policies can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Principles of consolidation
Our consolidated financial statements include
the accounts of Lifeway Foods, Inc. and all its wholly owned subsidiaries (collectively “Lifeway” or the “Company”).
All significant intercompany accounts and transactions have been eliminated.
Note 2 – Significant Accounting
Policies
Use of estimates
The preparation of consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements
and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant
estimates made in preparing the consolidated financial statements include the reserve for promotional allowances, the valuation
of goodwill and intangible assets, stock-based and incentive compensation, and deferred income taxes.
Revenue Recognition
We sell food and beverage products across
select product categories to customers predominantly within the United States (see Note 11, Segments, Products and Customers).
We also sell bulk cream, a byproduct of our fluid milk manufacturing process. In accordance with Accounting Standards Codification
(“ASC”) 606, Revenue from Contracts with Customers, we recognize revenue when control over the products transfers to
our customers, which generally occurs upon delivery to our customers or their common carriers. We adopted this standard at the
beginning of fiscal year 2018, with no significant impact to its financial position or results of operations, using the modified
retrospective method. The amount of revenue recognized reflects the consideration to which we expect to be entitled to receive
in exchange for these goods or services, using the five-step method required by ASC 606.
For the Company, the contract is the approved
sales order, which may also be supplemented by other agreements that formalize various terms and conditions with customers. We
apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including
the customer’s historical payment experience or, in the case of a new customer, published credit and financial information
pertaining to the customer.
Performance obligations promised in a contract
are identified based on the goods or services that will be transferred to the customer, which is the delivery of food products
which provide immediate benefit to the customer.
We account for product shipping and handling
as fulfillment activities with revenues for these activities recorded within net revenue and costs recorded within cost of goods
sold. Any taxes collected on behalf of government authorities are excluded from net revenues.
Variable consideration, which typically
includes volume-based rebates, known or expected pricing or revenue adjustments, such as trade discounts, allowances for non-saleable
products, product returns, trade incentives and coupon redemption, is estimated utilizing the most likely amount method.
Key sales terms, such as pricing and quantities
ordered, are established on a frequent basis such that most customer arrangements and related incentives have a one year or shorter
duration. As such, we do not capitalize contract inception costs and we capitalize product fulfillment costs in accordance with
U.S. GAAP and our inventory policies. We do not have any significant deferred revenue or unbilled receivables at the end of a period.
We generally do not receive noncash consideration for the sale of goods, nor do we grant payment financing terms greater than one
year.
Advertising and promotional costs
Lifeway expenses advertising costs as incurred.
For the three months ended March 31, 2019 and 2018 total advertising expenses were $1,088 and $1,389 respectively.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842), which affects any entity that enters into a lease (as that term is defined in ASU 2016-02), with some
specified scope exceptions. Under ASU 2016-02, companies can adopt the amended guidance using a modified retrospective transition
approach, using an application date of either the beginning of the earliest comparative period presented or the beginning of the
reporting period in which the companies first apply the new standard. We adopted this standard on January 1, 2019 using the application
date of January 1, 2019, and elected certain practical expedients allowed under the standard. In July 2018, the FASB issued ASU
No. 2018-11, Leases (842), Targeted Improvements, which provides an additional transition election to not restate comparative periods
for the effects of applying the new standard. The guidance requires lessees to recognize right-of-use assets and lease liabilities
in the balance sheet and disclose key information about leasing arrangements, such as information about variable lease payments
and options to renew and terminate leases. The amended guidance will require both operating and finance leases to be recognized
in the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the
lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.
Lifeway elected certain of the practical
expedients that are permitted under the transition guidance within ASU 2016-02 and related standards. Among other things, this
practical expedient allowed us to carryforward the historical lease classification, and not reassess initial direct costs for
any existing leases as of January 1, 2019 or reassess whether any expired or existing contracts are or contain leases. In addition,
we elected to adopt the hindsight practical expedient to determine the reasonably certain lease term for existing leases. We made
an accounting policy election to continue recording leases with an initial term of 12 months or less consistent with our prior
financial reporting and elect the practical expedient to combine lease and non-lease components. We have revised its relevant
policies and procedures, as applicable, to meet the new accounting, reporting and disclosure requirements of Topic 842 and has
updated internal controls accordingly.
The main difference between the guidance
in ASU 2016-02 and prior GAAP is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified
as operating leases under current GAAP. Recognition of the right-of-use assets and liabilities had a material impact to our consolidated
balance sheets upon adoption. However, since all our leases are operating leases under ASC 840 and we will carryforward the historical
lease classification, the new standard did not have a material impact on our Consolidated Statements of Operations, Consolidated
Statements of Stockholders’ Equity, or Consolidated Statements of Cash Flows. The adoption resulted in an increase of the
right-of-use assets of approximately $944 and lease liabilities of $997, and an adjustment to beginning retained earnings of $53
as of January 1, 2019.
Recently Issued Accounting Pronouncements
We do not anticipate
a material impact upon adoption from any accounting standards issued but not yet adopted.
Note 3 – Inventories, net
Inventories consisted of the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Ingredients
|
|
$
|
1,742
|
|
|
$
|
1,580
|
|
Packaging
|
|
|
2,188
|
|
|
|
2,072
|
|
Finished goods
|
|
|
2,584
|
|
|
|
2,165
|
|
Total inventories
|
|
$
|
6,514
|
|
|
$
|
5,817
|
|
Note 4 – Property, Plant and Equipment, net
Property, plant and equipment consisted of the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Land
|
|
$
|
1,747
|
|
|
$
|
1,747
|
|
Buildings and improvements
|
|
|
17,566
|
|
|
|
17,520
|
|
Machinery and equipment
|
|
|
29,744
|
|
|
|
29,692
|
|
Vehicles
|
|
|
828
|
|
|
|
937
|
|
Office equipment
|
|
|
838
|
|
|
|
838
|
|
Construction in process
|
|
|
527
|
|
|
|
546
|
|
|
|
|
51,250
|
|
|
|
51,280
|
|
Less accumulated depreciation
|
|
|
(27,291
|
)
|
|
|
(26,707
|
)
|
Total property, plant and equipment, net
|
|
$
|
23,959
|
|
|
$
|
24,573
|
|
Note 5 – Goodwill and Intangible Assets
Goodwill & indefinite-lived intangible assets consisted
of the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Gross goodwill
|
|
$
|
10,368
|
|
|
$
|
10,368
|
|
Accumulated impairment losses
|
|
|
(1,244
|
)
|
|
|
(1,244
|
)
|
Goodwill
|
|
|
9,124
|
|
|
|
9,124
|
|
Brand names
|
|
|
3,700
|
|
|
|
3,700
|
|
Goodwill and indefinite-lived intangible assets
|
|
$
|
12,824
|
|
|
$
|
12,824
|
|
Finite-lived Intangible Assets
Other intangible assets, net consisted of the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Recipes
|
|
$
|
44
|
|
|
$
|
44
|
|
Customer lists and other customer related intangibles
|
|
|
4,529
|
|
|
|
4,529
|
|
Customer relationship
|
|
|
985
|
|
|
|
985
|
|
Trade names
|
|
|
2,248
|
|
|
|
2,248
|
|
Formula
|
|
|
438
|
|
|
|
438
|
|
|
|
|
8,244
|
|
|
|
8,244
|
|
Accumulated amortization
|
|
|
(7,973
|
)
|
|
|
(7,900
|
)
|
Other intangible assets, net
|
|
$
|
271
|
|
|
$
|
344
|
|
Note 6 – Accrued Expenses
Accrued expenses consisted of the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Payroll and incentive compensation
|
|
$
|
1,881
|
|
|
$
|
1,937
|
|
Operating leases
|
|
|
495
|
|
|
|
–
|
|
Real estate taxes
|
|
|
297
|
|
|
|
398
|
|
Other
|
|
|
441
|
|
|
|
442
|
|
|
|
$
|
3,114
|
|
|
$
|
2,777
|
|
Note 7 – Debt
Notes Payable
We had two variable rate term
loans with an aggregate outstanding balance of $6,069 as of March 31, 2018. The term loans were subject to interest at the prime
rate or at the LIBOR plus 2.5% and were collateralized by substantially all of Lifeway’s assets. The two term loans were
refinanced and paid in full on May 7, 2018. See Line of Credit below.
Line of Credit
On May 7, 2018, Lifeway entered into an
Amended and Restated Loan and Security Agreement (the “Revolving Credit Facility”) with its existing lender. The Revolving
Credit Facility provides for a revolving line of credit up to a maximum of $10 million (the “Revolving Loan”) with
an incremental facility not to exceed $5 million (the “Incremental Facility” and together with the Revolving Loan,
the “Loans”). The proceeds of the Loans were used to pay off Lifeway’s existing debt with the lender under the
Loan and Security Agreement, Revolving Note, and Term Note entered into on February 6, 2009, and for general working capital purposes.
Upon closing, we retired all the then-outstanding term loans described above.
As of March 31, 2019, we had $4,671, net
of $49 of unamortized deferred financing costs, outstanding under the Revolving Credit Facility. We had approximately $4,280 available
under the Borrowing Base for future borrowings as of March 31, 2019.
All outstanding amounts under the Loans
bear interest, at Lifeway’s election, at either the lender Base Rate (the greater of either the Federal Funds Rate plus 0.5%,
or the Prime Rate) or the LIBOR plus 2.50%, payable monthly in arrears. Lifeway is also required to pay a quarterly unused line
fee and, in conjunction with the issuance of any letters of credit, a letter of credit fee. Lifeway’s average interest rate
on debt outstanding under our Revolving Credit Facility for the quarter ended March 31, 2019 was 4.98%.
The commitment under the Revolving Credit
Facility matures May 7, 2021. The Revolving Credit Facility is presented as a long-term debt obligation as of March 31, 2019. The
Loans and all other amounts due and owed under the Revolving Credit Facility and related documents are secured by substantially
all of our assets.
Amounts available for borrowing under the
Revolving Credit Facility equal the lesser of (i) the Borrowing Base (as defined below), or (ii) $10 million (plus the amount of
any Incremental Facility requested by Lifeway and approved by lender), in each case, as the same is reduced by the aggregate principal
amount outstanding under the Loans. “Borrowing Base” under the Revolving Credit Facility means, generally, an amount
equal to our cash and cash equivalents plus our eligible accounts receivable and eligible inventory, less certain reserves, divided
by 1.5.
The Revolving Credit Facility contains
customary representations, warranties, and covenants on the part of Lifeway, including financial covenants requiring us to achieve
a minimum EBITDA threshold for each of the fiscal quarters through December 31, 2018; maintain (a) a fixed charge coverage ratio
of no less than 1.25 to 1.0, and (b) a Senior Debt to EBITDA ratio of not more than 3.00 to 1.0 at December 31, 2018 and for each
of the succeeding fiscal quarters ending through the expiration date. The Revolving Credit Facility also provides for events of
default, including failure to repay principal and interest when due and failure to perform or violation of the provisions or covenants
of the agreement, as a result of which amounts due under the Revolving Credit Facility may be accelerated.
The revolving credit facility was amended
on April 10, 2019, effective March 31, 2019. See Note 14 for discussion of this subsequent event. We were in compliance with the
minimum EBITDA and fixed charge coverage ratio covenants at March 31, 2019 as defined in Note 14.
Note 8 – Leases
Lifeway has operating leases for three
retail stores for its Lifeway Kefir Shop subsidiary, certain machinery and equipment, and office space. All lease payments are
fixed, not variable. Remaining lease terms for these leases range from less than 1 year to 5 years. Some of our leases include
options to extend the leases for up to 5 years and have been included in our calculation of the right-of-use asset and lease liabilities.
There are no residual value guarantees. We do not currently have leases which meet the finance lease classification as defined
under ASC 842.
We do not record leases with an initial
term of 12 months or less on the balance sheet. Expense for these short-term leases is recorded on a straight-line basis over the
lease term. Total lease expense was $175 and $180 (including short term leases) for the three months ended March 31, 2019 and 2018,
respectively.
Lifeway treats contracts as a lease when
the contract conveys the right to use a physically distinct asset for a period of time in exchange for consideration, we direct
the use of the asset and obtains substantially all the economic benefits of the asset.
Right-of-use assets and lease liabilities
are measured and recognized based on the present value of the future minimum lease payments over the lease term at the commencement
date. We have elected the practical expedient to combine lease and non-lease components into a single component for all of its
leases. For many of our leases such as real estate leases, we are unable to determine an implicit rate; therefore, we use our
incremental borrowing rate based on the information available at the commencement date in determining the present value of future
payments for those leases. We include options to extend or terminate the lease in the measurement of the right-of-use asset and
lease liability when it is reasonably certain that it will exercise such options. Lease expense for minimum lease payments is
recognized on a straight-line basis over the lease term.
Future maturities of lease liabilities
were as follows
Year
|
|
Operating Leases
|
|
Nine months ended December 31, 2019
|
|
$
|
428
|
|
2020
|
|
|
294
|
|
2021
|
|
|
219
|
|
2022
|
|
|
181
|
|
2023
|
|
|
63
|
|
Thereafter
|
|
|
4
|
|
Total lease payments
|
|
|
1,189
|
|
Less: Interest
|
|
|
(83
|
)
|
Present value of lease liabilities
|
|
$
|
1,106
|
|
The weighted-average remaining lease term
for our operating leases was 2.9 years as of March 31, 2019. The weighted average discount rate of our operating leases was 5.27%
as of March 31, 2019. Cash paid for amounts included in the measurement of lease liabilities was $147 for the three-month period
ended March 31, 2019.
Note 9 – Commitments and contingencies
Litigation
Lifeway is engaged in various legal actions,
claims, and proceedings arising in the normal course of business, including commercial disputes, product liabilities, intellectual
property matters and employment-related matters resulting from our business activities.
We record accruals for outstanding legal
matters when we believe it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated. We
evaluate, on a periodic basis, developments in legal matters that could affect the amount of any accrual and developments that
would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable,
we do not establish an accrued liability. Currently, none of our accruals for outstanding legal matters are material individually
or in the aggregate to our financial position and it is management’s opinion that the ultimate resolution of these outstanding
legal matters will not have a material adverse effect on our business, financial condition, results of operations, or cash flows.
However, if we ultimately are required to make payments in connection with an adverse outcome, it is possible that it could have
a material adverse effect on our business, financial condition, results of operations or cash flows.
Lifeway’s contingencies are subject
to substantial uncertainties, including for each such contingency the following, among other factors: (i) the procedural status
of the case; (ii) whether the case has or may be certified as a class action suit; (iii) the outcome of preliminary motions; (iv)
the impact of discovery; (v) whether there are significant factual issues to be determined or resolved; (vi) whether the proceedings
involve a large number of parties and/or parties and claims in multiple jurisdictions or jurisdictions in which the relevant laws
are complex or unclear; (vii) the extent of potential damages, which are often unspecified or indeterminate; and (viii) the status
of settlement discussions, if any, and the settlement posture of the parties. Consequently, Lifeway cannot predict with any reasonable
certainty the timing or outcome of such contingencies, and we are unable to estimate a possible loss or range of loss.
Note 10 – Income taxes
For each interim period, Lifeway estimates
the effective tax rate (“ETR”) expected to be applicable for the full year and applies that rate to income before
provision for income taxes for the period. The effective tax rate for the three months ended March 31, 2019 was 12.2% compared
to 35.1% for the three months ended March 31, 2018. Our effective tax rate may change from period to period based on recurring
and non-recurring factors including the relative mix of pre-tax earnings (or losses), the underlying income tax rates applicable
to various state and local taxing jurisdictions, settlement of tax audits, the impact of non-deductible items, changes in valuation
allowances, and the expiration of the statute of limitations in relation to unrecognized tax benefits. We record discrete income
tax items such as enacted tax rate changes and completed tax audits in the period in which they occur.
Note 11 – Stock-based and Other Compensation
In December 2015, Lifeway stockholders
approved the 2015 Omnibus Incentive Plan, which authorized the issuance of an aggregate of 3.5 million shares to satisfy awards
of stock options, stock appreciation rights, unrestricted stock, restricted stock, restricted stock units, performance shares and
performance units to qualifying employees. Under the Plan, the Board or its Audit and Corporate Governance Committee approves stock
awards to executive officers and certain senior executives, generally in the form of restricted stock or performance shares. The
number of performance shares that participants may earn depends on the extent to which the corresponding performance goals have
been achieved. Stock awards generally vest over a three-year performance or service period. At March 31, 2019, 3.426 million shares
remain available under the Omnibus Incentive Plan. While we plan to continue to issue awards pursuant to the Plan at least annually,
we may choose to suspend the issuance of new awards in the future and may grant additional awards at any time including issuing
special grants of restricted stock, restricted stock units, and stock options to attract and retain new and existing
executives.
Stock Options
The following table summarizes stock option activity during
the three months ended March 31, 2019:
|
|
Options
|
|
|
Weighted
average
exercise price
|
|
|
Weighted
average
remaining contractual life
|
|
|
Aggregate
intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
41
|
|
|
$
|
10.42
|
|
|
|
7.22
|
|
|
|
–
|
|
Granted
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
41
|
|
|
$
|
10.42
|
|
|
|
6.97
|
|
|
$
|
–
|
|
Exercisable at March 31, 2019
|
|
|
39
|
|
|
$
|
10.46
|
|
|
|
6.96
|
|
|
$
|
–
|
|
For the three months ended March 31, 2019
and 2018 total pre-tax stock-based compensation expense recognized in the consolidated statements of operations was $1 and $4,
respectively. For the three months ended March 31, 2019 and 2018 tax-related benefits of $0 and $2 were also recognized. As of
March 31, 2019, the total remaining unearned compensation related to non-vested stock options was $1, which is expected to be amortized
over the weighted-average remaining service period of 0.25 years.
Restricted Stock Awards
A Restricted Stock Award (“RSA”)
represents the right to receive one share of common stock in the future. RSAs have no exercise price. The grant date fair value
of the awards is equal to our closing stock price on the grant date. The following table summarizes RSA activity during the three
months ended March 31, 2019.
|
|
RSA’s
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
25
|
|
Granted
|
|
|
7
|
|
Shares issued upon vesting
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
Outstanding at March 31, 2019
|
|
|
32
|
|
Weighted average grant date fair value per share outstanding
|
|
$
|
4.19
|
|
We expense RSA’s over the service period. For the three
months ended March 31, 2019 and 2018 total pre-tax stock-based compensation expense recognized in the consolidated statements of
operations was $25 and $1, respectively. For the three months ended March 31, 2019 and 2018 tax-related benefits of $7 and $0,
respectively, were also recognized. As of March 31, 2019, the total remaining unearned compensation related to non-vested RSA’s
was $71, which is expected to be amortized over the weighted-average remaining service period of 1.26 years.
Long-Term Incentive Plan Compensation
Lifeway established long-term incentive-based
compensation programs for fiscal year 2017 (the “2017 Plan”), fiscal year 2018 (the “2018 Plan”), and for
fiscal year 2019 (the “2019 Plan”) for certain senior executives and key employees (the “participants”).
Under both the 2017 Plan and the 2018 Plan, long-term incentive compensation is based on Lifeway’s achievement of certain
sales and adjusted EBITDA performance levels versus respective targets established by the Board for each fiscal year. Under the
2019 Plan, long-term equity incentive compensation is based on Lifeway’s achievement of four strategic milestones over a
three-year period from Fiscal 2019 through Fiscal 2021.
2017 Plan
Under the 2017 Plan, collectively the participants
had the opportunity to earn cash and equity-based incentive compensation in amounts ranging from $0 to $11,025 depending on Lifeway’s
performance levels compared to the respective targets and the participants performance compared to their individual objectives.
The equity portion of the incentive compensation is payable in restricted stock that vests one-third in each of the three years
from the 2017 grant dates. For the three months ended March 31, 2019 and 2018, $127 and $286 was expensed under the 2017 Plan as
stock-based compensation expense in the consolidated statements of operations, respectively. As of March 31, 2019, the total remaining
unearned compensation related to the 2017 Plan was $210, of which $161 and $49 is expected to be recognized in 2019 and 2020, respectively,
subject to vesting.
2018 Plan
Under the 2018 Plan, collectively the participants
had the opportunity to earn cash and equity-based incentive compensation in amounts ranging from $0 to $11,200 depending on Lifeway’s
performance levels compared to the respective targets and the participants performance compared to their individual objectives.
The equity portion of the incentive compensation was payable in restricted stock that vests one-third in each of the three years
from the 2018 grant dates. For the three months ended March 31, 2018, $171 was expensed under the 2018 Plan, of which $76 was recorded
as cash bonus expense and $95 was recorded as stock-based compensation expense in the consolidated statements of operations. Due
to the final fiscal 2018 financial results, there were no equity-based incentives awarded under the 2018 Plan.
2019 Plan
Under the 2019 Plan, collectively the participants
have the opportunity to earn equity-based incentive compensation in amounts ranging from $0 to $1,776 depending on Lifeway’s
performance levels compared to the respective targets. The equity-based incentive compensation is payable in restricted stock that
vests 50% of unvested shares in year one, 50% of unvested shares in year two, and 100% of remaining unvested shares in year three
from the 2019 grant date. For the three months ended March 31, 2019, $35 was expensed under the 2019 Plan as stock-based compensation
expense in the consolidated statements of operations.
2019 Retention Award
During Q1 2019, we awarded a special retention
grant (the “2019 Retention Award”) of restricted stock to senior executives and key employees (the “participants”).
The equity-based incentive compensation is payable in restricted stock that vests one-third in March 2019, and one-third in March
2020 and 2021, respectively. For the three months ended March 31, 2019, $157 was expensed under the 2019 Retention Award as stock-based
compensation expense in the consolidated statements of operations.
Retirement Benefits
Lifeway has a defined contribution plan
which is available to substantially all full-time employees. Under the terms of the plan, we match employee contributions under
a prescribed formula. For the three months ended March 31, 2019 and 2018 total contribution expense recognized in the consolidated
statements of operations was $96 and $132, respectively.
Note 12 – Segments, Products and Customers
Lifeway’s primary product is drinkable
kefir, a cultured dairy product. Lifeway Kefir is tart and tangy, high in protein, calcium and vitamin D. Thanks to our exclusive
blend of kefir cultures, each cup of kefir contains 12 live and active cultures and 15 to 20 billion beneficial CFU (Colony Forming
Units) at the time of manufacture.
We manufacture (directly or through co-packers)
our products under our own brand, as well as under private labels on behalf of certain customers. Lifeway offers approximately
20 varieties of our kefir products including more than 60 flavors. In addition to our core drinkable kefir products, we offer several
lines of products developed through our innovation and development efforts. These include Kefir Cups, a strained, cupped version
of our kefir; and Organic Farmer Cheese Cups, a cupped version of our soft cheeses, both served in resealable 5 oz. containers.
We also offer Skyr, a strained cupped Icelandic yogurt; Plantiful, a plant-based probiotic beverage made from organic and non-GMO
pea protein with 10 vegan kefir cultures; a line of probiotic supplements for adults and children; and a soft serve kefir mix.
Our product categories are:
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Drinkable Kefir, sold in a variety of organic and non-organic sizes, flavors, and types, including low fat, non-fat, whole milk, protein, BioKefir (a 3.5 oz. kefir with additional probiotic cultures), and Kefir with Oats.
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European-style soft cheeses, including farmer cheese in resealable cups.
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Cream and other, which consists primarily of cream, a byproduct of making our kefir.
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ProBugs, a line of kefir products in drinkable and frozen formats, designed for children.
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Other Dairy, which includes Cupped Kefir and Icelandic Skyr, a line of strained kefir and yogurt products in resealable cups.
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Frozen Kefir, available in both bars and pint-size containers.
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Lifeway has determined that it has one
reportable segment based on how our chief operating decision maker manages the business and in a manner consistent with the internal
reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating
resources and assessing our performance, has been identified collectively as the Chief Financial Officer, the Chief Operating Officer,
the Chief Executive Officer, and Chairperson of the board of directors. Substantially all of our consolidated revenues relate to
the sale of cultured dairy products that we produce using the same processes and materials and are sold to consumers through a
common network of distributors and retailers in the United States.
Net sales of products by category were
as follows for the three months ended March 31:
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2019
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2018
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$
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%
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$
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%
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Drinkable Kefir other than ProBugs
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$
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18,886
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77%
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$
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21,663
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76%
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Cheese
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2,851
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12%
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2,934
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10%
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Cream and other
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1,301
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5%
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1,492
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5%
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ProBugs Kefir
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763
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3%
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952
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3%
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Other dairy
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479
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2%
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1,337
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5%
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Frozen Kefir (a)
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335
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1%
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364
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1%
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Net Sales
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$
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24,615
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100%
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$
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28,742
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100%
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(a)
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Includes Lifeway Kefir Shop sales
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Significant Customers
–
Sales are predominately to companies in the retail food industry located within the United States. Two major customers accounted
for approximately 22% of net sales for the three months ended March 31, 2019 and 2018, respectively.
Note 13 – Related party transactions
Lifeway obtains consulting services from
the Chairperson of its board of directors. Fees earned by the Chairperson are included in general and administrative expenses in
the accompanying consolidated statements of operations and were $250 during each of the three months ended March 31, 2019 and 2018.
Lifeway is also a party to a royalty agreement
with the Chairperson of its board of directors under which we pay the Chairperson a royalty based on the sale of certain Lifeway
products, not to exceed $50 in any fiscal month. Royalties earned by the Chairperson are included in selling expenses in the accompanying
consolidated statements of operations and were $150 during each of the three months ended March 31, 2019 and 2018, respectively.
Note 14 – Subsequent Events
On April 10, 2019, effective March 31,
2019, Lifeway entered into the First Modification to the Amended and Restated Loan and Security Agreement (the “Modified
Revolving Credit Facility”) with its existing lender. Under the amendment, the Modified Revolving Credit Facility provides
for a revolving line of credit up to a maximum of $9 million (the “Revolving Loan”) with an incremental facility not
to exceed $5 million (the “Incremental Facility” and together with the Revolving Loan, the “Loans”).
All outstanding amounts under the Loans
bear interest, based on a level of the Senior Debt to EBITDA ratio, at Lifeway’s election, at either the lender Base Rate
(the greater of either the Federal Funds Rate plus 0.0% to 0.5%, or the Prime Rate) or the LIBOR plus 2.25% to 3.00%, payable monthly
in arrears. Lifeway is also required to pay a quarterly unused line fee and, in conjunction with the issuance of any letters of
credit, a letter of credit fee.
As amended, the Modified Revolving Credit
Facility contains customary representations, warranties, and covenants on the part of Lifeway, including financial covenants requiring
us to achieve a minimum EBITDA threshold for each of the fiscal quarters through December 31, 2019, and maintain a fixed charge
coverage ratio of no less than 1.25 to 1.0 each of the fiscal quarters ending through the expiration date. The Modified Revolving
Credit Facility also provides for events of default, including failure to repay principal and interest when due and failure to
perform or violation of the provisions or covenants of the agreement, as a result of which amounts due under the Modified Revolving
Credit Facility may be accelerated.