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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2021

 

or

 

TRANSITION REPORT PURSUANT TO 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 (I.R.S. Employer
incorporation or organization) Identification No.)

 

6431 West Oakton St., Morton Grove, Illinois 60053

(Address of principal executive offices) (Zip Code)

 

(847) 967-1010

(Registrant’s telephone number, including area code)

 

Securities registered under Section 12(b) of the Exchange Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, No Par Value LWAY Nasdaq Global Market

 

Securities registered under Section 12(g) of the Exchange Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

 

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

 

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer Smaller reporting company Emerging growth company

 

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

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☐  No ☒

 

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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the stock was last sold as of June 30, 2021 ($5.18 per share as quoted on the Nasdaq Global Market) was $21,142,470.

 

As of July 6, 2022, 15,473,269 shares of the registrant’s common stock, no par value, were outstanding.

 

 

 

 

     

 

 

Table of Contents

 

  Page
PART I  
     
Item 1. Business 1
Item 1A. Risk Factors 7
Item 1B. Unresolved Staff Comments 17
Item 2. Properties 17
Item 3. Legal Proceedings 17
Item 4. Mine Safety Disclosures 17
     
PART II  
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 18
Item 6. [RESERVED] 19
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 27
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 28
Item 9A. Controls and Procedures 28
Item 9B. Other Information 29
Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections 29
   
PART III  
     
Item 10. Directors, Executive Officers and Corporate Governance 30
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 51
Item 13. Certain Relationships and Related Transactions and Director Independence 53
Item 14. Principal Accountant Fees and Services 54
     
     
PART IV  
     
Item 15. Exhibits, Financial Statement Schedules 56
Item 16. Form 10-K Summary 57
  Signatures 58

 

 

 

 

  i  

 

 

 

EXPLANATORY NOTE

 

Restatement

 

Except as otherwise indicated or unless context otherwise requires, the terms “Lifeway,” “we,”, “us,”, “our,” or “the Company” refer to Lifeway Foods, Inc. and its subsidiaries on a consolidated basis.

 

On April 29, 2022, as previously reported in our Current Report on Form 8-K, filed with the Securities and Exchange Commission (“SEC”), management and the Audit and Corporate Governance Committee of our Board of Directors concluded that our consolidated financial statements as of and for the year ended December 31, 2020, and as of and for each of the quarterly periods ending in 2020 and 2021, should be restated and no longer be relied upon.

 

Within this Annual Report on Form 10-K, we have included restated audited consolidated financial statements as of and for the year ended December 31, 2020, as well as restated unaudited consolidated financial information as of and for each of the quarterly periods ending in 2020 and 2021 (together, the “Restatement”). Our consolidated financial statements as of and for the year ended 2020 included in this report have been restated from the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020.

 

The Restatement corrects a material error, made in connection with our 2009 acquisition of Fresh Made, Inc., that resulted in a $1.18 million understatement of both deferred income tax liabilities and goodwill. Specifically, the Company did not record a deferred income tax liability and corresponding increase to goodwill related to the difference in the book and income tax bases for the $3.7 million Fresh Made, Inc. indefinite-lived brand name intangible asset acquired. The Restatement had no impact on opening retained earnings of as of January 1, 2020 or the Company’s Consolidated Statements of Operations, Consolidated Statements of Cash Flows and Consolidated Statements of Stockholders’ Equity for any period subsequent to such date.

 

For additional discussion of the Restatement, including the accounting errors identified and the resulting adjustments, see “Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1 – Basis of presentation included in “Part II – Item 8 – Financial Statements and Supplementary Data.” “Note 17 – Correction of previously issued unaudited consolidated financial statements, to the consolidated financial statements included in this Annual Report on Form 10-K presents consolidated quarterly information for fiscal 2020 and 2021. For a description of the material weakness identified by Management as a result of our internal reviews and Management’s plan to remediate this deficiency, see “Part II – Item 9A – Controls and Procedures.”

 

We believe that presenting the information regarding the Restatement in this Annual Report allows investors to review all pertinent data in a single presentation. We have not amended, and do not intend to amend, our Annual Report on Form 10-K for the year ended December 31, 2020 or Quarterly Reports on Form 10-Q for each of the quarterly periods in 2020 and 2021. Instead, the financial statements contained in such reports are superseded in their entirety by the restated financial statements contained in this Annual Report on Form 10-K.

 

 

 

  ii  

 

 

FORWARD LOOKING STATEMENTS

 

In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, readers are advised that this document, any document incorporated by reference herein, and other documents we file with the SEC, contain forward looking statements. In addition, we, or others on our behalf, may make forward looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls, and conference calls. Forward looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those indicated by the forward looking statements. These statements use words, variations of words, and negatives of words such as "may," "could," "believe," "future," "depend," "expect," "will," "result," "can," "remain," "assurance," "subject to," "require," "limit," "impose," "guarantee," "restrict," "continue," "become," "predict," "likely," "opportunities," "effect," "change," "future," "predict," and "estimate." Examples of forward looking statements include, but are not limited to, (i) projections of revenues, income or loss, earnings or losses per share, capital expenditures, dividends, capital structure and other financial items, (ii) statements of Lifeway Foods, Inc.’s (the “Company”, “Lifeway”, “we”, or “our”) plans and objectives, including the introduction of new products, or estimates or predictions of actions by customers, suppliers, competitors or regulatory authorities, (iii) statements of future economic performance, and (iv) statements of assumptions underlying other statements and statements about Lifeway or its business.

 

These forward looking statements are based on management’s beliefs, assumptions, estimates and observations of future events based on information available to our management at the time the statements are made and include any statements that do not relate to any historical or current fact. These statements are not guarantees of future performance and they involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, implied or forecast by our forward looking statements due in part to the risks, uncertainties, and assumptions that include:

 

· the actions of our competitors and suppliers, including those related to price competition;

 

· the actions and decisions of our customers or consumers;

 

· our ability to successfully implement our business strategy;

 

· changes in the pricing of commodities;
   
· the potential impact of material weaknesses in our internal control over financial reporting;

 

· the effects of government regulation;
   
· the impact of the novel coronavirus (“COVID-19”) outbreak on our business, suppliers, consumers, customers, and employees;

 

· disruptions to our supply chain, or our manufacturing and distribution capabilities, including those due to cybersecurity threats and the COVID-19 outbreak; and

 

· the other risks and uncertainties that are set forth in Item 1, “Business”, Item 1A “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and that are described from time to time in our filings with the SEC.

 

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

 

 

 

  iii  

 

 

PART I

 

ITEM 1 BUSINESS

 

OVERVIEW

 

Lifeway was founded in 1986 by Michael Smolyansky shortly after he and his wife, Ludmila Smolyansky, emigrated from Eastern Europe to the United States. Lifeway was the first to successfully introduce kefir to the U.S. consumer on a commercial scale, initially catering to ethnic consumers in the Chicago, Illinois metropolitan area. In the thirty-five years that have followed, Lifeway has grown to become the largest producer and marketer of kefir in the U.S. and an important player in the broader market spaces of probiotic-based products and natural, “better for you” foods.

 

PRODUCTS

 

Our 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 25 to 30 billion beneficial CFU (Colony Forming Units) at the time of manufacture.

 

We manufacture (directly or through co-packers) and market products under the Lifeway, Fresh Made and Glen Oaks Farms brand names, as well as under private labels on behalf of certain customers.

 

Our product categories are:

 

  · Drinkable Kefir, sold in a variety of organic and non-organic sizes, flavors, and types;
     
  · European-style soft cheeses, including farmer cheese, white cheese, and Sweet Kiss;
     
  · Cream and other, which consists primarily of cream, a byproduct of making our kefir;
     
  · ProBugs, a line of kefir products designed for children;
     
  · Drinkable Yogurt, sold in a variety of sizes and flavors; and
     
  · Other Dairy, which consists primarily of Fresh Made butter and sour cream.
     

  

 

 

  1  

 

 

Net sales of products by category were as follows for the years ended December 31:

 

    2021     2020  
In thousands   $     %     $     %  
                         
Drinkable Kefir other than ProBugs   $ 95,850       80%     $ 81,437       80%  
Cheese     12,612       11%       12,905       13%  
Cream and other     3,582       3%       2,872       3%  
ProBugs Kefir     3,178       3%       2,733       2%  
Drinkable Yogurt     2,223       2%             0%  
Other dairy (a)     1,620       1%       2,079       2%  
Net Sales   $ 119,065       100%     $ 102,026       100%  

 

(a) Includes Lifeway Kefir Shop sales

 

Product innovation and new product development

 

Lifeway is committed to maintaining its positions as the leading producer of kefir and a recognized leader in the market for probiotic products. We routinely evaluate opportunities for new product flavors and formulations, improved package design, new product configurations and other innovation opportunities. Beyond our core drinkable kefir products, we have an ongoing effort to extend the strength of the Lifeway brand and leverage the capabilities of the Lifeway organization into categories both inside and outside of the dairy aisle, including into non-food categories and into additional channels, such as gyms and fitness studios. In 2021, we maintained the level of focus on product innovations, packaging innovations, and growth opportunities. These product innovation and development efforts have led to additional revenue opportunities.

 

Lifeway considers research and development of new products to be a significant part of our overall business philosophy. Where possible, we leverage our existing staff and facilities to conduct our innovation, research, and development efforts, rather than maintaining a dedicated research and development staff and facilities or relying solely on third parties. Until the second half of 2021, in light of the COVID-19 outbreak, our focus was on expanding sales of our current products, and less on new product development. In August 2021, we purchased the Glen Oaks drinkable yogurt product line and in December 2021 launched our drinkable oat-based kefir product line.

 

PRODUCTION

 

Manufacturing

 

During 2021 and 2020, approximately 98% and 99% of our revenue, respectively, was derived from products manufactured at our own facilities. We currently operate the following manufacturing and distribution facilities:

 

  · Morton Grove, Illinois, which produces drinkable kefir, drinkable ProBugs kefir, and cheese products;

  

  · Waukesha, Wisconsin, which produces drinkable kefir products and from which we store and distribute products;

 

  · Niles, Illinois, which stores and serves as a distribution point for products; and

 

  · Philadelphia, Pennsylvania, which produces drinkable kefir, cheese, and butter products, from which we store and distribute products.

 

We own these manufacturing facilities. All our fixed assets associated with manufacturing, storage, and distribution of our products are located in the United States.

 

 

 

  2  

 

 

Co-Packers

 

In addition to the products manufactured in our own facilities, independent manufacturers (“co-packers”) manufacture some of our products. We have a co-packer agreement to manufacture drinkable yogurt in California. We have co-packer agreements to manufacture drinkable and frozen kefir in Ireland and the United Kingdom, respectively, to serve our European markets. During 2021 and 2020, approximately 2% and 1% of our revenue, respectively, was derived from products manufactured by co-packers. Our domestic co-packer is Safe Quality Food (“SQF”) certified and follows Good Manufacturing Practices (GMPs). Additionally, the co-packers are required to ensure our products are manufactured in accordance with our quality specifications and that they are compliant with all applicable laws and regulations.

 

SALES AND DISTRIBUTION

 

Sales Organization

 

We sell our products primarily through our direct sales force, brokers, and distributors. Our sales organization strives to cultivate strong, collaborative relationships with our customers that facilitate favorable shelf placement for our products, which we believe will drive sales volumes when combined with our marketing efforts and our brand strength. Our relationships with food brokers provide additional retail customer coverage as a supplement to our direct sales force.

 

Distribution inside the United States

 

Lifeway’s products reach the consumer through three primary “route-to-market” pathways:

 

  · Retail-direct;

 

  · Distributor; and

 

  · Direct store delivery (“DSD”).

  

Under the retail-direct channel, we sell our products to retailers and deliver it through either the retailers’ carriers or third-party carriers that deliver to such retailers’ distribution centers. In turn, our retailers then deliver the products to their respective stores. Customers in this route-to-market grouping include Kroger, Walmart and Trader Joe’s. Under the retail direct-model, optimal product merchandising, assortments and product presentation are attended to by the retailer with limited support from Lifeway’s broker network. Sales to our retail-direct customers represent approximately 46% of our total net sales for the year ended 2021.

 

Under the distributor channel, we sell our products to distributors and deliver it through either the distributors’ carriers or third-party carriers that deliver to such distributors’ designated warehouses. In turn, our distributors then sell and ship our products to their retail customers. Our distributors often use a DSD model of their own to make deliveries directly to individual stores, but they also make deliveries to retailers’ distribution centers. Our distributor customers include United Natural Foods (UNFI), KeHE Distributors, and C&S Wholesale Grocers. The distributor attends to optimal product merchandising, assortments, and product presentations at the retail end of the channel, with support from Lifeway’s direct sales force and broker network. Sales to our distributor customers represented approximately 51% of our total net sales for year ended 2021.

 

 

  3  

 

 

Under the direct store delivery (DSD) route to market, we sell our products to retailers and deliver it directly to the store using Company-owned vehicles and a team of Lifeway merchandisers who engage face-to-face with store management to ensure optimal product assortments and presentations. We operate our DSD model in the Chicago, Illinois metropolitan area only. Sales to our DSD customers represent approximately 2% of our total net sales for the year ended 2021.

 

In the Chicago, Illinois metropolitan area, Lifeway operated two retail stores and a food truck under its Lifeway Kefir Shop subsidiary. This subsidiary was closed during 2021. The Lifeway Kefir Shop sold frozen and drinkable kefir products, as well as certain Lifeway products, through these retail outlets. Sales through these retail outlets represented less than 1% of net sales for the year ended 2021.

 

Distribution outside of the U.S.

 

Substantially all of Lifeway’s products are distributed within the United States; however, certain of our distributors sell our products to retailers in Mexico and portions of South America and the Caribbean. Additionally, Lifeway products reach consumers in the United Kingdom, Ireland, and the Middle East under third party co-manufacturing agreements and in-country broker and distributor arrangements. Sales outside the United States represented approximately 2% of net sales for the year ended 2021.

 

Channel- and Market-Specific Distribution and Broker Representation Arrangements

 

Lifeway’s generally standardized agreements with independent distributors and food brokers allow us the latitude to establish new relationships as opportunities and needs arise. Where appropriate given the relationship, market, and business opportunity, we offer exclusive channels, markets, and/or territories to our distributors and brokers.

 

We provide our independent distributors with products at wholesale prices for distribution to their retail accounts. Lifeway believes that the prices at which we sell our products to distributors are competitive with the prices generally paid by distributors for similar products in the markets served. Due to the perishable nature of our products and the costs to return, we do not offer return privileges to any of our distributors or channel customers; however, from time to time we do provide our customers with allowances for non-saleable product.

  

Lifeway engages independent food brokers generally on a commission basis, subject in some cases to a minimum commission guarantee. The commissions vary based on the scope of services provided and customers served. Our brokers represent our products to a variety of prospective buyers. These buyers could be specialty stores, retail grocery chains, wholesalers, foodservice operators and distributors, drug chains, mass merchandisers, industrial users, schools and universities, or military installations. With support from our direct sales force, brokers may provide other value-added services. These may include scheduling and coordinating promotions, merchandising, centralized ordering, and data collection services.

 

MARKETING

 

We use a combination of sales incentives, trade promotions, and consumer promotions to market our products.

 

Sales Incentives and Trade Promotion Allowances

 

Lifeway offers various sales incentives and trade promotional programs to its retailer and distributor customers from time to time in the normal course of business. These sales incentives and trade promotion programs typically include rebates, in-store display and demo allowances, allowances for non-saleable product, coupons, and other trade promotional activities. Trade promotions support price features, displays, and other merchandising of our products by our retail and distributor customers. We record these arrangements as a reduction to net sales in our consolidated statements of operations.

 

 

 

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Consumer Promotions and Marketing Campaigns

 

We engage in an ongoing and wide variety of marketing and media campaigns - primarily digital and social media, print advertising, and television advertising. We complement these marketing and media efforts by sponsoring cultural and community events, and various festivals, as well as participating in industry-related trade shows and in-store promotional events. Our consumer marketing efforts also include cooperative advertising programs with our retail customers and various couponing campaigns, online consumer relationship programs, and other similar forms of promotions.

 

Our marketing efforts are aimed at stimulating demand with new and existing consumers by elevating awareness and consumption of kefir and probiotics, as well as enhancing our brand equity. Our awareness marketing seeks to promote the verifiable nutritional profile, purity, benefits, and good taste of our kefir.

 

COMPETITION

 

Lifeway competes with a limited number of other domestic kefir producers and consequently faces a small amount of direct competition for kefir products. However, Lifeway’s kefir-based products compete with other dairy products, such as spoonable and drinkable yogurt, and, increasingly, with non-dairy probiotic products. Many of our competitors are well-established and have significantly greater financial resources than Lifeway to promote their products.

 

SUPPLIERS

 

We purchase our ingredients such as milk, pectin, and other ingredients from unaffiliated suppliers. In addition, we purchase significant quantities of packaging materials to package our products and natural gas and electricity to operate our facilities. Purchases are made through purchase orders or contracts, and price, delivery terms, and product specifications vary. Although the prices for our principal inputs can fluctuate based on economic, weather, and other conditions, Lifeway believes it has ready access to alternative suppliers for all critical ingredients, packaging, and other input requirements.

 

MAJOR CUSTOMERS

 

During the year ended December 31, 2021, two customers collectively accounted for approximately 23% of our total net sales. These customers collectively accounted for approximately 32% of net accounts receivable as of December 31, 2021.

  

SEGMENTS

 

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 Company performance, has been identified collectively as the Chief Executive Officer and, Chief Financial Officer. 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.

  

DANONE SA

 

Since October 1999, Danone SA, through subsidiaries (collectively “Danone”), has been the beneficial owner of approximately 22% of the outstanding common stock of Lifeway. Lifeway and Danone are parties to a Stockholders’ Agreement dated October 1, 1999, which as amended provides Danone the right to designate one director nominee, provides Danone with anti-dilutive rights relating to certain future offerings and issuances of capital stock, and grants Danone limited registration rights.

 

 

 

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INTELLECTUAL PROPERTY

 

We believe that our rights in our trademarks and service marks are important to our marketing efforts to develop brand recognition and differentiate our brand from our competitors and are a valuable part of our business. We own many domestic and international trademarks and service marks. In addition, we own numerous registered and unregistered copyrights, registered domain names, and proprietary trade secrets, trade dress, technology, know-how, processes, and other proprietary rights that are not registered. Depending on the jurisdiction, trademarks are generally valid as long as they are in use and/or their registrations are properly maintained, and they have not been found to have become generic. Registrations of trademarks can also generally be renewed indefinitely as long as the trademarks are in use. We also have licenses to use certain trademarks inside and outside of the United States and to certain product formulas, all subject to the terms of the agreements under which such licenses are granted. Lifeway’s policy is to pursue registration of intellectual property whenever appropriate. We protect our intellectual property rights by relying on a combination of trademark, copyright, trade dress, trade secret and other intellectual property laws, and domain name dispute resolution systems; as well as licensing agreements, third-party confidentiality, nondisclosure, and assignment agreements; and by policing third-party misuses of our intellectual property. We regard the Lifeway family of trademarks and other intellectual property as having substantial value and as being an important factor in the marketing of our products. The loss of such protection would have a material adverse impact on our operations and share price.

 

REGULATION

 

Lifeway is subject to extensive regulation by federal, state, and local governmental authorities. In the United States, agencies governing the manufacture, marketing, and distribution of our products include, among others, the Federal Trade Commission (“FTC”), the United States Food & Drug Administration (“FDA”), the United States Department of Agriculture (“USDA”), the United States Environmental Protection Agency (“EPA”), the Occupational Safety and Health Administration (“OSHA”), and their state and local equivalents. Under various statutes, these agencies prescribe, among other things, the requirements and standards for quality, safety, and representation of our products to consumers. We are also subject to federal laws and regulations relating to our products and production. For example, as required by the National Organic Program (“NOP”), we rely on third parties to certify certain of our products and production locations as organic. Additionally, our facilities are subject to various laws and regulations regarding the release of material into the environment and the protection of the environment in other ways.

 

Internationally, we are subject to the laws and regulatory authorities of the foreign jurisdictions in which we manufacture and sell our products, including the Food Standards Agency in the United Kingdom; the National Service of Health, Food Safety and Agro-Food Quality (known by its Spanish-language acronym “SENASICA”) and the Federal Commission for the Protection from Sanitary Risks (“COFEPRIS”) in Mexico; the Food Safety Authority in Ireland; and the European Food Safety Authority, which supports the European Commission, as well as individual country, province, state, and local regulations.

   

MILK INDUSTRY REGULATION

 

Our primary raw material is milk. The federal government establishes minimum prices for raw milk purchased in federally regulated areas. Some states have established their own rules for determining minimum prices. The federal government announces prices for raw milk each month. While we are subject to federal government regulations that establish minimum prices for milk, and we also pay producer (“over-order”) premiums, federal order administration costs, and other related charges that vary by milk product, location, and supplier.

 

 

 

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FOOD SAFETY

 

Lifeway takes appropriate precautions to ensure the safety of our products. In addition to routine inspections by state and federal regulatory agencies, including the USDA and FDA, we have instituted Company-wide quality systems that address topics such as supplier control; ingredient, packaging, and product specifications; preventive maintenance; pest control; and sanitation. Each of our facilities also has in place a hazard analysis critical control points (“HACCP”) plan that identifies critical pathways for contaminants and mandates control measures that must be used to prevent, eliminate or reduce relevant food-borne hazards. To the extent that the federal Food Safety Modernization Act applies to Lifeway’s business, we develop food safety plans and implement preventive measures to protect against food contamination. We also maintain a product recall plan, including lot identifiability and traceability measures that allow us to act quickly to reduce the risk of consumption of any product that we suspect may pose a health issue.

 

We maintain various types of insurance, including product liability and product recall coverages, which we believe to be sufficient to cover potential product liabilities.

 

We have also implemented the SQF program at our Illinois and Wisconsin facilities. SQF is a fully integrated food safety and quality management protocol designed specifically for the food sector. The SQF Code, based on universally accepted CODEX Alimentarius, HACCP guidelines and the Global Food Safety Initiative (“GFSI”) standards, offers a comprehensive methodology to manage food safety and quality simultaneously. SQF certification provides an independent and external validation that a product, process or service complies with international, regulatory and other specified standards.

 

SEASONALITY

 

Lifeway’s business is not seasonal.

 

EMPLOYEES

 

As of December 31, 2021, we employed 280 full-time and two part-time employees, of which 93 were members of a union bargaining unit.

 

AVAILABLE INFORMATION

 

Lifeway maintains a corporate website for investors at www.lifewayfoods.com and makes available, free of charge, through this website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports that we file with or furnish to the SEC as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

  

ITEM 1A        RISK FACTORS

 

In evaluating and understanding us and our business, you should carefully consider the risks described below, in conjunction with all of the other information included in this Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II, Item 7 and “Quantitative and Qualitative Disclosures About Market Risk” contained in Part II, Item 7A. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may become important factors that adversely affect our business. If any of the events or circumstances described in the following risk factors actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected.

 

 

 

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RISKS RELATED TO OUR BUSINESS

 

Our product categories face a high level of competition, which could negatively impact our sales and results of operations.

 

We compete with a limited number of other domestic kefir producers and consequently face a small amount of direct competition for kefir products. However, our kefir-based products compete with other dairy products, notably spoonable and drinkable yogurt, and, increasingly, with non-dairy probiotic products that incorporate kefir cultures but are not kefir. We face significant competition for limited retailer shelf space in each of our product categories. Competition in our product categories is based on product innovation, product quality, price, brand recognition and loyalty, effectiveness of marketing, promotional activity, and our ability to identify and satisfy consumer tastes and preferences. We believe that our brands have benefited in many cases from being the first to introduce products in their categories, and their success has attracted competition from other food and beverage companies that produce branded products, as well as from private label competitors. Some of our competitors, such as Danone, General Mills, Chobani, Hain Celestial Group, and Nestle, have substantial financial and marketing resources. These competitors and others may be able to introduce innovative products more quickly or market their products more successfully than we can, which could cause our growth rate to be slower than we anticipate and could cause sales to decline.

 

We also compete with producers of non-dairy products, such as Millennium Products and PepsiCo, that have lower ingredient and production-related costs. As a result, these competing producers may be able to offer their products to customers at a lower price point. This could cause us to lower our prices, resulting in lower profitability or, in the alternative, cause us to lose market share if we fail to lower prices. Furthermore, private label competitors are generally able to sell their products at lower prices because private label products typically have lower marketing costs than their branded counterparts. If our products fail to compete successfully with other branded or private label offerings, demand for our products and our sales volumes could be negatively impacted.

 

Additionally, due to high levels of competition, certain of our key retailers may demand price concessions on our products or may become more resistant to price increases for our products. Increased price competition and resistance to price increases have had, and may continue to have, a negative effect on our results of operations.

 

We may not be able to successfully implement our business strategy for our brands on a timely basis or at all.

 

We believe that our future success depends, in part, on our ability to implement our strategy of leveraging our existing brands with our new products to maintain our market position in our product categories; drive increased sales; acquire or establish new brands; and create strategic alliances including potential joint ventures. Our ability to implement this strategy depends, among other things, on our ability to:

 

  · enter into distribution and other strategic arrangements with third-party retailers and other potential distributors of our products;
     
  · compete successfully in the product categories in which we choose to operate;
     
  · introduce timely, new, cost-effective, and appealing products and innovate successfully within our existing product categories;
     
  · develop and maintain consumer interest in and demand for our brands considering prevailing consumer tastes and preferences; 
     
  · increase our brand recognition and loyalty;
     
  · enter into strategic arrangements with third-party suppliers to obtain necessary raw materials;
     
  · identify suitable acquisition candidates or joint venture partners and accurately assess their value, growth potential, strengths, weaknesses, contingent and other liabilities, and potential profitability;
     
  · negotiate acquisitions and joint ventures on terms acceptable to us; and
     
  · integrate acquired brands, products, or joint ventures into our company and our business strategy.

 

 

 

  8  

 

 

If we fail to execute these and other important elements of our business strategy, our business and results of operations could be adversely affected.

 

One key element of our business strategy is to introduce timely, new, cost-effective, and appealing products and to innovate successfully within our existing product categories. However, consumer tastes and preferences change rapidly, and evolve over time. Factors that may affect consumer tastes and preferences include:

 

  · dietary trends and increased attention to nutritional values, such as the sugar, fat, protein, fiber or calorie content of different foods and beverages;

 

  · concerns regarding the health effects of specific ingredients and nutrients, such as sugar, other sweeteners, dairy, soybeans, nuts, oils, vitamins, fiber and minerals;

 

  · concerns regarding the public health consequences associated with obesity, particularly among young people;

 

  · decisions by yogurt and non-dairy beverage manufacturers to mislabel their products as “kefir” in order to benefit from our branding and marketing efforts, a marketing ploy that can cause significant confusion and misunderstanding among consumers; and

 

  · increased awareness of the environmental and social effects of food processing.

 

Our future investments may not produce the results we expect when we expect them for a variety of reasons including those described herein. Our future product development and innovation will be reliant on our ability to identify and develop potential new growth opportunities. This process is inherently risky and will result in investments of substantial time and resources for which we may not achieve any return or value. Successful product development and innovation is also affected by our ability to launch new or improved products successfully and on a timely and cost-effective basis.

 

We may have to pay cash, incur debt, or issue equity, equity-linked, or debt securities to fund our business strategy, or may be unable to fund that strategy. Any of these events could adversely affect our financial results and our business. We could experience similar effects if we invest resources in a strategy that ultimately proves unsuccessful. If, due to a failure of our strategy or any other reason, consumer demand for our products declines, our sales volumes, results of operations, and our business could be negatively affected, and we may not be able to create or sustain growth or successfully implement our business strategy.

  

Interruption of our supply chain could affect our ability to manufacture or distribute products, could adversely affect our business and sales, and/or could increase our operating costs and capital expenditures.

 

We have several supply agreements with suppliers and co-packers that require them to provide us with specific finished goods, including packaging and kefir. For some of these products, we essentially rely on a single supplier or co-packer as our sole source for the item. The failure for any reason of any such sole source or other co-packer to fulfill its obligations under the applicable agreements with us or the termination or renegotiation of any such sourcing agreement could result in disruptions to our supply of finished goods and have an adverse effect on our results of operations. Additionally, our suppliers and co-packers are subject to risk, including labor disputes, union organizing activities, financial liquidity, inclement weather, natural disasters, supply constraints, and general economic and political conditions that could limit their ability to timely provide us with acceptable products, which could disrupt our supply of finished goods, or require that we incur additional expense by providing financial accommodations to the supplier or co-packer or taking other steps to seek to minimize or avoid supply disruption, such as establishing new arrangements with other providers. A new arrangement may not be available on terms as favorable to us as our existing arrangements, if at all.

 

Our inability to maintain sufficient internal capacity or establish satisfactory co-packing, warehousing and distribution arrangements could limit our ability to operate our business or implement our strategic plan and could negatively affect our sales volumes and results of operations.

 

 

 

  9  

 

 

Disruption of our manufacturing or distribution chains or information technology systems, including disruption due to cybersecurity threats, could adversely affect our business.

 

The success of our business depends, in part, on maintaining a strong production platform and we rely primarily on internal production resources to fulfill our manufacturing needs. Our ongoing initiatives to expand our production platform and our productive capacity could fail to achieve such objectives and, in any case, could increase our operating costs beyond our expectations and could require significant additional capital expenditures. If we cannot maintain sufficient production, warehousing, and distribution capacity, either internally or through third party agreements, we may be unable to meet customer demand and/or our manufacturing, distribution, and warehousing costs may increase, which could negatively affect our business.

  

Furthermore, damage or disruption to our manufacturing or distribution capabilities due to weather, natural disaster, fire, environmental incident, terrorism, cybersecurity threats and other security breaches, pandemic, strikes, the financial or operational instability of key distributors, warehousing, and transportation providers, or other reasons could impair our ability to manufacture or distribute our products.

 

We rely on a limited number of production and distribution facilities. A disruption in operations at any of these facilities or any other disruption in our supply chain relating to common carriers, supply of raw materials and finished goods, or otherwise, whether as a result of casualty, natural disaster, power loss, telecommunications failure, cybersecurity threat, terrorism, labor shortages, contractual disputes or other causes, could significantly impair our ability to operate our business and adversely affect our relationship with our customers. Furthermore, our insurance coverage may not be adequate to cover all related costs.

 

Our information technology systems are also critical to the operation of our business and essential to our ability to successfully perform day-to-day operations. These systems include, without limitation, networks, applications, and outsourced services in connection with the operation of our business. A failure of our information technology systems to perform as we anticipate could disrupt our business and result in transaction errors, processing inefficiencies, and sales losses, causing our business to suffer. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, systems failures, and cybersecurity threats. Cybersecurity threats in particular are persistent, evolve quickly and include, without limitation, computer viruses, unauthorized attempts to access information, denial of service attacks, and other electronic security breaches. Like our customers, suppliers, subcontractors and other third parties with whom we do business generally, we expect that we will continue to be the subject of cybersecurity threats. In some cases, we must rely on the safeguards put in place by the third parties with whom we do business to protect against security threats. We believe we have implemented appropriate measures and controls and have invested in sufficient resources to appropriately identify and monitor these threats and mitigate potential risks, including risks involving our customers and suppliers. However, there can be no assurance that any such actions will be sufficient to prevent cybersecurity breaches, disruptions to mission critical systems, the unauthorized release of sensitive information or corruption of data, or harm to facilities or personnel.

  

These threats and other events could disrupt our operations, or the operations of our customers, suppliers, subcontractors and other third parties; could require significant management attention and resources; could result in the loss of business, regulatory actions and potential liability; and could negatively impact our reputation among our customers and the public. Any of these outcomes could have a negative impact on our financial condition, results of operations, or liquidity.

 

Our debt and financial obligations could adversely affect our financial condition, our ability to obtain future financing, and our ability to operate our business.

 

We have outstanding debt obligations that could adversely affect our financial condition and limit our ability to successfully implement our business strategy. Furthermore, from time to time, we may need additional financing to support our business and pursue our business strategy, including strategic acquisitions. Our ability to obtain additional financing, if and when required, will depend on investor demand, our operating performance, the condition of the capital markets, and other factors. We cannot assure that additional financing will be available to us on favorable terms when required, or at all. If we raise additional funds through the issuance of equity, equity-linked, or debt securities, those securities may have rights, preferences, or privileges senior to those of our common stock, and, in the case of equity and equity-linked securities, our existing stockholders may experience dilution.

 

 

 

  10  

 

 

As of December 31, 2021, we had $2.77 million outstanding under the Revolving Credit Facility and $4.47 million outstanding under the note payable, net of $30 thousand of unamortized deferred financing. Our loan agreements contain certain restrictions and requirements that among other things:

 

  · require us to maintain a quarterly fixed charge coverage ratio and minimum working capital ratio;

 

  · limit our ability to obtain additional financing in the future for working capital, capital expenditures and acquisitions, to fund growth or for general corporate purposes;

 

  · limit our future ability to refinance our indebtedness on terms acceptable to us or at all;

 

  · limit our flexibility in planning for or reacting to changes in our business and market conditions or in funding our strategic growth plan; and

 

  · impose on us financial and operational restrictions.

 

Our ability to meet our debt service obligations will depend on our future performance, which will be affected by the other risk factors described in this Annual Report on Form 10-K. If we do not generate enough cash flow to pay our debt service obligations, we may be required to refinance all or part of our existing debt, sell our assets, borrow more money or raise equity. There is no guarantee that we will be able to take any of these actions on a timely basis, on terms satisfactory to us, or at all.

 

Our Revolving Credit Facility and term loan bear interest at variable rates. If market interest rates increase, it will increase our debt service requirements, which could adversely affect our cash flow.

 

Our loan agreements also contain provisions that restrict our ability to:

 

  · borrow money or guarantee debt;

 

  · create liens;

 

  · make specified types of investments and acquisitions;

 

  · pay dividends on or redeem or repurchase stock;

 

  · enter into new lines of business;

 

  · enter into transactions with affiliates; and

 

  · sell assets or merge with other companies.

  

These restrictions on the operation of our business could harm our ability to execute on our business strategy by, among other things, limiting our ability to take advantage of financing, merger and acquisition opportunities, and other corporate opportunities. Various risks, uncertainties, and events beyond our control could affect our ability to comply with these covenants. Unless cured or waived, a default would permit lenders to accelerate the maturity of the debt under the credit agreement and to foreclose upon the collateral securing the debt.

 

 

 

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Loss of our key management or other personnel, or an inability to attract such management and other personnel, could negatively impact our business.

 

We depend on the skills, working relationships, and continued services of key personnel, including our experienced senior management team. We also depend on our ability to attract and retain qualified personnel to operate and expand our business. If we lose one or more members of our senior management team whose responsibilities cannot otherwise be distributed among our other officers, or if we fail to attract talented new employees, our business and results of operations could be negatively affected.

 

Employee strikes and other labor-related disruptions may adversely affect our operations.

 

We have a union contract governing the terms and conditions of employment for a significant portion of our workforce. Although we believe union relations since the union’s certification as the exclusive bargaining representative of this portion of our workforce have been amicable, there is no assurance that this will continue in the future or that we will not be subject to future union organizing activity. There are potential adverse effects of labor disputes with our own employees or by others who provide warehousing, transportation, and distribution, both domestic and foreign, of our raw materials or other products. Strikes or work stoppages or other business interruptions could occur if we are unable to renew collective bargaining agreements on satisfactory terms or enter into new agreements on satisfactory terms, which could impair manufacturing and distribution of our products or result in a loss of sales, which could adversely impact our business, financial condition, or results of operations. The terms and conditions of existing, renegotiated, or new collective bargaining agreements could also increase our costs or otherwise affect our ability to fully implement future operational changes to enhance our efficiency or to adapt to changing business needs or strategy.

 

Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products and brands.

 

We consider our intellectual property rights, particularly our trademarks, but also our copyrights, registered domain names, and proprietary trade secrets, technology, know-how, processes and other proprietary rights to be a significant and valuable aspect of our business. We attempt to protect our intellectual property rights by relying on a combination of trademark, copyright, trade dress, trade secret, and other intellectual property laws, and domain name dispute resolution systems; as well as licensing agreements, third-party confidentiality, nondisclosure, and assignment agreements; and by policing third-party misuses of our intellectual property. Our failure to obtain or maintain adequate protection of our intellectual property rights, or any change in law or other changes that serve to lessen or remove the current legal protections of our intellectual property, may diminish our competitiveness and could materially harm our business.

 

We also face the risk of claims that we have infringed third parties’ intellectual property rights. Any claims of intellectual property infringement, even those without merit, could be expensive and time consuming to defend, cause us to cease making, licensing, or using products that incorporate the challenged intellectual property, require us to redesign or rebrand our products or packaging, divert management’s attention and resources, or require us to enter into royalty or licensing agreements to obtain the right to use a third party’s intellectual property. Any royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all. Additionally, a successful claim of infringement against us could result in our being required to pay significant damages, enter into costly license or royalty agreements, or stop the sale of certain products, any of which could have a negative effect on our results of operations.

  

The Smolyansky family controls a substantial portion of our common stock and has the ability to control the outcome of matters submitted for stockholder approval.

 

Members of the Smolyansky family together control 49.61% of our common stock and collectively, they could significantly influence any matter requiring approval by our stockholders, including the election of all of our directors and the approval or rejection of any merger, change of control, or other significant corporate transaction. It is unlikely that any person interested in acquiring Lifeway will be able to do so without obtaining the consent of some members of the Smolyansky family. The Smolyansky family’s interests may not always be aligned with other stockholders’ interests. By exercising their influence, members of the Smolyansky family could cause Lifeway to take actions that are at odds with the investment goals of institutional, short-term, non-voting, or other non-controlling investors, or that have a negative effect on our stock price.

 

 

 

 

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Recently identified material weaknesses in our internal control over financial reporting could have a significant adverse effect on our business and the price of our common stock.

 

Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial statements. As a public reporting company, we are subject to the rules and regulations established from time to time by the SEC and Nasdaq. These rules and regulations require, among other things, that we have, and periodically evaluate, procedures with respect to our internal control over financial reporting. In addition, as a public company we are required to document and test our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act so that our management can certify as to the effectiveness of our internal control over financial reporting.

 

We have identified a material weakness in our internal control. A description of the material weakness can be found in Item 9A of this Annual Report on Form 10-K.

 

Unless and until this material weakness has been remediated or should new material weaknesses arise or be discovered in the future, material misstatements could occur and go undetected in our interim or annual consolidated financial statements, and we may be required to restate our financial statements. In addition, we may experience delays in satisfying our reporting obligations or to comply with SEC rules and regulations, which could result in investigations and sanctions by regulatory authorities. Any of these results could adversely affect our business and the value of our common stock. 

 

RISKS RELATED TO OUR INDUSTRY

 

The consolidation of our customers or the loss of any of our largest customers could negatively impact our sales and results of operations.

 

Customers, such as supermarkets and food distributors, continue to consolidate. This consolidation has produced larger, more sophisticated organizations with increased negotiating and buying power that are able to resist price increases or demand increased promotional programs, as well as operate with lower inventories, decrease the number of brands that they carry and increase their emphasis on private label products, all of which could negatively impact our business. The consolidation of retail customers also increases the risk that a significant adverse impact on their business could have a corresponding material adverse impact on our business.

 

Two of our customers together accounted for 23% of our net sales in the fiscal year ended December 31, 2021. Where we enter into written agreements with our customers, they are generally terminable after short notice periods by the customer. In addition, our customers sometimes award contracts based on competitive bidding, which could result in lower profits for contracts we win and the loss of business for contracts we lose. The loss of any large customer, the reduction of purchasing levels, or the cancellation of any business from a large customer for an extended period of time could negatively affect our sales and results of operations.

  

We rely on sales made by or through our independent distributors to customers. Distributors purchase directly for their own account for resale. The loss of, or business disruption at, one or more of these distributors may harm our business. If we are required to obtain additional or alternative distribution agreements or arrangements in the future, we cannot be certain that we will be able to do so on satisfactory terms or in a timely manner. Our inability to enter into satisfactory distribution agreements may inhibit our ability to implement our business plan or to establish markets necessary to expand the distribution of our products successfully.

  

 

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We are subject to the risk of product contamination and product liability claims, which could harm our reputation, force us to recall products and incur substantial costs.

 

The sale of food products for human consumption involves the risk of injury to consumers. Such injuries may result from tampering by unauthorized third parties, inadvertent mislabeling, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the storage, processing, handling or transportation phases. We also may be subject to liability if our products or production processes violate applicable laws or regulations, including environmental, health, and safety requirements, or in the event our products cause injury, illness, or death.

 

Under certain circumstances, we may be required to recall or withdraw products, suspend production of our products, or cease operations, which may lead to a material adverse effect on our business. In addition, customers may cancel orders for such products as a result of such events. Even if a situation does not necessitate a recall or market withdrawal, and even if we and each of our co-packers and suppliers comply in all material respects with all applicable laws and regulations, we may become subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or physical harm, including the risk of reputational harm being magnified and/or distorted through the rapid dissemination of information over the Internet, including through news articles, blogs, chat rooms, and social media, could adversely affect our reputation with existing and potential customers and consumers and our corporate and brand image. Moreover, claims or liabilities of this type might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others. We maintain product liability and product recall insurance in amounts that we believe to be adequate. However, we cannot be sure that we will not incur claims or liabilities for which we are not insured or that exceed the amount of our insurance coverage. A product liability judgment against us or a product recall could have a material adverse effect on our business, consolidated financial condition, results of operations or liquidity.

 

We rely on independent certification for several of our products and facilities.

 

We rely on independent certification, such as certifications of our products as “organic,” or “gluten-free,” to differentiate our products from others. The loss of any independent certifications could adversely affect our market position as a probiotic-based product and natural, “better for you” foods company, which could harm our business. We rely on independent SQF certification at some of our facilities, a certification that some of our customers require us to maintain.

 

We must comply with the requirements of independent organizations or certification authorities in order to label our products as certified. For example, we can lose our “organic” certification if a manufacturing plant becomes contaminated with non-organic materials, or if it is not properly cleaned after a production run. In addition, all organic raw materials must be certified organic or organic compliant. Our products could lose their organic certifications if our raw material suppliers lose their organic certifications. Similarly, we could lose our SQF certification if we do not meet the requirements of the SQF Code. The loss of these certifications could cause us to lose customers that require Lifeway products and/or facilities to carry some or all of them, which could negatively affect our sales and results of operations.

 

Increases in the cost of raw milk could reduce our gross margin and profit.

 

Conventional and organic raw milk, our primary raw material, is an agricultural commodity that is subject to price fluctuations. Both conventional and organic milk prices in fiscal 2021 were higher than the prior year, and there can be no assurance that such prices will remain at these levels in the future. The supply and price of raw milk may be impacted by, among other things, weather, natural disasters, real or perceived supply shortages, lower dairy and crop yields, general increases in farm inputs and costs of production, political and economic conditions, labor actions, government actions, and trade barriers. Increases in the market price for raw milk or over-order premiums charged by producers may also impact our ability to enter into purchase commitments at a fixed price. There can be no assurance that our purchasing practices will mitigate future price risk. As a result, increases in the cost of raw milk could have an adverse impact on our profitability.

 

 

 

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In addition, the dairy industry continues to experience periodic imbalances between supply and demand for organic raw milk. Industry regulation and the costs of organic farming compared to costs of conventional farming can impact the supply of organic raw milk in the market. Oversupply levels of organic raw milk can increase competitive pressure on our products and pricing, while supply shortages can cause higher input costs and reduce our ability to deliver product to our customers. Cost increases in raw materials and other inputs could cause our profits to decrease significantly compared to prior periods, as we may be unable to increase our prices to offset the increased cost of these raw materials and other inputs. If we are unable to obtain raw materials and other inputs for our products or offset any increased costs for such raw materials and inputs, our business could be negatively affected.

 

Reduced availability of raw materials and other inputs, as well as increased costs for them, could adversely affect us.

 

Our business depends heavily on raw materials and other inputs in addition to conventional and organic raw milk, such as sweeteners, diesel fuel, packaging material, resin, and other commodities. Our raw materials are generally sourced from third-party suppliers, and we are not assured of continued supply, pricing, or exclusive access to raw materials from any of these suppliers. In 2021, costs to us increased primarily due to inflationary price increases of other ingredients, packaging materials, and freight. However, for market conditions or competitive reasons, our pricing actions may also lag input cost changes, or we may not be able to pass along the full effect of increases in raw materials and other input costs as we incur them.

 

The organic ingredients we use in some of our products are less plentiful and available from a fewer number of suppliers than their conventional counterparts. Competition with other manufacturers in the procurement of organic product ingredients may increase in the future if consumer demand for organic products increases.

 

Our business is subject to various food, environmental, and health and safety laws and regulations, which may increase our compliance costs, subject us to liabilities, or otherwise adversely affect our business.

 

Our business operations are subject to numerous requirements in the United States relating to food safety, production, and marketing, as well as the protection of the environment, and health and safety matters. The food production and marketing industry is subject to a variety of federal, state, local, and foreign laws and regulations, including food safety requirements related to the ingredients, manufacture, processing, storage, marketing, advertising, labeling, and distribution of our products, as well as those related to worker health and workplace safety. Our activities, both in and outside of the United States, are subject to extensive regulation. We are regulated by, among other federal and state authorities, the FDA, USDA, the U.S. Federal Trade Commission (“FTC”), and the U.S. Departments of Commerce, and Labor, as well as by similar authorities in the foreign countries in which we do business. Environmental laws including the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and the National Organic Standards of the U.S. Department of Agriculture, as well as similar state and local statutes and regulations in the United States and in each of the foreign countries in which we do business apply to our business operations as well. These laws and regulations govern, among other things, air emissions and the discharge of wastewater and other pollutants, the use of refrigerants, the handling and disposal of hazardous materials, and the cleanup of contamination in the environment.

 

In addition, the marketing and advertising of our products could make us the target of claims relating to alleged false or deceptive advertising under federal, state, and foreign laws and regulations, and we may be subject to initiatives that limit or prohibit the marketing and advertising of our products to children.

 

We are also subject to federal laws and regulations relating to our organic products and production. For example, as required by the National Organic Program (“NOP”), we rely on third parties to certify certain of our products and production locations as organic. Regulations and formal and informal positions taken by the NOP pursuant to the Organic Foods Production Act of 1990, which created the NOP, are subject to continued review and scrutiny.

 

 

 

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Changes in these laws or regulations or the introduction of new laws or regulations could increase our compliance costs, increase other costs of doing business for us, our customers, or our suppliers, or restrict our actions, which could adversely affect our results of operations. In some cases, new laws and regulations or other federal and state regulatory initiatives could interrupt distribution of our products or force changes in our production processes and our products. Governmental regulations also affect taxes and levies, healthcare costs, energy usage, immigration, and other labor issues, all of which may have a direct or indirect effect on our business or those of our customers or suppliers. These costs could negatively affect our results of operations and financial condition. Further, if we are found to be in violation of applicable laws and regulations in these areas, we could be subject to civil remedies, including third-party claims for property damage or personal injury, fines, injunctions, recalls, cleanup costs, and other civil sanctions, as well as potential criminal sanctions, any of which could have a material adverse effect on our business.

  

RISKS RELATED TO COVID-19 AND OTHER PANDEMIC OR DISEASE OUTBREAKS

 

Pandemics or disease outbreaks, such as the COVID-19 pandemic, may disrupt consumption and trade patterns, supply chains, available labor supply, and production processes, which could materially affect our operations and results of operations.

 

The ultimate impact that the COVID-19 pandemic or any future pandemic or disease outbreak will have on our business and our consolidated results of operations is uncertain.

 

To date we have seen increased customer and consumer demand for our products. We have not experienced significant supply chain disruptions or labor supply shortages and we have continued to be able to satisfy customer and consumer demand for our products. However, the COVID-19 pandemic, or any future pandemic, may limit the availability of, or increase the cost of, employees, ingredients, packaging and other inputs necessary to produce our products, and our operations may be negatively impacted. In 2021, our costs increased primarily due to inflationary price increases of milk, other ingredients, packaging materials, and freight. However, because of market conditions or for competitive reasons, our pricing actions may sometimes lag input cost changes, or we may not be able to pass along the full effect of increases in raw materials and other input costs as we incur them.

 

In 2022, social distancing, shelter-in-place and work-from-home mandates and recommendations have begun to be reduced or eliminated. The increased customer demand we have realized over the past two years as consumers increased their at-home consumption and e-commerce purchasing during the COVID-19 pandemic may change or decrease due to the decrease in social distancing and stay-at-home and work-from-home mandates and recommendations. We are unable to predict the nature and timing of when such change may occur, if at all.

 

The ultimate impact of the COVID-19 pandemic on our business will depend on many factors, including, among others, whether additional waves of COVID-19 or different variants of COVID-19 will affect the United States and other markets and the duration of any social distancing and stay home and work from home mandates or recommendations that may occur as a result of such COVID-19 wave or variant; our ability and the ability of our suppliers to continue to maintain production despite unprecedented demand in the food industry, supply chain disruptions, tight labor markets and increased raw materials and packaging costs; and the extent to which macroeconomic conditions resulting from the pandemic and the pace of the subsequent recovery impact consumer eating and shopping habits. We cannot predict the duration or scope of the disruption or the impact of any recovery from the impacts of COVID-19. Therefore, the financial impact cannot be reasonably estimated at this time.

 

Future pandemics or disease outbreaks could similarly adversely affect economies and financial markets, consumer spending and confidence levels and result in an economic downturn that affects customer demand for our products. Our efforts to manage and mitigate these risks may be unsuccessful, and the effectiveness of these efforts depends on factors beyond our control, including the duration and severity of any pandemic or disease outbreak, as well as third party actions taken to contain its spread and mitigate public health effects.

 

 

 

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ITEM 1B        UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2           PROPERTIES

 

We operate the following facilities:

 

Location   Owned / Leased   Principal Use
Morton Grove, Illinois   Owned   Production of kefir and cheese, principal executive offices
Waukesha, Wisconsin   Owned   Production of kefir, administrative offices
Niles, Illinois   Owned   Distribution center, administrative offices
Philadelphia, Pennsylvania   Owned   Production of kefir and cheese, administrative offices

 

Lifeway believes that its facilities are adequate for its current needs and that suitable additional space will be available on commercially acceptable terms as required. We believe that we have adequate insurance coverage for all our properties.

 

ITEM 3           LEGAL PROCEEDINGS

 

From time to time, we are engaged in litigation matters arising in the ordinary course of business. While the results of litigation and claims cannot be predicted with certainty, Lifeway believes that no such matter is reasonably likely to have a material adverse effect on our financial position or results of operations.

 

ITEM 4           MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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PART II

 

ITEM 5           MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is listed on the Nasdaq Global Market under the symbol “LWAY.” Trading commenced on March 29, 1988. As of June 17, 2022, there were approximately 55 holders of record of Lifeway’s Common Stock, one of which was Cede & Co., a nominee for Depository Trust Company, or DTC, and 75 financial institutions as nominees for beneficial owners or in “street name” the shares of which were deposited into participant accounts at DTC and are considered to be held of record by Cede & Co. as one stockholder.

 

Common stock price

 

The following table shows the high and low sale prices per share of our common stock as reported on the Nasdaq Global Market for each quarter during the two most recent fiscal years:

 

    Common Stock Price Range
    2020
    Low   High
First Quarter   $ 1.50     $ 2.65  
Second Quarter   $ 1.71     $ 2.99  
Third Quarter   $ 2.30     $ 7.45  
Fourth Quarter   $ 4.61     $ 7.81  

 

    2021
    Low   High
First Quarter   $ 5.21     $ 6.90  
Second Quarter   $ 4.56     $ 5.71  
Third Quarter   $ 5.15     $ 7.04  
Fourth Quarter   $ 4.60     $ 5.85  

 

Dividend Policy

 

Lifeway does not routinely declare and pay dividends. From time to time however our Board of Directors may declare and pay dividends depending on our operating cash flow, financial condition, capital requirements and such other factors as the Board of Directors may deem relevant.

 

There were no dividends declared or paid in fiscal 2021 or 2020.

 

 

 

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Issuer Purchases of Equity Securities

 

Period   Total number of shares purchased   Average price paid per share   Total number of shares purchased as part of a publicly announced program (a)   Approximate Dollar Value of Shares that may yet be Purchased Under the Plans or Programs
($ in thousands)
                 
1/1/2020 to 1/31/2020     97,739     $ 2.33       97,739     $ 3,738  
2/1/2020 to 2/28/2020     35,198     $ 2.49       35,198     $ 3,650  
3/1/2020 to 3/31/2020     45,469     $ 1.98       45,469     $ 3,560  
4/1/2020 to 4/30/2020     11     $ 2.01       11     $ 3,560  
Fiscal Year 2020     178,417     $ 2.27       178,417     $ 3,560  
                                 
7/1/2021 to 7/31/2021     250,000     $ 6.33       250,000     $  
Fiscal Year 2021     250,000     $ 6.33       250,000     $  

 

  (a) During the fourth quarter of 2015, Lifeway publicly announced a share repurchase program. On November 1, 2017, our Board of Directors amended the 2015 stock repurchase program (the “2017 amendment”), by adding to (i.e., exclusive of the shares previously authorized under the 2015 stock program repurchase) the authorization the lesser of $5,185 or 625 shares. The program has no expiration date. As of April 2020, the Company had reached the amended threshold of 625 shares and therefore no shares of common stock remain available to be purchased under the 2017 Repurchase Plan Amendment. On June 24, 2021, our Board authorized a plan to repurchase up to 250 shares of Common Stock in the open market within 24 months at no more than $10 per share (the “2021 Repurchase Plan”). As of December 31, 2021, the Company had reached the threshold of 250 shares and therefore no shares of common stock remain available to be purchased under the 2021 Repurchase Plan Amendment.

 

ITEM 6           [RESERVED]

 

 

ITEM 7           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of the financial condition and results of operations as of and for the years ended December 31, 2021 and 2020 should be read in conjunction with the audited consolidated financial statements and the notes to those statements that are included elsewhere in this Annual Report on Form 10-K. In addition to historical information, the following discussion contains certain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as "may," "could," "believe," "future," "depend," "expect," "will," "result," "can," "remain," "assurance," "subject to," "require," "limit," "impose," "guarantee," "restrict," "continue," "become," "predict," "likely," "opportunities," "effect," "change," "future," "predict," and "estimate," and similar terms or terminology, or the negative of such terms or other comparable terminology. Although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bounds of our knowledge of our business, our actual results could differ materially from those discussed in these statements. Factors that could contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section in Part I, Item 1A. We undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future.

 

 

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Restatement of Previously Issued Consolidated Financial Statements

 

During the preparation of our fiscal 2021 consolidated financial statements, we identified a material error in the accounting for our deferred income tax liabilities and goodwill. Specifically, in connection with our 2009 acquisition of Fresh Made, Inc., we did not record a deferred income tax liability and corresponding increase to goodwill related to the difference in the book and income tax bases for the $3.7 million Fresh Made indefinite-lived brand name intangible asset acquired. The error resulted in a $1.18 million understatement of both deferred income tax liabilities and goodwill of as of January 1, 2020. The Restatement had no impact on our Consolidated Statements of Operations, Consolidated Statements of Cash Flows, or Consolidated Statements of Stockholders’ Equity during 2021 and 2020. The impact of the Restatement on periods prior to 2020 had no effect on opening retained earnings as of January 1, 2020.

 

The accounting adjustments required to correct the error in the consolidated financial statements for the year ended December 31, 2020 as a result of completing the restatement process are described in Note 1 – Basis of presentation - Restatement of Previously Issued Consolidated Financial Statements included in “Part II – Item 8 – Financial Statements and Supplementary Data.” Note 17 – Restatement of previously issued unaudited consolidated financial statements presents the accounting adjustments to correct the error in the quarterly consolidated financial statements for the fiscal quarters in 2020 and 2021.

 

The accompanying Management’s Discussion and Analysis of Financial Condition and Results for Operation gives effect to the Restatement adjustments made to the previously reported Consolidated Financial Statements for the year ended December 31, 2020.

 

Recent Developments

 

COVID-19 Pandemic Impact

 

In December 2019, COVID-19 was first reported and subsequently characterized by the World Health Organization ("WHO") as a pandemic in March 2020. In an effort to reduce the global transmission of COVID-19, various policies and initiatives have been implemented by governments around the world, including orders to close businesses not deemed "essential", shelter-in-place orders enacted by state and local governments, and the practice of social distancing measures when engaging in essential activities.

 

During the first quarter of 2020, Management, anticipating the spread of COVID-19 and its effects, implemented a plan to mitigate effects of COVID-19 on supply and transportation of materials used to make and package our products, staffing, and transportation of our products to customers. Management’s proactive planning allowed the Company to avoid disruption to its manufacturing facilities and production, transportation, and sales and to meet the increased demand without delay. The Company has maintained full production capacity available at all locations and does not anticipate manufacturing or staffing disruptions in the near term.

 

To date, we have seen increased customer and consumer demand for our products. We have not experienced significant supply chain disruptions or labor supply shortages and we have continued to be able to satisfy customer and consumer demand for our products. However, the COVID-19 pandemic, or any future pandemic, may limit the availability of, or increase the cost of, employees, ingredients, packaging and other inputs necessary to produce our products, and our operations may be negatively impacted. In 2021, our costs increased primarily due to inflationary price increases of milk, other ingredients, packaging materials, and freight. However, because of market conditions or for competitive reasons, our pricing actions may sometimes lag input cost changes, or we may not be able to pass along the full effect of increases in raw materials and other input costs as we incur them.

 

Recently, in 2022, social distancing, shelter-in-place and work-from-home mandates and recommendations have begun to be reduced or eliminated. The increased customer demand for our products as consumers increased their at-home consumption and e-commerce purchasing during the COVID-19 pandemic may change or decrease due to the decrease in social distancing and stay-at-home and work-from-home mandates and recommendations. We are unable to predict the nature and timing of when such change may occur, if at all.

 

 

  

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Results of Operations

 

Comparison of Year Ended December 31, 2021 to Year Ended December 31, 2020 (in 000’s)

 

    December 31,
    2021   2020
      $       %       $       %  
                                 
Net sales     119,065       100.0 %     102,026       100.0 %
                                 
Cost of goods sold     87,604       73.6 %     72,006       70.6 %
Depreciation expense     2,751       2.3 %     3,087       3.0 %
Total cost of goods sold     90,355       75.9 %     75,093       73.6 %
                                 
Gross profit     28,710       24.1 %     26,933       26.4 %
                                 
Selling expenses     11,097       9.3 %     10,197       10.0 %
General & administrative expenses     11,611       9.8 %     11,661       11.4 %
Amortization expense     122       0.1 %     152       0.2 %
Total operating expenses     22,830       19.2 %     22,010       21.6 %
                                 
Income from operations     5,880       4.9 %     4,923       4.8 %
                                 
Other income (expense):                                
Interest expense     (116 )     (0.1 %)     (118 )     (0.1 %)
Gain on investments     2       0.0 %     4       0.0 %
Loss on sales or property and equipment     (88 )     (0.1 %)     (28 )     (0.0 %)
Other Income, net     (62 )     (0.0 %)     47       0.0 %
Total other income (expense)     (264 )     (0.2 %)     (95 )     (0.1 %)
                                 
Income before provision for income taxes     5,616       4.7 %     4,828       4.7 %
                                 
Provision for income taxes     2,305       1.9 %     1,596       1.6 %
                                 
Net income     3,311       2.8 %     3,232       3.1 %

 

 

 

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Net Sales

 

Net sales were $119,065 for the year ended December 31, 2021, an increase of $17,039 or 16.7% versus prior year. The net sales increase was primarily driven by higher volumes of our branded drinkable kefir and, to a lesser extent, the favorable impact of our acquisition of Glen Oaks Farms during the third quarter of 2021. Approximately 11% of the net sales increase results from our acquisition of Glen Oaks Farms during the third quarter of 2021. Approximately 20% of the net sales increase results from the Farmers to Families Food Box program with the USDA, which began during the middle of the first quarter of 2021 and ended during May 2021.

 

Gross Profit

 

Gross profit as a percentage of net sales decreased to 24.1% during the year ended December 31, 2021 from 26.4% during the same period in 2020. The decrease versus the prior year was primarily due to the unfavorable impact of milk pricing, and the inflationary price increases of other ingredients, packaging materials, and freight, partially offset by the decrease in depreciation expense and favorable labor efficiency due to increased volumes. We took favorable pricing actions beginning in December 2021 to recover input and freight cost inflation. However, for market conditions or competitive reasons, our pricing actions may also lag input cost changes, or we may not be able to pass along the full effect of increases in raw materials and other input costs as we incur them.

  

Selling Expenses

 

Selling expenses increased by $900 to $11,097 during the year ended December 31, 2021 from $10,197 during the same period in 2020. The increase versus prior year is primarily due to increased investment in advertising and marketing programs, partially offset by lower compensation and broker expense.

 

General and Administrative Expenses

 

General and administrative expenses decreased $50 to $11,611 during the year ended December 31, 2021 from $11,661 during the same period in 2020. The decrease is primarily a result of lower compensation, related party consulting, and office rent expense, partially offset by higher employee incentive compensation expense.

 

Provision for Income Taxes

 

The provision for income taxes includes federal, state and local income taxes. The provision for income taxes was $2,305 and $1,596 during the year ended December 31, 2021 and 2020, respectively.

 

Our effective income tax rate was 41.0% in 2021 compared to 33.1% in 2020. The statutory Federal and state tax rates remained consistent from 2020 to 2021. The Company has a number of items that are nondeductible or are discrete adjustments to tax expense. The Company consistently reflects non-deductible officer compensation expense, non-deductible compensation expense related to equity incentive awards and separate state tax rates from year to year. Although similar items were reflected in 2021, the percentage effect is different due to the difference in pre-tax income in 2021 compared to 2020.

 

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, enacted tax legislation, 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 in the period in which they occur.

 

 

 

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Section 162(m) of the Internal Revenue Code (the “Code”) limits the deductibility of compensation paid to certain of our executives. Under Section 162(m), no tax deduction in taxable years beginning after December 31, 2017 is allowed for compensation paid to any covered employee to the extent that the total compensation for that covered employee exceeds $1,000,000 in any taxable year.

 

Income taxes are discussed in Note 10 in the Notes to the Consolidated Financial Statements.

  

Net Income (Loss)

 

We reported net income of $3,311 or $0.21 per basic and diluted common share for the year ended December 31, 2021 compared to net income of $3,232 or $0.21 per basic and diluted common share in the same period in 2020.

 

Liquidity and Capital Resources

 

Cash Flow

 

At this time, the COVID-19 pandemic has not materially impacted our operations. We expect to meet our foreseeable liquidity and capital resource requirements, and to ensure the continuation of the Company as a going concern, through anticipated cash flows from operations, our revolving credit facility and cash and cash equivalents. If additional borrowings are needed, approximately $2,223 was available under the Revolving Credit Facility as of December 31, 2021. See Note 7 to our Consolidated Financial Statements for additional information regarding our Revolving Credit Facility. We are in compliance with the terms of the Credit Agreement and expect to meet foreseeable financial requirements. The success of our business and financing strategies will continue to provide us with the financial flexibility to take advantage of various opportunities as they arise. Given the dynamic nature of COVID-19, we will continue to assess our liquidity needs while continuing to manage our discretionary spending and investment strategies.

  

The ultimate impact that the COVID-19 pandemic or any future pandemic or disease outbreak will have on our business and our consolidated results of operations is uncertain.

  

 

 

 

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Sources and Uses of Cash

 

Lifeway had a net increase in cash and cash equivalents of $1,307 and $4,090 during the years ended December 31, 2021 and 2020, respectively. The drivers of the year over year change are as follows:

  

Net cash provided by operating activities was $6,144 in 2021 compared to $6,385 in 2020, a decrease in cash provided of $241. The decrease is primarily due to the change in working capital.

 

Net cash used in investing activities was $7,722 in 2021 compared to $1,890 in 2020, an increase in cash used of $5,832. The increase reflects the August 2021 acquisition of Glen Oak Farms, Inc. The $5,800 acquisition purchase price was funded through proceeds from our new $5,000 term loan and existing cash. Capital spending was $1,922 in 2021 compared to $1,895 in 2020. Our capital spending is focused in three core areas: growth, cost reduction, and facility improvements. Growth capital spending supports new product innovation and enhancements. Cost reduction and facility improvements support manufacturing efficiency, safety and productivity.

 

Net cash provided by financing activities was $2,885 during the year ended December 31, 2021 compared to net cash used in financing activities of $405 in the same period in 2020. The increase in net cash provided by financing activities relates to the term loan entered into during August 2021 in connection with the acquisition of Glen Oaks Farms, Inc. See the Debt Obligations section below for further detail.

 

On June 24, 2021, Lifeway’s Board authorized a plan to repurchase up to 250 shares of Common Stock in the open market within 24 months at no more than $10 per share. We repurchased all 250 shares of common stock at a cost of $1,583 during the three-month period ended September 30, 2021. We intend to hold repurchased shares in treasury for general corporate purposes, including issuances under our 2015 Omnibus Incentive Plan. Treasury shares are accounted for using the cost method.

 

 

  24  

 

 

Debt Obligations

 

On August 18, 2021, Lifeway entered into the Fourth Modification (the “Fourth Modification”) to the Amended and Restated Loan and Security Agreement (as amended and modified from time to time, the “Credit Agreement”) with its existing lender and certain of its subsidiaries. The Fourth Modification amends the Credit Agreement to provide for, among other things, a $5 million term loan by the existing lender to the borrowers to be repaid in quarterly installments of principal and interest over a term of five years (the “Term Loan”).  The termination date of the Term Loan is August 18, 2026, unless earlier terminated. Except for the addition of the Term Loan, the Credit Agreement remains substantively unchanged and in full force and effect.

 

As of December 31, 2021, we had $2,777 outstanding under the Revolving Credit Facility and $4,470 outstanding under the note payable, net of $30 of unamortized deferred financing fees. We had $2,223 available for future borrowings under the Revolving Credit Facility as of December 31, 2021. As amended, all outstanding amounts under the Loans bear interest, at Lifeway’s election, at either the lender Base Rate (the Prime Rate minus 1.00%) or the LIBOR plus 1.95%, payable monthly in arrears. Lifeway is also required to pay a quarterly unused line fee of 0.20% on the Revolving Credit Facility and, in conjunction with the issuance of any letters of credit, a letter of credit fee of 0.20%. The interest rate on debt outstanding under the Loans as of December 31, 2021 was 2.15%.

 

We are in compliance with all applicable financial debt covenants as of December 31, 2021. See Note 7 to our Consolidated Financial Statements for additional information regarding our indebtedness and related agreements.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet financing arrangements as defined in Item 303(a)(4) of Regulation S-K.

 

Contractual Obligations

 

Not applicable.

 

Critical Accounting Estimates 

 

Critical accounting estimates are those estimates made in accordance with U.S. GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP with no need for the application of our judgement. In certain circumstances, the preparation of our Consolidated Financial Statements in conformity with U.S. GAAP requires us to use our judgment to make certain estimates and assumptions. These estimates affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of net sales and expenses during the reporting period. We believe in the quality and reasonableness of our critical accounting estimates; however, materially different amounts might be reported under different conditions or using assumptions, estimates or making judgments different from those that we have applied. Management has discussed the development and selection of these critical accounting policies, as well as our significant accounting policies (see Note 2 to the Consolidated Financial Statements), with the Audit Committee of our Board of Directors. We have identified the policies described below as our critical accounting policies.

 

 

 

  25  

 

 

Goodwill and intangible asset valuation

 

Goodwill totaled $11,704 as of December 31, 2021. The Company completed its annual goodwill impairment analysis as of December 31, 2021. Our assessment did not result in an impairment. Goodwill represents the excess purchase price over the fair value of the net tangible and other identifiable intangible assets acquired. We estimate the fair value of our one reporting unit annually (as of December 31), or more frequently if certain conditions exist, using a combination of the fair values derived from both the income approach and the market approach. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on our estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used to determine the present value of future cash flows is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the business's ability to execute on the projected cash flows. The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable publicly-traded companies with similar operating and investment characteristics. The resulting fair value, based on the income and market approaches, is then compared to the carrying value to determine if impairment is necessary.

 

We reviewed our indefinite lived intangible assets, which consist of brand names totaling $3,700 as of December 31, 2021, using the relief from royalty method. Significant assumptions include the royalty rate, revenue growth rates, and discount rates. Our assumptions were based on historical performance and management estimates of future performance. Our assessment did not result in an impairment in 2021.

 

Sales discounts & allowance.

 

We offer various trade promotions and sales incentive programs to customers and consumers. From time to time, we grant certain sales discounts to customers which are classified as a reduction in sales. The measurement and recognition of discounts and allowances involve the use of judgment and our estimates are made based on historical experience and specific customer program accruals. Differences between estimated and actual discount and allowance costs are normally not material and are recognized in earnings in the period such differences are determined. The process for analyzing trade promotion programs could impact our results of operations and trade spending accruals depending on how actual results of the programs compare to original estimates. As of December 31, 2021, we had $1,170 of accrued discounts and allowances.

 

Share-based compensation.

 

Certain employees and non-employee directors receive various forms of share-based payment awards and we recognize compensation expense for these awards based on their grant date fair values. The fair values of stock option awards are estimated on the grant date using the Black-Scholes option pricing model, which incorporates certain assumptions regarding the expected term of an award and expected stock price volatility. The expected term is determined under the simplified method, using an average of the contractual term and vesting period of the stock options. The expected volatility is based on the historic volatility of our common stock. We do not estimate forfeitures in measuring the grant date fair value, but rather account for forfeitures as they occur. Key assumptions are described in further detail in Note 11 to our consolidated financial statements. No stock options were issued during 2021 or 2020.

 

Income taxes.

 

We pay income taxes based on tax statutes, regulations, and case law of the various jurisdictions in which we operate. At any given time, multiple tax years are subject to audit by the various taxing authorities. Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse.

  

 

 

  26  

 

 

We recognize an income tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The income tax benefit recognized in our financial statements from such a position is measured based on the largest estimated benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. These judgments and estimates made at a point in time may change based on the outcome of tax audits and changes to, or further interpretations of, regulations. If such changes take place, there is a risk that our tax rate may increase or decrease in any period, which would impact our earnings. Future business results may affect deferred tax liabilities or the valuation of deferred tax assets over time. 

 

Recent Accounting Pronouncements.

 

See Note 2, Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for information regarding recent accounting pronouncements.

 

ITEM 7A        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable

 

ITEM 8           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Report of Independent Registered Accounting Firm (PCAOB ID 199) F-1
Consolidated Balance Sheets as of December 31, 2021 and 2020 F-2
Consolidated Statements of Operations for the Years Ended December 31, 2021 and 2020 (as restated) F-3
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2021 and 2020 (as restated) F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020 (as restated) F-5
Notes to Consolidated Financial Statements (as restated) F-6

 

 

 

 

 

 

 

 

 

 

 

 

  27  

 

 

Report of Independent Registered Public Accounting Firm

 

 

To the Board of Directors and

Stockholders of Lifeway Foods, Inc. and Subsidiaries:

 

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Lifeway Foods, Inc. and Subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

 

Restatement of the 2020 Financial Statements

 

As discussed in Note 1, the 2020 financial statements have been restated to correct a misstatement.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

 

 

 

/s/ Mayer Hoffman McCann P.C.

 

 

We have served as the Company's auditor since 2015

Chicago, Illinois

July 21, 2022

 

 

 

  F- 1  

 

 

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2021 and 2020

(In thousands)

 

             
    December 31,  
    2021    

2020

(As Restated)

 
Current assets                
Cash and cash equivalents   $ 9,233     $ 7,926  
Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $1,170 and $1,350 at December 31, 2021 and 2020, respectively     9,930       8,002  
Inventories, net     8,285       6,930  
Prepaid expenses and other current assets     1,254       1,163  
Refundable income taxes     344       31  
Total current assets     29,046       24,052  
                 
Property, plant and equipment, net     20,130       21,048  
Operating lease right-of use asset     216       345  
                 
Intangible assets                
Goodwill and indefinite-lived intangibles     15,404       14,004  
Other intangible assets, net     4,278        
Total intangible assets     19,682       14,004  
                 
Other Assets     1,800       1,800  
Total assets   $ 70,874     $ 61,249  
                 
Current liabilities                
Current portion of note payable   $ 1,000     $  
Accounts payable     6,614       5,592  
Accrued expenses     3,724       2,196  
Accrued income taxes     725       653  
Total current liabilities     12,063       8,441  
Line of credit     2,777       2,768  
Note Payable     3,470        
Operating lease liabilities     85       165  
Deferred income taxes, net     3,201       2,944  
Other long-term liabilities     147       77  
Total liabilities     21,743       14,395  
                 
Commitments and contingencies            
                 
Stockholders’ equity                
Preferred stock, no par value; 2,500 shares authorized; none issued            
Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,435 and 15,604 shares outstanding at 2021 and 2020     6,509       6,509  
Paid-in capital     2,552       2,600  
Treasury stock, at cost     (13,436 )     (12,450 )
Retained earnings     53,506       50,195  
Total stockholders’ equity     49,131       46,854  
                 
Total liabilities and stockholders’ equity   $ 70,874     $ 61,249  

 

See accompanying notes to consolidated financial statements

 

 

 

  F- 2  

 

 

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

For the Years Ended December 31, 2021 and 2020

(In thousands, except per share data)

 

             
    2021    

2020

(As Restated)

 
             
Net sales   $ 119,065     $ 102,026  
                 
Cost of goods sold     87,604       72,006  
Depreciation expense     2,751       3,087  
Total cost of goods sold     90,355       75,093  
                 
Gross profit     28,710       26,933  
                 
Selling expenses     11,097       10,197  
General and administrative     11,611       11,661  
Amortization expense     122       152  
Total operating expenses     22,830       22,010  
                 
Income from operations     5,880       4,923  
                 
Other income (expense):                
Interest expense     (116 )     (118 )
Realized gain on investments, net     2       4  
Loss on sale of property and equipment     (88 )     (28 )
Other (expense) income     (62 )     47  
Total other income (expense)     (264 )     (95 )
                 
Income before provision for income taxes     5,616       4,828  
                 
Provision for income taxes     2,305       1,596  
                 
Net income   $ 3,311     $ 3,232  
                 
Basic earnings per common share   $ 0.21     $ 0.21  
                 
Diluted earnings per common share   $ 0.21     $ 0.21  
                 
Weighted average number of shares outstanding - Basic     15,537       15,597  
                 
Weighted average number of shares outstanding - Diluted     15,773       15,766  

 

See accompanying notes to consolidated financial statements

 

 

  F- 3  

 

 

 

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

For the Years Ended December 31, 2021 and 2020

(In thousands)

 

 

                                           
    Common Stock                    
    Issued     In treasury     Paid-In     Retained     Total  
    Shares     $     Shares     $     Capital     Earnings     Equity  
                                           
Balance, January 1, 2020 (As Restated)     17,274     $ 6,509       (1,564 )   $ (12,601 )   $ 2,380     $ 46,963     $ 43,251  
                                                         
Cumulative impact of change in accounting principles, net of tax                                          
                                                         
Treasury stock purchased                 (179 )     (405 )                 (405 )
                                                         
Issuance of common stock in connection with stock-based compensation                 74       556       (62 )           494  
                                                         
Stock-based compensation                             282             282  
                                                         
Net income                                   3,232       3,232  
                                                         
Balance, December 31, 2020     17,274     $ 6,509       (1,669 )   $ (12,450 )   $ 2,600     $ 50,195     $ 46,854  
                                                         
Treasury stock purchased                 (250 )     (1,583 )                 (1,583 )
                                                         
Issuance of common stock in connection with stock-based compensation                 80       597       (721 )           (124 )
                                                         
Stock-based compensation                             673             673  
                                                         
Net Income                                   3,311       3,311  
                                                         
Balance, December 31, 2021     17,274     $ 6,509       (1,839 )   $ (13,436 )   $ 2,552     $ 53,506     $ 49,131  

 

See accompanying notes to consolidated financial statements

 

 

  F- 4  

 

 

 

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2021 and 2020

(In thousands)

 

 

             
    2021    

2020

(As Restated)

 
             
Cash flows from operating activities:                
Net income   $ 3,311     $ 3,232  
Adjustments to reconcile net income to operating cash flow:                
Depreciation and amortization     2,873       3,239  
Non-cash interest expense     11       23  
Non-cash rent expense     1       (37 )
Bad debt expense     2       (6 )
Deferred Revenue     (30 )     (91 )
Stock-based compensation     1,144       393  
Deferred income taxes     257       841  
Loss on sale of property and equipment     88       28  
(Increase) decrease in operating assets:                
Accounts receivable     (1,931 )     (1,304 )
Inventories     (1,356 )     (538 )
Refundable income taxes     (313 )     649  
Prepaid expenses and other current assets     (91 )     423  
Increase (decrease) in operating liabilities:                
Accounts payable     1,022       311  
Accrued expenses     504       (1,278 )
Operating lease asset amortization/liability            
Accrued income taxes     72       500  
Net cash provided by operating activities     5,564       6,385  
                 
Cash flows from investing activities:                
Purchases of property and equipment     (1,922 )     (1,895 )
Proceeds from sale of property and equipment           5  
Acquisition, net of cash acquired     (5,220 )      
Net cash used in investing activities     (7,142 )     (1,890 )
                 
Cash flows from financing activities:                
Purchase of treasury stock     (1,583 )     (405 )
Payment of deferred financing cost     (32 )      
Proceeds from note payable     5,000        
Repayment of note payable     (500 )      
Net cash provided by (used in) financing activities     2,885       (405 )
                 
Net increase in cash and cash equivalents     1,307       4,090  
Cash and cash equivalents at the beginning of the period     7,926       3,836  
Cash and cash equivalents at the end of the period   $ 9,233     $ 7,926  
                 
Supplemental cash flow information:                
Cash paid for income taxes, net of (refunds)   $ 2,288     $ (426 )
Cash paid for interest   $ 102     $ 99  
Non-cash investing activities                
Increase (decrease) in right-of-use assets and operating lease obligations   $ 45     $ (44 )
Business acquisition escrow payable   $ 580     $  
Non-cash financing activities                
Issuance of common stock under equity incentive plans   $     $ 522  

 

See accompanying notes to consolidated financial statements

 

  F- 5  

 

 

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

(In thousands)

 

 

Note 1 – Basis of presentation

 

The consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include all of the assets, liabilities and results of operations of Lifeway’s wholly owned subsidiaries (collectively “Lifeway” or the “Company”). All inter-company balances and transactions have been eliminated in the consolidated financial statements.

 

Restatement of Previously Issued Consolidated Financial Statements

 

Lifeway has restated herein its consolidated financial statements as of and for the year ended December 31, 2020. In addition, the Company has restated its unaudited quarterly consolidated financial statements for the first three quarters of the years ended December 31, 2020 and 2021, as presented in Note 17 – Correction of previously issued unaudited consolidated financial statements. Lifeway has also restated impacted amounts within the notes to the consolidated financial statements, as applicable.

 

Restatement Background

 

During the preparation of the fiscal 2021 consolidated financial statements, the Company identified an error in the accounting for its deferred income tax liabilities and goodwill. Specifically, in connection with its 2009 acquisition of Fresh Made, Inc., the Company did not record a deferred income tax liability and corresponding increase to goodwill related to the difference in the book and income tax bases for the $3,700 Fresh Made indefinite-lived brand name intangible asset acquired. The error resulted in a $1,180 understatement- of both deferred income tax liabilities and goodwill of as of January 1, 2020. The Restatement had no impact on the Company’s Consolidated Statements of Operations, Consolidated Statements of Cash Flows, or Consolidated Statements of Stockholders’ Equity during 2021 and 2020. The impact of the Restatement on periods prior to 2020 had no effect on opening retained earnings as of January 1, 2020.

 

 

 

 

  F- 6  

 

 

The following table summarizes the impact of the restatement adjustments on the Consolidated Balance Sheet for the year ended December 31, 2020.

 

                       
  December 31, 2020  
    As Previously Reported     Restatement Adjustment     As Restated  
Current assets                        
Cash and cash equivalents   $ 7,926     $     $ 7,926  
Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $1,350 at December 31, 2020     8,002             8,002  
Inventories, net     6,930             6,930  
Prepaid expenses and other current assets     1,163             1,163  
Refundable income taxes     31             31  
Total current assets     24,052             24,052  
                         
Property, plant and equipment, net     21,048             21,048  
Operating lease right-of use asset     345             345  
                         
Intangible assets                        
Goodwill and indefinite-lived intangibles     12,824       1,180       14,004  
Other intangible assets, net                  
Total intangible assets     12,824       1,180       14,004  
                         
Other Assets     1,800             1,800  
Total assets   $ 60,069     $ 1,180     $ 61,249  
                         
Current liabilities                        
Accounts payable   $ 5,592           $ 5,592  
Accrued expenses     2,196             2,196  
Accrued income taxes     653             653  
Total current liabilities     8,441             8,441  
Line of credit     2,768             2,768  
Operating lease liabilities     165             165  
Deferred income taxes, net     1,764       1,180       2,944  
Other long-term liabilities     77             77  
Total liabilities     13,215       1,180       14,395  
                         
Commitments and contingencies                  
                         
Stockholders’ equity                        
Preferred stock, no par value; 2,500 shares authorized; none issued                  
Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,604 shares outstanding at 2020     6,509             6,509  
Paid-in capital     2,600             2,600  
Treasury stock, at cost     (12,450 )           (12,450 )
Retained earnings     50,195             50,195  
Total stockholders’ equity     46,854             46,854  
                         
Total liabilities and stockholders’ equity   $ 60,069     $ 1,180     $ 61,249  

 

 

  F- 7  

 

 

Note 2 – Summary of significant accounting policies

 

Use of estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to use judgement 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 the reported amounts of net sales 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.

 

During the fourth quarter of 2021, the Company completed an assessment of the useful life of its indefinite-lived brand name intangible asset and determined that it should adjust the estimated useful life from an indefinite length to 15 years. The change in accounting estimate will be effective January 1, 2022, at which time the Company will begin amortizing the asset over 15 years. The future amortization expense is included in the five-year intangible asset amortization table in Note 5 – Goodwill and Intangible Assets.

 

Going Concern

 

The Company follows the guidance in Accounting Standards Codification (“ASC”) 205-40, Presentation of Financial Statements - Going Concern which requires management to assess an entity’s ability to continue as a going concern and to provide related disclosure in certain circumstances. There were no conditions or events, when considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued.

 

Cash and cash equivalents

 

Lifeway considers cash and all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates or equals fair value due to their short-term nature.

 

Lifeway from time to time may have bank deposits in excess of insurance limits of the Federal Deposit Insurance Corporation. The Company places its cash and cash equivalents with high credit quality financial institutions. Lifeway has not experienced any losses in such accounts and believes the financial risks associated with these financial instruments are minimal.

  

The Company has $580 of restricted cash which is included in cash and cash equivalents as of December 31, 2021. The restricted cash balance represents escrow funds deposited by Lifeway in connection with the September 18, 2021 acquisition of certain assets of Glen Oaks Farms, Inc. The funds are security for the liability and indemnity obligations of seller as defined under the asset purchase agreement. The funds will remain in escrow for twelve months from the acquisition closing date, at which time the funds, less any amounts for outstanding seller obligations, will be remitted to the sellers.

 

Revenue Recognition

 

Lifeway sells food and beverage products across select product categories to customers predominantly within the United States (see Note 12 - Segments, Products and Customers). The Company also sells bulk cream, a byproduct of its fluid milk manufacturing process. In accordance with ASC 606, Revenue from Contracts with Customers, Lifeway recognizes revenue when control over the products transfers to its customers, which generally occurs upon delivery to its customers or their common carriers. The amount of revenue recognized reflects the consideration to which the Company expects 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. The Company applies 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.

 

 

  F- 8  

 

 

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.

 

Lifeway accounts 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, the Company does not capitalize contract inception costs and it capitalizes product fulfillment costs in accordance with U.S. GAAP and its inventory policies. Lifeway does not have any significant deferred revenue or unbilled receivables at the end of a period. It generally does not receive noncash consideration for the sale of goods, nor does it grant payment financing terms greater than one year.

 

Accounts Receivable

 

Lifeway provides credit terms to customers in-line with industry standards and maintain allowances for potential credit losses based on historical experience. Customer balances are written off after all collection efforts are exhausted. Estimated product returns, which have not been material, are deducted from sales at the time of revenue recognition. The Company does not charge interest on past due accounts receivable.

 

Inventories

 

Inventories are stated at the lower of cost or net realizable value, valued on a first in, first out basis (“FIFO”). The costs of finished goods inventories include raw materials, direct labor, and overhead costs. Inventories are stated net of reserves for excess or obsolete inventory.

 

Property, plant and equipment

 

Property, plant and equipment are recorded at cost. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets as follows: 

   
Asset   Useful Life
Buildings and improvements   10 – 39 years
Machinery and equipment   5 – 12 years
Office equipment   3 – 7 years
Vehicles   5 years
Leasehold improvements   Shorter of expected useful life or lease term

  

The Company performs impairment tests when circumstances indicate that the carrying value of an asset may not be recoverable. Expenditures for repairs and maintenance, which do not improve or extend the life of the assets, are expensed as incurred.

 

 

 

 

  F- 9  

 

 

Intangible Assets

 

Goodwill and indefinite-lived intangible assets

 

Goodwill represents the excess purchase price over the fair value of the net tangible and other identifiable intangible assets acquired. Lifeway estimates the fair value of its one reporting unit annually (as of December 31), or more frequently if certain conditions exist, using a combination of the fair values derived from both the income approach and the market approach. Under the income approach, it calculates the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on the Company’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used to determine the present value of future cash flows is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the business's ability to execute on the projected cash flows. The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable publicly traded companies with similar operating and investment characteristics. The resulting fair value, based on the income and market approaches, is then compared to the carrying value to determine if impairment is necessary.

 

Lifeway assesses whether indefinite-lived intangible asset impairment exists using both qualitative and quantitative assessments annually in the fourth quarter or more frequently, if certain conditions exist. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If, based on this qualitative assessment, the Company determines it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount or if it elects not to perform a qualitative assessment, a quantitative assessment is performed to determine whether an indefinite-lived intangible asset impairment exists. Lifeway tests the indefinite-lived intangible assets for impairment by comparing the carrying value to the fair value based on current revenue projections of the related operations, under the relief from royalty method. Any excess of the carrying value over the amount of fair value is recognized as an impairment. Any such impairment would be recognized in full in the reporting period in which it has been identified.

 

Definite lived intangible assets

 

Intangible assets acquired in a business combination are recorded at their estimated fair values at the date of acquisition. Identifiable intangible assets with finite lives are amortized over their estimate useful lives as follows: 

   
Asset   Useful Life
Recipes   4 years
Brand names   8-15 years
Formula   10 years
Customer lists   5-10 years
Customer relationships   15 years

 

All amortization expense related to intangible assets is recorded in Amortization expense in the consolidated statements of operations.

  

Amortizable intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Lifeway conducts more frequent impairment assessments if certain conditions exist, such as 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 its products or changes in the size of the market for its products. If an evaluation of the undiscounted cash flows indicates impairment, the asset is written down to its estimated fair value, which is generally based on discounted future cash flows. If the estimated remaining useful life of an intangible asset is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life.

 

 

  F- 10  

 

 

Fair value measurements

 

Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3. Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

 

Lifeway’s financial assets and liabilities that are not carried at fair value on a recurring basis include cash and cash equivalents, accounts receivable, other receivables, accounts payable, accrued expenses and revolving line of credit for which carrying value approximates fair value.

 

The Company records its investments in equity securities without a readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. As of December 31, 2021, and 2020, the Company has one investment without a readily determinable fair value which is recorded at $1,800 in other assets on the consolidated balance sheet.  The investment cost of $1,800 includes a cumulative unrealized gain of $1,731 resulting from an observable price change in 2019.  There were no upward or downward adjustments to the investment cost during 2021 or 2020.

 

Income taxes

 

The Provision for income taxes includes federal, state, local and foreign income taxes currently payable, and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using enacted tax rates expected to apply to taxable income in the year in which the deferred tax assets or liabilities are expected to be realized or settled. The principal sources of temporary differences are different depreciation and amortization methods for financial statement and tax purposes, incentive compensation, unrealized gain, capitalization of indirect inventory costs for tax purposes, reserves for excess and obsolete inventory and the allowance for doubtful accounts. Valuation allowances are recorded to reduce deferred tax assets when it is more likely not that a tax benefit will not be realized. Deferred income tax expense or benefit is based on the changes in the asset or liability from period to period.

  

Lifeway analyzes filing positions in all 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 Company recognizes the income tax benefit from an uncertain tax position when it is more likely than not that, based on technical merits, the position will be sustained upon examination, including resolutions of any related appeals or litigation processes. It applies a more likely than not threshold to the recognition and derecognition of uncertain tax positions. Accordingly, Lifeway recognizes the amount of tax benefit that has a greater than 50% likelihood of being ultimately realized upon settlement. Future changes in judgment related to the expected ultimate resolution of uncertain tax positions will affect earnings in the period of such change. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. The total amount of unrecognized tax benefits can change due to audit settlements, tax examination activities, statute expirations and the recognition and measurement criteria under accounting for uncertainty in income taxes. Lifeway recognizes penalties and interest related to unrecognized tax benefits in the provision (benefit) for income taxes in the consolidated statements of operations.

 

 

  F- 11  

 

 

Share-based compensation

 

Share-based compensation expense is recognized for equity awards over the vesting period based on their grant date fair value. The fair value of restricted stock awards is equal to the closing price of Lifeway’s stock on the date of grant. The Company does not estimate forfeitures in measuring the grant date fair value, but rather account for forfeitures as they occur. The Company issues share based equity awards from treasury shares.

 

Treasury stock

 

Treasury stock is recorded using the cost method.

 

Advertising costs

 

Advertising costs are expensed as incurred and reported in Selling expense in the Company’s consolidated statements of operations. Expenditures totaled $3,267 and $2,407 for the years ended December 31, 2021 and 2020, respectively.

 

Earnings (loss) per common share

 

Basic earnings (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares issued and outstanding during the reporting period. Diluted earnings (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares issued and outstanding and the effect of all dilutive common stock equivalents related to the Company’s outstanding stock-based compensation awards outstanding during the reporting period. For the years ended December 31, 2021 and 2020, there were 236 and 169 common stock equivalents outstanding, respectively.

 

Recent accounting pronouncements

 

Issued by not yet effective

 

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new guidance provides a single comprehensive accounting model on revenue recognition for contracts with customers and requires that the acquirer in a business combination recognize and measure contract assets and liabilities acquired in a business combination in accordance with Topic 606 (Revenue from Contracts with Customers). The amendments in this ASU are effective for fiscal years beginning after December 15, 2022. Early adoption is permitted, including adoption in an interim period. With early adoption, the amendments are applied retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of adoption and prospectively to all business combinations that occur on or after the date of initial application. Management is currently evaluating the impact that the new guidance will have on the consolidated financial statements.

 

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance will be effective prospectively as of March 12, 2020 through December 31, 2022 and interim periods within those fiscal years. Management is currently evaluating the impact that the new guidance will have on the consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, in November 2018 issued an amendment, ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, and in November 2019 issued two amendments, ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The series of new guidance amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. The guidance should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. The guidance is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. Management is currently evaluating the impact that the new guidance will have on the consolidated financial statements.

 

 

  F- 12  

 

  

Note 3 – Inventories, net 

               
    December 31,
    2021   2020
Ingredients   $ 2,279     $ 1,725  
Packaging     2,723       2,234  
Finished goods     3,283       2,971  
Total inventories, net   $ 8,285     $ 6,930  

 

Note 4 – Property, Plant and Equipment, net 

               
    December 31,
    2021   2020
Land   $ 1,565     $ 1,565  
Buildings and improvements     17,920       17,834  
Machinery and equipment     32,073       31,707  
Vehicles     640       778  
Office equipment     900       857  
Construction in process     417       228  
      53,515       52,969  
Less accumulated depreciation     (33,385 )     (31,921 )
Total property, plant and equipment, net   $ 20,130     $ 21,048  

  

Note 5 – Goodwill and Intangible Assets

 

Prior year amounts have been restated to reflect the correction of errors discussed in Note 1 – Basis of presentation. Changes in the carrying amount of goodwill and indefinite-lived intangible assets for the years ended December 31, 2021 and 2020 are as follows:

           
    Goodwill   Brand Names   Total
             
Balance at December 31, 2020, before accumulated impairment loses (As Restated)   $ 11,548     $ 3,700     $ 15,248  
Accumulated impairment loses     (1,244 )           (1,244 )
Balance at December 31, 2020 (As Restated)     10,304       3,700       14,004  
Acquisition (1)     1,400             1,400  
Balance at December 31, 2021   $ 11,704     $ 3,700     $ 15,404  

____________

  (1) Refer to Note 16 for additional information regarding acquisition-related adjustments to goodwill

 

Goodwill

 

The Company performed the annual impairment assessment of goodwill for its single reporting unit as of December 31, 2021 and 2020, noting no impairment loss. Considerable management judgment is necessary to evaluate goodwill for impairment. Lifeway estimates fair value using widely accepted valuation techniques including discounted cash flows and market multiples analysis with respect to its single reporting unit. These valuation approaches are dependent upon a number of factors, including estimates of future growth rates, its cost of capital, capital expenditures, income tax rates, and other variables. Assumptions used in the Company’s valuations were consistent with its internal projections and operating plans. Lifeway’s discounted cash flows forecast could be negatively impacted by 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 its products or changes in the size of the market for its products. Additionally, under the market approach analysis, the Company used significant other observable inputs including various guideline company comparisons. Lifeway bases its fair value estimates on assumptions it believes to be reasonable, but which are unpredictable and inherently uncertain. Changes in these estimates or assumptions could materially affect the determination of fair value and the conclusions of the quantitative goodwill test for the Company’s one reporting unit.

 

 

  F- 13  

 

 

Indefinite-lived Intangible Assets

 

The Company performed the annual impairment assessment on the indefinite-lived intangible asset as of December 31, 2021 and 2020, resulting in no impairment losses.

 

During the fourth quarter of 2021, the Company completed an assessment of the useful life of its indefinite-lived brand name intangible asset and determined it should adjust the estimated useful life from indefinite to 15 years. The change in accounting estimate will be effective January 1, 2022, at which time the Company will begin amortizing the asset over 15 years. The future amortization expense is included in the five-year intangible asset amortization table in the finite-lived intangible asset section below.

 

Finite-lived Intangible Assets

 

The gross carrying amounts and accumulated amortization of finite-lived intangible assets consisted of the following:

                       
    December 31, 2021   December 31, 2020
    Gross       Net   Gross       Net
    Carrying   Accumulated   Carrying   Carrying   Accumulated   Carrying
    Amount   Amortization   Amount   Amount   Amortization   Amount
Recipes   $ 44     $ (44 )   $     $ 44     $ (44 )   $  
Customer lists and other customer related intangibles     4,529       (4,529 )           4,529       (4,529 )      
Customer relationship     3,385       (1,052 )     2,333       985       (985 )      
Brand names     4,248       (2,303 )     1,945       2,248       (2,248 )      
Formula     438       (438 )           438       (438 )      
Total finite lived intangible assets   $ 12,644     $ (8,366 )   $ 4,278     $ 8,244     $ (8,244 )   $  

 

Estimated amortization expense on intangible assets for the next five years is as follows: 

       
Year   Amortization
2022   $ 540  
2023   $ 540  
2024   $ 540  
2025   $ 540  
2026   $ 540  

 

Note 6 – Accrued Expenses

 

Accrued expenses consist of: 

               
    December 31,
    2021   2020
Payroll and incentive compensation   $ 2,951     $ 1,366  
Real estate taxes     359       341  
Current portion of operating lease liabilities     131       179  
Other     283       310  
Total accrued expenses   $ 3,724     $ 2,196  

 

 

  F- 14  

 

 

Note 7 – Debt 

               
    December 31,
    2021   2020
Term loan due August 2026. Interest (2.15% at December 31, 2021) payable monthly.   $ 4,500     $  
Unamortized deferred financing costs     (30 )      
Total note payable     4,470        
Less current portion     (1,000 )      
Total long-term portion   $ 3,470     $  

 

The scheduled maturities of the term loan, excluding deferred financing costs, at December 31, 2021 are as follows: 

       
2022   $ 1,000  
2023     1,000  
2024     1,000  
2025     1,000  
2026     500  
Total term loan   $ 4,500  

 

Credit Agreement

 

On September 30, 2020, Lifeway entered into the Third Modification to the Amended and Restated Loan and Security Agreement, as amended, (the “Third Modification”) with its existing lender. The Third Modification amends the Amended and Restated Loan and Security Agreement, as amended, by removing the monthly borrowing base reporting requirement effective September 30, 2020, including a covenant to maintain a quarterly minimum working capital financial covenant, as defined, of no less than $11.25 million each of the fiscal quarters commencing the fiscal quarter ending December 31, 2020 through the expiration date, and eliminating the tier interest pricing structure. The Amended and Restated Loan and Security Agreement continues to provide Lifeway with a revolving line of credit up to a maximum of $5 million (the “Revolving Loan”) and provides the Borrowers with an incremental facility not to exceed $5 million (the “Incremental Facility” and together with the Revolving Loan, the “Loans”). The Termination Date of the Revolving Loan was extended to June 30, 2025, unless earlier terminated.

 

On August 18, 2021, Lifeway entered into the Fourth Modification (the “Fourth Modification”) to the Amended and Restated Loan and Security Agreement (as amended and modified from time to time, the “Credit Agreement” and, as amended and modified by the Fourth Modification, the “Modified Credit Agreement”) with its existing lender and certain of its subsidiaries. The Fourth Modification amends the Credit Agreement to provide for, among other things, a $5 million term loan by the existing lender to the borrowers to be repaid in quarterly installments of principal and interest payable monthly over a term of five years (the “Term Loan”). The termination date of the Term Loan is August 18, 2026, unless earlier terminated.

 

As amended, all outstanding amounts under the revolving line of credit and term loan bear interest, at Lifeway’s election, at either the lender Base Rate (the Prime Rate minus 1.00%) or the LIBOR plus 1.95%, payable monthly in arrears. Lifeway is also required to pay a quarterly unused revolving line of credit fee of 0.20% and, in conjunction with the issuance of any letters of credit, a letter of credit fee of 0.20%. There were no letters of credit issued or outstanding as of December 31, 2021.

 

Except as described above, as amended, the Modified Credit Agreement remains substantively unchanged and in full force and effect, including customary representations, warranties, and covenants on the part of Lifeway, including financial covenants requiring us to maintain a fixed charge coverage ratio of no less than 1.25 to 1.00 each of the fiscal quarters ending through the expiration date. The Modified Credit Agreement continues to provide 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 Credit Agreement may be accelerated. The loans and all other amounts due and owed under the Credit Agreement and related documents are secured by substantially all of the Company’s assets.

 

Lifeway was in compliance with the fixed charge coverage ratio and minimum working capital covenants at December 31, 2021.

 

 

  F- 15  

 

 

Revolving Credit Facility

 

As of December 31, 2021, the Company had $2,777 outstanding under the Revolving Credit Facility. Lifeway had $2,223 available for future borrowings under the Revolving Credit Facility as of December 31, 2021. Lifeway’s interest rate on debt outstanding under the Revolving Credit Facility as of December 31, 2021 was 2.15%.

 

Deferred Financing Costs

 

As of December 31, 2021, net unamortized deferred financing costs of $30 related to the term loan were included as a direct deduction from outstanding long-term debt.

 

Note 8 – Leases

 

Lifeway had operating leases for two retail stores for its Lifeway Kefir Shop subsidiary which included fixed base rent payments as well as variable rent payments to reimburse the landlord for operating expenses and taxes. The Company terminated the operating leases during 2021. The Company terminated its office space leases in September 2020. The Company also leases certain machinery and equipment with fixed base rent payments and variable costs based on usage. Remaining lease terms for these leases range from less than one year to five years. Some of its leases include options to extend the leases for up to five years and have been included in its calculation of the right-of-use asset and lease liabilities. Lifeway includes only fixed payments for lease components in the measurement of the right-of-use asset and lease liability. Variable lease payments are those that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time. There are no residual value guarantees. Lifeway does not currently have leases which meet the finance lease classification as defined under ASC 842.

 

The Company does 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 $304 and $440 (including short term leases) for the years ended December 31, 2021 and 2020, 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, it directs the use of the asset and obtain 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. Lifeway has elected the practical expedient to combine lease and non-lease components into a single component for all of its leases. For many of its leases such as real estate leases, the Company is unable to determine an implicit rate; therefore, it uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments for those leases. Lifeway includes 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
2022   $ 149  
2023     47  
2024     30  
2025     18  
Thereafter     6  
Total lease payments     250  
Less: Interest     (34 )
Present value of lease liabilities   $ 216  

 

 

  F- 16  

 

 

The weighted-average remaining lease term for its operating leases was 2.4 years as of December 31, 2021. The weighted average discount rate of its operating leases was 12.60% as of December 31, 2021. Cash paid for amounts included in the measurement of lease liabilities was $198 for the year ended December 31, 2021.

   

Note 9 – Commitments and Contingencies

 

Litigation

 

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

 

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

 

Note 10 – Income taxes

 

The provision for income taxes consists of the following: 

       
    For the Years Ended December 31,
    2021   2020
Current:        
Federal   $ 1,097     $ 398  
State and local     951       357  
Total current     2,048       755  
Deferred     257       841  
Provision for income taxes   $ 2,305     $ 1,596  

 

 

 

  F- 17  

 

  

The following is a reconciliation of income tax expense computed at the U.S. federal statutory tax rate to income tax expense reported in the consolidated statement of operations: 

                               
    2021   2020
    Amount   Percentage   Amount   Percentage
Federal income tax at statutory rate   $ 1,179       21.0 %   $ 1,015       21.0 %
State and local tax, net     440       7.8 %     428       8.9 %
Other permanent differences     6       0.1 %     12       0.3 %
Section 162m     206       3.7 %     296       6.1 %
Stock based compensation     100       1.8 %     157       3.2 %
Uncertain tax positions     218       3.9 %     (43 )     (0.9 %)
Change in tax rates     198       3.4 %     (245 )     (5.0 %)
Other     (42 )     (0.7 %)     (24 )     (0.5 %)
Provision for income taxes   $ 2,305       41.0 %   $ 1,596       33.1 %

  

Prior year amounts have been restated to reflect the correction of errors discussed in Note 1 – Basis of presentation. The tax effects of temporary differences giving rise to deferred income tax assets and liabilities were: 

               
    December 31,
    2021  

2020

(As Restated)

Deferred tax liabilities attributable to:                
Accumulated depreciation and amortization   $ (3,401 )   $ (3,281 )
Unrealized gains     (473 )     (467 )
Total deferred tax liabilities     (3,874 )     (3,748 )
Deferred tax assets attributable to:                
Net operating losses     6       6  
Accrued compensation     170       149  
Incentive compensation     164       168  
Inventory     324       323  
Allowances for doubtful accounts and discounts     5       109  
Deferred revenue     10       15  
Other     (6 )     34  
Total net deferred tax assets     673       804  
Net deferred tax liabilities   $ (3,201 )   $ (2,944 )

 

The following table details the Company's tax attributes related to net operating losses for which it has recorded deferred tax assets. 

                 
Tax Attributes   Gross Amount     Net Amount     Expiration Years  
State net operating losses   $ 116     $ 6       2035  
            $ 6          

 

During the year, the Company recorded adjustments to its unrecognized tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: 

               
    2021   2020
Balance at January 1   $ 95     $ 142  
Additions based on tax positions of prior years     301        
Reduction for tax positions of prior years     –        (47 )
Balance at December 31   $ 396     $ 95  

 

 

  F- 18  

 

 

Lifeway is subject to U.S. federal income tax as well as income tax in multiple state and city jurisdictions. With limited exceptions, Lifeway’s calendar year 2018 and subsequent federal and state tax years remain open by statute. The amount of unrecognized tax benefits that, if recognized, would impact the annual effective tax rate was not significant as of December 31, 2021. The annual effective tax rate would have decreased by 3.9% as of December 31, 2021 if the unrecognized tax benefits were recognized.

 

The amount of interest and penalties recognized in the consolidated statements of operations was $0 and $(16) during 2021 and 2020, respectively. The amount of accrued interest and penalties recognized in the consolidated balance sheets was $0 and $44 at December 31, 2021 and 2020, respectively.

  

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. On December 31, 2021, 3.281 million shares remain available under the 2015 Omnibus Incentive Plan. While the Company plans to continue to issue awards pursuant to the Plan at least annually, it 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 year ended December 31, 2021: 

                               
    Options   Weighted
average
exercise price
 

Weighted
average
remaining

contractual life

  Aggregate
intrinsic value
                 
Outstanding at December 31, 2020     41     $ 10.42       5.22     $  
Granted                          
Exercised                        
Forfeited                        
Outstanding at December 31, 2021     41     $ 10.42       4.22     $  
Exercisable at December 31, 2021     41     $ 10.42       4.22     $  

   

As of December 31, 2019, all outstanding options were vested and there was no remaining unearned compensation expense.

 

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

 

 

 

  F- 19  

 

 

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 the Company’s closing stock price on the grant date. The following table summarizes RSA activity during the year ended December 31, 2021. 

       
    RSA’s
     
Outstanding at December 31, 2020     78  
Granted     60  
Shares issued upon vesting     (44 )
Forfeited      
Outstanding at December 31, 2021     94  
Weighted average grant date fair value per share outstanding   $ 4.50  

 

Lifeway expenses RSAs over the service period. For the years ended December 31, 2021 and 2020 total stock-based compensation expense recognized in the consolidated statements of operations was $264 and $83, respectively. For the years ended December 31, 2021 and 2020 tax-related benefits of $76 and $22, respectively, were also recognized. As of December 31, 2021, the total remaining unearned compensation related to non-vested RSAs was $198, which is expected to be amortized over the weighted-average remaining service period of 1.25 years.

 

Long-Term Incentive Plan Compensation

 

Lifeway established long-term incentive-based compensation programs for fiscal year 2017 (the “2017 Plan”), fiscal year 2019 (the “2019 Plan”), and for fiscal year 2021 (the “2021 Plan”) for certain senior executives and key employees (the “participants”). Under the 2017 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. Under the 2021 Plan, long-term incentive compensation is based on Lifeway’s achievement of adjusted EBITDA performance versus the respective target established by the Board for 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 years ended December 31, 2021 and 2020, $0 and $49 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. As of December 31, 2021, there was no remaining expense.

 

2019 Plan

 

Under the 2019 Plan, collectively the participants can 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 years ended December 31, 2021 and 2020, $145 and $112 was expensed under the 2019 Plan as stock-based compensation expense in the consolidated statements of operations, respectively. As of December 31, 2021, there was no remaining expense.

 

2019 Retention Award

 

During 2019, Lifeway 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, one-third in March 2020 and one-third in March 2021. For the years ended December 31, 2021 and 2020, $8 and $87 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. As of December 31, 2021, there was no remaining expense.

 

 

  F- 20  

 

 

2020 CEO Incentive Award

 

During the fourth quarter 2020, Lifeway awarded a long-term equity-based incentive of $750 to its Chief Executive Officer (the “2020 CEO Award”) depending on Lifeways 2020 performance levels compared to the respective targets. The equity-based incentive compensation is payable in restricted stock that vests one-third in April 2022, one-third in April 2023, and one-third in April 2024. The issuance of vested equity awards is subject to approval under the Stock Purchase Agreement dated October 1, 1999. For the years ended December 31, 2021 and 2020, $342 and $50 was expensed as stock-based compensation expense in the consolidated statements of operations. As of December 31, 2021, the total remaining unearned compensation was $359, of which $229 will be recognized in 2022, $106 in 2023, and $24 in 2024, respectively, subject to vesting. During Q2 2021, the number of shares became fixed and determinable. Therefore, the award liability was reclassified from long-term liabilities to paid in capital.

 

2021 Equity Award

 

Under the 2021 Plan, collectively the participants can earn equity-based incentive compensation in amounts ranging from $0 to $1,069 depending on Lifeway’s achievement of the respective financial target. The equity-based incentive compensation is payable in restricted stock that is expected to vest one-third in March 2022, one-third in March 2023, and one-third in March 2024. For the year ended December 31, 2021, $386 was expensed under the 2021 Plan as stock-based compensation expense in the consolidated statements of operations, respectively. As of December 31, 2021, the total remaining unearned compensation was $683, of which $474 will be recognized in 2022, $181 in 2023, and $28 in 2024, respectively, subject to vesting. As of December 31, 2021, the number of shares to be awarded is not fixed and determinable. Therefore, the liability is classified in accrued expenses and other long-term liabilities as of December 31, 2021. When the number of shares awarded becomes fixed and determinable, the award liability will be reclassified from liabilities to paid in capital.

 

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 years ended December 31, 2021 and 2020 total contribution expense recognized in the consolidated statements of operations was $432 and $420, 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 its exclusive blend of kefir cultures, each cup of kefir contains 12 live and active cultures and 25 to 30 billion beneficial CFU (Colony Forming Units) at the time of manufacture.

 

Lifeway manufactures (directly or through co-packers) and market products under the Lifeway, Fresh Made, and Glen Oaks Farms brand names, as well as under private labels on behalf of certain customers.

  

The Company’s product categories are:

 

  · Drinkable Kefir, sold in a variety of organic and non-organic sizes, flavors, and types.
  · European-style soft cheeses, including farmer cheese, white cheese, and Sweet Kiss.
  · Cream and other, which consists primarily of cream, a byproduct of making our kefir.
  · ProBugs, a line of kefir products designed for children.
  · Drinkable Yogurt, solid in a variety of sizes and flavors
  · Other Dairy, which consists primarily of Fresh Made butter and sour cream.

 

Lifeway has determined that it has one reportable segment based on how its 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 the Company’s performance, has been identified collectively as the Chief Executive Officer and Chief Financial Officer. Substantially all of Lifeway’s consolidated revenues relate to the sale of cultured dairy products that it produces using the same processes and materials and are sold to consumers through a common network of distributors and retailers in the United States.

 

 

  F- 21  

 

 

Net sales of products by category were as follows for the years ended December 31: 

                               
    2021   2020
In thousands   $   %   $   %
                 
Drinkable Kefir other than ProBugs   $ 95,850       80%     $ 81,437       80%  
Cheese     12,612       11%       12,905       13%  
Cream and other     3,582       3%       2,872       3%  
ProBugs Kefir     3,178       3%       2,733       2%  
Drinkable Yogurt     2,223       2%             0%  
Other dairy (a)     1,620       1%       2,079       2%  
Net Sales   $ 119,065       100%     $ 102,026       100%  

__________________

(a) Includes Lifeway Kefir Shop sales  

  

Significant Customers – Sales are predominately to companies in the retail food industry located within the United States. Two major customers accounted for approximately 23% and 21% of net sales for the years ended December 31, 2021 and 2020, respectively. Two major customers accounted for 32% and 22% of accounts receivable as of December 31, 2021 and 2020, respectively.  

 

Note 13 – Share repurchase program

 

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

 

Pursuant to the share repurchase program, during the year ended December 31, 2020, the Company repurchased 179 shares at a cost of $405 or approximately $2.27 per share. During 2020, the Company reached the amended threshold of 625 shares and therefore no shares of common stock remain available to be purchased under the 2017 Repurchase Plan Amendment as of December 31, 2020.

 

On June 24, 2021, the Lifeway’s Board authorized a plan to repurchase up to 250 shares of Common Stock in the open market within 24 months at no more than $10 per share (the “2021 Repurchase Plan”). The Company repurchased all 250 shares of common stock at a cost of $1,583 during the three-month period ended September 30, 2021. Lifeway intends to hold repurchased shares in treasury for general corporate purposes, including issuances under its 2015 Omnibus Incentive Plan. Treasury shares are accounted for using the cost method.

 

Note 14 – Related party transactions

 

Lifeway obtains consulting services from the Chairperson of its Board of Directors. On December 28, 2020, Lifeway entered into an amended and restated consulting agreement (the “Agreement”), effective as of December 31, 2020, with the Chairperson. Under the terms and conditions of the Agreement, the Chairperson will continue to provide consulting services with respect to, among other things, the Company’s business strategy, international expansion and product management and expansion. For the services, the Company will pay an annual service fee of $500. The Chairperson will also be eligible for an annual performance fee target of $500 based on the achievement of specified performance criteria. The Chairpersons annual service fee and target bonus amounts are subject to periodic change by the Compensation Committee of the Company’s Board of Directors on 30 days’ prior written notice to the Chairperson. The Agreement shall continue until either party provides at least a 10-day written notice of termination.

 

 

  F- 22  

 

 

Service fees earned by the Chairperson are included in general and administrative expenses in the accompanying consolidated statements of operations and were $500 and $1,000 during the years ended December 31, 2021, and 2020, respectively.

 

Lifeway is also a party to a royalty agreement with the Chairperson of its Board of Directors under which it pays 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 $600 during the years ended December 31, 2021 and 2020, respectively.

  

Note 15 – COVID-19

 

The ultimate impact that the COVID-19 pandemic or any future pandemic or disease outbreak will have on Lifeway’s business and its consolidated results of operations is uncertain.

 

To date, the Company has seen increased customer and consumer demand for its products. Lifeway has not experienced significant supply chain disruptions or labor supply shortages and it has continued to be able to satisfy customer and consumer demand for its products. However, COVID-19 pandemic, or any future pandemic, may limit the availability of, or increase the cost of, employees, ingredients, packaging and other inputs necessary to produce Lifeway’s products, and its operations may be negatively impacted. In 2021, the Company’s costs increased primarily due to inflationary price increases of milk, other ingredients, packaging materials, and freight. However, because of market conditions or for competitive reasons, the Company’s pricing actions may sometimes lag input cost changes, or it may not be able to pass along the full effect of increases in raw materials and other input costs as it incurs them.

 

In 2022, social distancing, shelter-in-place and work-from-home mandates and recommendations have begun to be ease. The increased customer demand the Company has realized over the past two years as consumers increased their at-home consumption and e-commerce purchasing during the COVID-19 pandemic may change or decrease due to the decrease in social distancing and stay-at-home and work-from-home mandates and recommendations. Lifeway is unable to predict the nature and timing of when such change may occur, if at all.

 

The ultimate impact of the COVID-19 pandemic on the Company’s business will depend on many factors, including, among others, whether additional waves of COVID-19 or different variants of COVID-19 will affect the United States and other markets and the duration of any social distancing and stay home and work from home mandates or recommendations that may occur as a result of such COVID-19 wave or variant; the Company’s ability and the ability of its suppliers to continue to maintain production despite unprecedented demand in the food industry, supply chain disruptions, tight labor markets and increased raw material and packaging costs; and the extent to which macroeconomic conditions resulting from the pandemic and the pace of the subsequent recovery may impact consumer eating and shopping habits. The Company cannot predict the duration or scope of the disruption or the impact of any recovery from the impacts of COVID-19. Therefore, the financial impact cannot be reasonably estimated at this time.

 

Note 16 – Business Acquisition

 

On August 18, 2021, the Company completed the acquisition of certain assets of Glen Oaks Farms Inc. for a purchase price of $5,800 in cash. Glen Oaks is engaged in the manufacture, development, and sale of probiotic drinkable yogurt. The acquisition of Glen Oaks Farms initiates Lifeway’s expansion outside of kefir and into drinkable yogurt. The current distribution of Glen Oaks Farms in western U.S. retailers is strategically significant for Lifeway as the Company seeks to further grow its presence in this region. From a portfolio perspective, it complements the Company’s eastern U.S. presence with the Fresh Made brand and national strength with Lifeway. The acquisition was funded through the proceeds of a $5,000 note payable (see Note 7) and the Company’s existing cash resources.

 

Management considers the purchase of Glen Oaks Farms Inc. to consist of inputs, processes and outputs and has accounted for the purchase as a business combination. The acquisition was accounted for under the acquisition method of accounting and the results of operations were included in the Company’s consolidated statement of operations from the date of acquisition. Included in the Company’s consolidated statements of operations are the acquisition’s net sales of $2,223 and income before income taxes of approximately $384 from the date of acquisition through December 31, 2021. The Company incurred approximately $83 in acquisition-related costs which are expensed as incurred and included in general and administrative expense on the consolidated statement of operations. Pro-forma results of operation have not been presented as the effect would not be material to the Company’s results of operations for any periods presented.

 

 

  F- 23  

 

 

The following table summarizes the preliminary purchase price allocation of the fair value of intangible assets acquired and liabilities assumed: 

   
    $
     
Customer relationships     2,400  
Brand name     2,000  
Goodwill     1,400  
Assets acquired     5,800  
Liabilities assumed      
Total purchase price     5,800  

 

The fair value for the customer relationships at the acquisition date were determined using the excess earnings method under the income approach. The brand name fair value was determined using the relief from royalty method. The customer relationship and brand name intangible assets have an estimated life of 15 years and will be amortized over that period. The fair value measurements of intangible assets are based on significant unobservable inputs, and thus represent Level 3 inputs. Significant assumptions used in assessing the fair values of intangible assets include discounted future cash flows, customer attrition rates, and royalty rates. Goodwill arises principally from category expansion opportunities to better serve its regional and national customers. The goodwill resulting from the acquisition is tax deductible. 

 

Note 17 – Restatement of Previously Issued Unaudited Consolidated Financial Statements

 

As described in Note 1 – Basis of presentation, in lieu of filing quarterly reports on Form 10-Q for 2021, quarterly financial data for 2021 and 2020 (as restated) is included in this Annual Report on Form 10-K in the tables that follow. For a description of the referenced adjustments, please refer to Note 1.

 

 

 

 

  F- 24  

 

 

                       
    March 31, 2020  
    As Previously Reported     Restatement Adjustment     As Restated  
Current assets                        
Cash and cash equivalents   $ 1,978     $     $ 1,978  
Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $1,467 at March 31, 2020     8,430             8,430  
Inventories, net     6,883             6,883  
Prepaid expenses and other current assets     1,279             1,279  
Refundable income taxes     1,027             1,027  
Total current assets     19,597             19,597  
                         
Property, plant and equipment, net     21,910             21,910  
Operating lease right-of use asset     707             707  
                         
Intangible assets                        
Goodwill and indefinite-lived intangibles     12,824       1,180       14,004  
Other intangible assets, net     113             113  
Total intangible assets     12,937       1,180       14,117  
                         
Other Assets     1,800             1,800  
Total assets   $ 56,951     $ 1,180     $ 58,131  
                         
Current liabilities                        
Accounts payable   $ 6,113           $ 6,113  
Accrued expenses     2,632             2,632  
Accrued income taxes     116             116  
Total current liabilities     8,861             8,861  
Line of credit     2,751             2,751  
Operating lease liabilities     427             427  
Deferred income taxes, net     1,292       1,180       2,472  
Other long-term liabilities     50             50  
Total liabilities     13,381       1,180       14,561  
                         
Commitments and contingencies                        
                         
Stockholders’ equity                        
Preferred stock, no par value; 2,500 shares authorized; none issued                  
Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,558 shares outstanding     6,509             6,509  
Paid-in capital     2,748             2,748  
Treasury stock, at cost     (12,796 )           (12,796 )
Retained earnings     47,109             47,109  
Total stockholders’ equity     43,570             43,570  
                         
Total liabilities and stockholders’ equity   $ 56,951     $ 1,180     $ 58,131  

 

 

  F- 25  

 

 

 

                         
    June 30, 2020  
    As Previously Reported     Restatement Adjustment     As Restated  
Current assets                        
Cash and cash equivalents   $ 4,619     $     $ 4,619  
Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $1,300 at June 30, 2020     7,737             7,737  
Inventories, net     6,653             6,653  
Prepaid expenses and other current assets     1,086             1,086  
Refundable income taxes     615             615  
Total current assets     20,710             20,710  
                         
Property, plant and equipment, net     21,394             21,394  
Operating lease right-of use asset     431             431  
                         
Intangible assets                        
Goodwill and indefinite-lived intangibles     12,824       1,180       14,004  
Other intangible assets, net     74             74  
Total intangible assets     12,898       1,180       14,078  
                         
Other Assets     1,800             1,800  
Total assets   $ 57,233     $ 1,180     $ 58,413  
                         
Current liabilities                        
Accounts payable   $ 5,108           $ 5,108  
Accrued expenses     3,066             3,066  
Line of credit- current     2,757             2,757  
Accrued income taxes     92             92  
Total current liabilities     11,023             11,023  
Operating lease liabilities     239             239  
Deferred income taxes, net     1,292       1,180       2,472  
Other long-term liabilities     42             42  
Total liabilities     12,596       1,180       13,776  
                         
Commitments and contingencies                        
                         
Stockholders’ equity                        
Preferred stock, no par value; 2,500 shares authorized; none issued                  
Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,592 shares outstanding     6,509             6,509  
Paid-in capital     2,587             2,587  
Treasury stock, at cost     (12,548 )           (12,548 )
Retained earnings     48,089             48,089  
Total stockholders’ equity     44,637             44,637  
                         
Total liabilities and stockholders’ equity   $ 57,233     $ 1,180     $ 58,413  

 

 

  F- 26  

 

 

 

                         
    September 30, 2020  
    As Previously Reported     Restatement Adjustment     As Restated  
Current assets                        
Cash and cash equivalents   $ 7,616     $     $ 7,616  
Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $1,410 at September 30, 2020     8,159             8,159  
Inventories, net     6,472             6,472  
Prepaid expenses and other current assets     1,339             1,339  
Refundable income taxes     189             189  
Total current assets     23,775             23,775  
                         
Property, plant and equipment, net     21,082             21,082  
Operating lease right-of use asset     380             380  
                         
Intangible assets                        
Goodwill and indefinite-lived intangibles     12,824       1,180       14,004  
Other intangible assets, net     35             35  
Total intangible assets     12,859       1,180       14,039  
                         
Other Assets     1,800             1,800  
Total assets   $ 59,896     $ 1,180     $ 61,076  
                         
Current liabilities                        
Accounts payable   $ 6,036           $ 6,036  
Accrued expenses     2,890             2,890  
Accrued income taxes     176             176  
Total current liabilities     9,102             9,102  
Line of credit     2,763             2,763  
Operating lease liabilities     198             198  
Deferred income taxes, net     1,292       1,180       2,472  
Other long-term liabilities     35             35  
Total liabilities     13,390       1,180       14,570  
                         
Commitments and contingencies                  
                         
Stockholders’ equity                        
Preferred stock, no par value; 2,500 shares authorized; none issued                  
Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,605 shares outstanding     6,509             6,509  
Paid-in capital     2,532             2,532  
Treasury stock, at cost     (12,450 )           (12,450 )
Retained earnings     49,915             49,915  
Total stockholders’ equity     46,506             46,506  
                         
Total liabilities and stockholders’ equity   $ 59,896     $ 1,180     $ 61,076  

 

 

  F- 27  

 

 

 

                         
    March 31, 2021  
    As Previously Reported     Restatement Adjustment     As Restated  
Current assets                  
Cash and cash equivalents   $ 8,618     $     $ 8,618  
Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $1,100 at March 31, 2021     9,961             9,961  
Inventories, net     6,736             6,736  
Prepaid expenses and other current assets     1,110             1,110  
Refundable income taxes     46             46  
Total current assets     26,471             26,471  
                         
Property, plant and equipment, net     20,744             20,744  
Operating lease right-of use asset     317             317  
                         
Intangible assets                        
Goodwill and indefinite-lived intangibles     12,824       1,180       14,004  
Other intangible assets, net                  
Total intangible assets     12,824       1,180       14,004  
                         
Other Assets     1,800             1,800  
Total assets   $ 62,156     $ 1,180     $ 63,336  
                         
Current liabilities                        
Accounts payable   $ 5,289           $ 5,289  
Accrued expenses     2,587             2,587  
Accrued income taxes     1,215             1,215  
Total current liabilities     9,091             9,091  
Line of credit     2,774             2,774  
Operating lease liabilities     143             143  
Deferred income taxes, net     1,764       1,180       2,944  
Other long-term liabilities     160             160  
Total liabilities     13,932       1,180       15,112  
                         
Commitments and contingencies                        
                         
Stockholders’ equity                        
Preferred stock, no par value; 2,500 shares authorized; none issued                  
Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,604 shares outstanding     6,509             6,509  
Paid-in capital     2,664             2,664  
Treasury stock, at cost     (12,450 )           (12,450 )
Retained earnings     51,501             51,501  
Total stockholders’ equity     48,224             48,224  
                         
Total liabilities and stockholders’ equity   $ 62,156     $ 1,180     $ 63,336  

 

 

  F- 28  

 

 

 

                         
    June 30, 2021  
    As Previously Reported     Restatement Adjustment     As Restated  
Current assets                        
Cash and cash equivalents   $ 10,412     $     $ 10,412  
Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $1,190 at June 30, 2021     9,157             9,157  
Inventories, net     7,291             7,291  
Prepaid expenses and other current assets     908             908  
Refundable income taxes     354             354  
Total current assets     28,122             28,122  
                         
Property, plant and equipment, net     20,671             20,671  
Operating lease right-of use asset     226             226  
                         
Intangible assets                        
Goodwill and indefinite-lived intangibles     12,824       1,180       14,004  
Other intangible assets, net                  
Total intangible assets     12,824       1,180       14,004  
                         
Other Assets     1,800             1,800  
Total assets   $ 63,643     $ 1,180     $ 64,823  
                         
Current liabilities                        
Accounts payable   $ 5,285           $ 5,285  
Accrued expenses     3,587             3,587  
Accrued income taxes     106             106  
Total current liabilities     8,978             8,978  
Line of credit     2,777             2,777  
Operating lease liabilities     107             107  
Deferred income taxes, net     1,764       1,180       2,944  
Other long-term liabilities     12             12  
Total liabilities     13,638       1,180       14,818  
                         
Commitments and contingencies                        
                         
Stockholders’ equity                        
Preferred stock, no par value; 2,500 shares authorized; none issued                  
Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,650 shares outstanding     6,509             6,509  
Paid-in capital     2,488             2,488  
Treasury stock, at cost     (12,111 )           (12,111 )
Retained earnings     53,119             53,119  
Total stockholders’ equity     50,005             50,005  
                         
Total liabilities and stockholders’ equity   $ 63,643     $ 1,180     $ 64,823  

 

 

  F- 29  

 

 

 

                         
    September 30, 2021  
    As Previously Reported     Restatement Adjustment     As Restated  
Current assets                        
Cash and cash equivalents   $ 10,018     $     $ 10,018  
Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $1,290 at September 30, 2021     9,828             9,828  
Inventories, net     7,572             7,572  
Prepaid expenses and other current assets     1,315             1,315  
Refundable income taxes     415             415  
Total current assets     29,148             29,148  
                         
Property, plant and equipment, net     20,546             20,546  
Operating lease right-of use asset     255             255  
                         
Intangible assets                        
Goodwill and indefinite-lived intangibles     14,224       1,180       15,404  
Other intangible assets, net     4,367             4,367  
Total intangible assets     18,591       1,180       19,771  
                         
Other Assets     1,800             1,800  
Total assets   $ 70,340     $ 1,180     $ 71,520  
                         
Current liabilities                        
Current maturities of notes payable   $ 1,000           $ 1,000  
Accounts payable     7,867             7,867  
Accrued expenses     3,872             3,872  
Accrued income taxes     100             100  
Total current liabilities     12,839             12,839  
Line of credit     2,777             2,777  
Notes Payable     3,726             3,726  
Operating lease liabilities     113             113  
Deferred income taxes, net     1,764       1,180       2,944  
Other long-term liabilities     62             62  
Total liabilities     21,281       1,180       22,461  
                         
Commitments and contingencies                        
                         
Stockholders’ equity                        
Preferred stock, no par value; 2,500 shares authorized; none issued                  
Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,435 shares outstanding