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Notify via Website only
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General Information
10-K
Doug Hass
847-967-1010
Not Applicable
0000814586 (Lifeway Foods, Inc.)
**********
N
Yes
N
N
No
No
No
NASD
12-31-2018
No
No
(End General Information)
Document Information
8
lifeway_10k-123118.htm
10-K
Form 10-K
lifeway_10k-ex1001.htm
EX-10.1
First Modification to Amended and Restated Loan and Security
Agreement
lifeway_10k-ex0021.htm
EX-21
Subsidiaries of Lifeway Foods, Inc.
lifeway_10k-ex2301.htm
EX-23.1
Consent
lifeway_10k-ex3101.htm
EX-31.1
Certification
lifeway_10k-ex3102.htm
EX-31.2
Certification
lifeway_10k-ex3201.htm
EX-32.1
Certification
lifeway_10k-ex3202.htm
EX-32.2
Certification
(End Document Information)
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, 2018
Commission file number: 000-17363
LIFEWAY FOODS, INC.
(Name of registrant as specified in its charter)
Illinois
(State or other jurisdiction of
incorporation or organization)
36-3442829
(IRS Employer
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
Name of each exchange on which registered
Common Stock, No Par Value
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”, “accelerated filer,” “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
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, 2018 ($5.03 per share as quoted on the Nasdaq Global Market) was $22,411,859.
As of March 15, 2019, 15,762,801 shares of the registrant’s common stock, no par value, were outstanding.
Portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on June 20, 2019, are incorporated by reference into
Part III.
1
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
Signatures
i
Page
1
7
15
15
15
15
16
17
17
21
22
23
23
24
25
25
25
25
25
26
27
28
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 customers, including those related to price competition;
the decisions of customers or consumers;
our ability to successfully implement our business strategy;
changes in the pricing of commodities;
the effects of government regulation;
disruptions to our supply chain, or our manufacturing and distribution capabilities, including those due to cybersecurity threats;
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 Securities and Exchange Commission (“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.
ii
ITEM 1 BUSINESS
OVERVIEW
PART I
Lifeway was co-founded in 1986 by Michael and Ludmila Smolyansky shortly after their emigration from Russia to the United States. Mr. and Mrs.
Smolyansky were 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 over thirty 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 15 to 20 billion beneficial CFU (Colony Forming
Units) at the time of manufacture.
We manufacture (directly or through co-packers) our products under our own brand, as well as under private labels on behalf of certain customers.
As of December 31, 2018, Lifeway offered approximately 20 varieties of our kefir products including more than 60 flavors. In addition to our core
drinkable kefir products, we offer several lines of products developed through our innovation and development efforts. These include Kefir Cups, a
strained, cupped version of our kefir; and Organic Farmer Cheese Cups, a cupped version of our soft cheeses, both served in resealable 5 oz.
containers. We also offer Skyr, a strained cupped Icelandic yogurt; Plantiful, a plant-based probiotic beverage made from organic and non-GMO pea
protein with 10 vegan kefir cultures; a line of probiotic supplements for adults and children; and a soft serve kefir mix.
Our product categories are:
Drinkable Kefir, sold in a variety of organic and non-organic sizes, flavors, and types, including low fat, non-fat, whole milk, protein,
BioKefir (a 3.5 oz. kefir with additional probiotic cultures), and Kefir with Oats.
European-style soft cheeses, including farmer cheese in resealable cups.
Cream and other, which consists primarily of cream, a byproduct of making our kefir.
ProBugs, a line of kefir products in drinkable and frozen formats, designed for children.
Other Dairy, which includes Cupped Kefir and Icelandic Skyr, a line of strained kefir and yogurt products in resealable cups.
Frozen Kefir, available in both bars and pint-size containers.
Net sales of products by category were as follows for the years ended December 31:
In thousands
Drinkable Kefir other than ProBugs
Cheese
Cream and other
Cupped Kefir and Skyr
ProBugs Kefir
Frozen Kefir (a)
Net Sales
(a)
Includes Lifeway Kefir Shop sales
2018
2017
$
%
$
%
$
$
78,523
11,486
5,276
3,836
2,795
1,434
103,350
76% $
11%
5%
4%
3%
1%
100% $
90,514
11,516
6,527
4,138
4,537
1,661
118,893
76%
10%
5%
4%
4%
1%
100%
1
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 2018, we continued to focus relatively more of our personnel, financial resources,
and management attention on product innovations, packaging innovations, and growth opportunities than in prior years. As noted above, these
product innovation and development efforts have led to additional revenue opportunities from our cupped kefir and cupped cheese, probiotic
supplements, and non-dairy based probiotic beverage lines like Plantiful. We expect that these efforts will continue to diversify our revenue sources
in 2019. New items introduced or expanded through our innovation efforts were offset by lower volumes of our core drinkable kefir products in
2018.
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.
PRODUCTION
Manufacturing
During 2018 and 2017, approximately 98% of our revenue 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, Kefir Cups, 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, including those manufactured by co-packers;
Philadelphia, Pennsylvania, which produces drinkable kefir, cheese, and butter products.
We own these manufacturing facilities, and all our fixed assets associated with manufacturing, storage, and distribution of our products are located
in the United States.
Co-Packers
In addition to the products manufactured in our own facilities, independent manufacturers (“co-packers”) manufacture some of our products. We
have co-packer agreements to manufacture drinkable kefir in European markets our frozen kefir products, and our probiotic supplements.
During 2018 and 2017, approximately 2% of our revenue was derived from products manufactured by co-packers. Our co-packers are audited
regularly by our staff and are required to follow our specifications and Good Manufacturing Practices (GMPs). Additionally, the co-packers are
required to ensure our products are manufactured in accordance with our quality and safety specifications and that they are compliant with all
applicable laws and regulations.
2
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 four primary “route-to-market” pathways:
Retail-direct;
Distributor;
Direct store delivery (“DSD”);
Retail sales.
Under the retail-direct channel, we sell our products to the retailer that either the retailer’s carrier picks up or Lifeway ships through third party
carriers for delivery to those 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 Costco. 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 50% of our total net sales for the year ended 2018.
Under the distributor channel, we sell our products to distributors that either the distributor’s carrier picks up or Lifeway ships through third party
carriers for delivery to those 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 represent approximately 44% of our total net sales for year ended
2018.
Under the direct store delivery (DSD) route to market, we distribute our products directly to the retailer using a fleet of 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 4% of our total net
sales for the year ended 2018.
In the Chicago, Illinois metropolitan area, Lifeway operates three retail stores and a food truck under its Lifeway Kefir Shop subsidiary. The
Lifeway Kefir Shop sells its frozen and drinkable kefir products, as well as certain Lifeway products, through these retail outlets. Sales through
these retail outlets represent less than 1% of net sales for the year ended 2018.
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, Costa Rica, portions of South America, and the Caribbean. Additionally, Lifeway products reach consumers in the United Kingdom,
Ireland, Norway, Sweden, and the Middle East under third party co-manufacturing agreements and in-country broker and distributor arrangements.
Sales outside the United States represents less than 1% of net sales for the year ended 2018.
3
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
the 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 associated with moving product back through the channel, 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.
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 in some
newspapers and magazines, and, to a lesser extent, targeted 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, notably spoonable and drinkable yogurt, and, increasingly,
with non-dairy probiotic products that incorporate kefir cultures but are not kefir. Many of our competitors are well-established and have
significantly greater financial resources than Lifeway to promote their products.
4
SUPPLIERS
We purchase our ingredients such as raw milk, pectin, and fruit purees 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 multiple suppliers for all ingredient, packaging, and other input requirements.
MAJOR CUSTOMERS
During the year ended December 31, 2018, two customers, United Natural Foods, Inc. (UNFI) and one other customer , represented approximately
12% and 9% of our total net sales. These customers collectively accounted for approximately 17% of net accounts receivable as of December 31,
2018.
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 Financial Officer, the Chief Operating
Officer, the Chief Executive Officer and Chairperson of the board of directors. Substantially all of our consolidated revenues relate to the sale of
cultured dairy products that we produce using the same processes and materials and are sold to consumers through a common network of
distributors and retailers in the United States.
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.
INTELLECTUAL PROPERTY
We own more than seventy five 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.
5
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 conventional and organic raw milk. Raw milk primarily contains raw skim milk, in addition to a small percentage of
butterfat and other components. 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, the prices we pay producers of organic raw milk are
generally well above such minimum prices, as organic milk production is generally costlier, and organic milk therefore commands a price premium.
In addition to the prices for raw milk, we also pay producer (“over-order”) premiums, federal order administration costs, and other related charges
that vary by milk product, location, and supplier.
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 coverage, which we believe to be sufficient to cover potential product liabilities.
We have also implemented the Safe Quality Food (“SQF”) program at all of our 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. Safe Quality Food or SQF certification provides an independent and external validation that a product, process or service complies
with international, regulatory and other specified standards. Our Waukesha and Morton Grove facilities are SQF certified at the highest level of such
certification.
SEASONALITY
Lifeway’s business is not seasonal.
EMPLOYEES
As of December 31, 2018, we employed approximately 322 employees, approximately 108 of which were members of a union bargaining unit.
AVAILABLE INFORMATION
Lifeway maintains a corporate website for investors at www.lifewayfoods.com and it 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.
6
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.
Our product categories face a high level of competition, which could negatively impact our sales and results of operations.
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, Dean Foods, 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 current and
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;
7
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.
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. New items introduced through our innovation efforts partially offset lower volumes in 2018 of our core drinkable kefir
products. 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 in substantial time and resources for which we do 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.
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.
8
Two of our customers together accounted for 21% of our net sales in the fiscal year ended December 31, 2018. 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.
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 insurance in an amount 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 products 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. 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.
9
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. Although both
conventional and organic milk prices in fiscal 2018 were relatively consistent with the prior year, 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.
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 addition, some of our raw materials are also
agricultural products, and therefore subject to the same vulnerabilities described above for raw milk. Other events that adversely affect our third-
party suppliers and that are out of our control could also impair our ability to obtain the raw materials and other inputs that we need in the quantities
and at the prices that we desire. Such events include problems with our suppliers’ businesses, finances, labor relations, costs, production, insurance,
and reputation.
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.
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,
kefir, and probiotic supplements. 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.
10
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.
11
As of December 31, 2018, we had outstanding borrowings of approximately $6.0 million, net of $55 of unamortized deferred financing costs, which
consisted of a revolving line of credit. Our loan agreements contain certain restrictions and requirements that among other things:
require us to maintain a minimum year-to-date EBITDA in fiscal year 2019, and a quarterly fixed charge coverage 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 notes 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.
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, or if we fail to attract talented new employees, our business and results of operations could be negatively affected.
12
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.
Litigation or legal proceedings could expose us to significant liabilities and have a negative impact on our reputation.
We are or may become party to various claims and legal proceedings in the ordinary course of our business. These claims and legal proceedings
may include lawsuits or claims relating to contracts, intellectual property, product recalls, product liability, the marketing and labeling of products,
employment matters, environmental matters, regulatory compliance, or other aspects of our business. Even when not merited, the defense of these
claims and legal proceedings may divert our management’s attention, and we may incur significant expenses in defending these claims and
proceedings. In addition, we may be required to pay damage awards or settlements or become subject to injunctions or other equitable remedies,
which could have a material adverse effect on our financial position, cash flows, or results of operations. The outcome of litigation is often difficult
to predict, and the outcome of pending or future claims and legal proceedings may have a material adverse effect on our financial position, cash
flows, or results of operations. We evaluate these claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if
possible, the amount of potential losses. Based on these assessments and estimates, we establish reserves or disclose the relevant litigation claims or
legal proceedings, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a
significant amount of management judgment. Actual outcomes or losses may differ materially from our current assessments and estimates. If actual
outcomes or losses differ materially from our current assessments and estimates or additional claims or legal proceedings are initiated, we could be
exposed to significant liabilities.
13
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.
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, clean up costs,
and other civil sanctions, as well as potential criminal sanctions, any of which could have a material adverse effect on our business.
The Smolyansky family controls a majority of our common stock and has the ability to control the outcome of matters submitted for stockholder
approval.
A majority of our common stock is controlled by members of the Smolyansky family, and collectively, they have the ability to control the outcome
of stockholder votes, including the election of all of our directors and the approval or rejection of any merger, change of control, or other significant
corporate transaction. No person interested in acquiring Lifeway will be able to do so without obtaining the consent of the Smolyansky family. We
believe that having the Smolyansky family as a significant part of a long-term-focused, committed, and engaged stockholder base provides us with
an important strategic advantage, particularly in a business with a mature, well-recognized brand. This advantage could be eroded or lost, however,
should Smolyansky family members cease, collectively, to be controlling stockholders of Lifeway. We desire to remain independent and family-
owned, and we believe the Smolyansky family shares these interests. However, the Smolyansky family’s interests may not always be aligned with
other stockholders’ interests. By exercising their control, 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.
14
Because the Smolyansky family, collectively, controls a majority of our common stock (approximately 50.4%), we are considered a “controlled
company” under Nasdaq Listing Rules. Controlled companies are exempt from Nasdaq listing standards that require a board composed of a majority
of independent directors, a fully independent nominating/corporate governance committee, and a fully independent compensation committee. Our
Board of Directors has determined that Lifeway will avail itself of these exemptions, though we currently maintain a Board composed of a majority
of independent directors. In reliance on the controlled company exemptions described above, we have chosen to combine our audit, compensation,
and nominating committees into an Audit and Corporate Governance Committee comprised of a majority of the Board’s independent directors to
eliminate unnecessary redundancies in our independent committee structure given the size of our Board. The Committee fulfills the Board’s
delegated audit, compensation, and nominating duties. As a result of our use of controlled company exemptions, our corporate governance practices
differ from those of non-controlled companies, which are subject to all of the Nasdaq corporate governance requirements.
We have identified a material weakness in our internal control over financial reporting, and our business and stock price may be adversely
affected if we have other material weaknesses or significant deficiencies in our internal control over financial reporting.
Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial statements. We have identified a
material weakness in our internal control over financial reporting related to our controls over the review of the step one goodwill impairment
evaluation performed by third party valuation experts. A description of the material weakness can be found in Item 9A of this report. As a result of
this material weakness, management concluded that our disclosure controls and procedures and internal control over financial reporting were not
effective as of December 31, 2018.
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.
ITEM 1B UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2 PROPERTIES
We operate the following facilities:
Location
Morton Grove, Illinois
Waukesha, Wisconsin
Niles, Illinois
Philadelphia, Pennsylvania
Chicago, Illinois
Chicago, Illinois
New York, New York
Owned / Leased
Owned
Owned
Owned
Owned
Leased
Leased
Leased
Principal Use
Production of kefir and cheese, principal executive offices
Production of kefir, administrative offices
Distribution center, administrative offices
Production of kefir and cheese, administrative offices
3 Retail stores
Administrative offices
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 of 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
None
15
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 March 15,
2019, there were approximately 150 holders of record of Lifeway’s Common Stock.
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:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Dividend Policy
Common Stock Price Range
2017
Low
High
10.31
9.12
8.15
7.79
$
$
$
$
2018
5.99
4.79
2.66
1.88
$
$
$
$
Low
11.83
10.58
9.62
10.56
8.40
6.48
4.63
3.39
High
$
$
$
$
$
$
$
$
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 2018 or 2017.
16
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)
to
to
to
to
to
8/1/2017
8/31/2017
9/1/2017
9/30/2017
10/1/2017
10/31/2017
11/1/2017
11/30/2017 (a)
12/1/2017
12/31/2017
Fiscal Year 2017
to
to
to
to
to
1/1/2018
1/31/18
2/1/2018
2/28/2018
4/1/2018
4/30/2018
6/1/2018
6/30/2018
8/1/2018
8/31/2018
9/1/2018
9/30/2018
11/1/2018
11/30/2018
12/1/2018
12/31/2018
Fiscal Year 2018
to
to
to
85,665 $
10.54
31,348 $
12,818 $
10,390 $
7,325 $
147,546 $
106,441 $
24,486 $
15,433 $
4,143 $
1,332 $
40,364 $
17,228 $
8,305 $
217,732 $
9.06
9.23
10.37
10.03
10.07
8.22
7.21
6.09
5.46
3.96
3.35
2.99
2.25
6.33
– $
31,348 $
12,818 $
10,390 $
7,325 $
61,881 $
106,441 $
24,486 $
15,433 $
4,143 $
1,332 $
40,364 $
17,228 $
8,305 $
217,732 $
1,220
936
818
5,895
5,822
5,822
5,007
4,830
4,736
4,714
4,709
4,573
4,522
4,503
4,503
(a) During the fourth quarter of 2015, Lifeway publicly announced a share repurchase program. On November 1, 2017, the 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.
ITEM 6 SELECTED FINANCIAL DATA
Not applicable
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 for the years ended December 31, 2018 and December 31, 2017 should
be read in conjunction with the audited consolidated financial statements and the notes to those statements that are included elsewhere in this 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.
17
Results of Operations
Comparison of Year Ended December 31, 2018 to Year Ended December 31, 2017 (in 000’s)
Net sales
Cost of goods sold
Depreciation expense
Total cost of goods sold
Gross profit
Gross Profit % to net sales
Selling expenses
Selling expenses % to net sales
General & administrative expenses
General & administrative % to net sales
Goodwill impairment
Amortization expense
Total operating expenses
Total operating expense % to net sales
Income (loss) from operations
Income (loss) from operations % to net sales
Net Sales
December 31,
Change
2018
2017
$
%
$
$
$
$
$
$
$
$
$
103,350
74,646
2,846
77,492
25,858
25.0%
13,477
13.0%
13,616
13.2%
1,244
631
28,968
28.0%
(3,110)
(3.0%)
$
$
$
$
$
$
$
$
$
118,893
85,757
2,440
88,197
30,696
25.8%
16,595
14.0%
13,955
11.7%
–
672
31,222
26.3%
(526)
(0.4%)
$
$
$
$
$
$
$
$
$
(15,543)
(13.1%)
11,111
(406)
10,705
–
12.1%
(4,838)
(15.8%)
3,118
339
18.8%
2.4%
(1,244)
(100.0%)
41
2,254
6.1%
7.2%
(2,584)
(491.3%)
Net sales finished at $103,350 for the year ended December 31, 2018, a decrease of $15,543 or 13.1% versus prior year. The decline was primarily
due to volume/mix of 16.6%, partially offset by lower spend in trade promotion and allowances of 1.7%, and partially offset by pricing gains of
1.8%. The decline in volume/mix was primarily driven by volume softness in our branded drinkable and ProBugs kefir, partially offset by the
incremental volume of new item introductions. The volume decline reflects lower consumption of our products that is consistent with the overall
volume decline in dairy and cultured dairy product categories.
Pricing primarily includes the favorable impact of a second quarter 2018 price increase to recover higher input costs. This increase was partially
offset by the lapping of a price reduction driven by the shift in delivery method for select customers in the first quarter 2017. The favorable
promotional activity reflects lower trade spending, partially offset by the increased redemptions on our 2018 coupon program.
18
Gross Profit
Gross profit as a percentage of net sales was 25.0% during the year ended December 31, 2018. Gross profit percentage was 25.8% in the prior year.
The decline versus the prior year was primarily due to the unfavorable impact of operating leverage that arises from lower net sales relative to fixed
costs, increased trade promotion investment, and higher freight and fixed costs, partially offset by an increase in pricing and a reduction in variable
costs. Additionally, depreciation expense increased reflecting the continued investment in manufacturing improvements. We incurred $139k of
direct labor severance expense in 2018 to reduce expense and create efficiencies in our manufacturing process.
Selling Expenses
Selling expenses decreased by $3,118 or 18.8% to $13,477 during the year ended December 31, 2018. The decrease versus prior year, primarily
reflects a change in media spending to reduce programs with lower efficiency. The primary driver was a reduction in television advertising spend in
2018 compared to the prior year, and to a lesser extent lower broker commissions and marketing spending. The reduction was partially offset by
severance expense. We incurred $274 of selling severance expense in 2018 to align our organizational structure and reduce expenses.
General and administrative expenses
General and administrative expenses were slightly lower for the year ended December 31, 2018 finishing at $13,616, 2.4% below the prior year.
This reflects decreased incentive compensation and bad debt expense, partially offset by severance expense. We incurred $431 of general and
administrative severance expense in 2018 to align our organizational structure and reduce expenses.
As noted in the sections above, we incurred a total of $845 of severance expense during fiscal year 2018, primarily in the fourth quarter.
Goodwill Impairment
During the fourth quarter of fiscal 2018, we recorded a goodwill impairment charge of $1,244. There were no goodwill impairment charges
recorded during fiscal 2017. See Note 5, Goodwill and Intangible Assets, in the Notes to the Consolidated Financial Statements included in Item 8
of this Form 10-K.
Provision for Income Taxes
The provision for income tax includes federal, state and local income taxes. Benefit for income taxes was $225 during the year ended December 31,
2018, compared to a benefit for income taxes of $458 during the same period in 2017.
Our effective income tax rate (ETR) was 6.8% and 57.0% of pre-tax loss for the years ended December 31, 2018 and 2017, respectively. The lower
effective tax rate was primarily due to the reduction in the federal statutory tax rate and the 2018 impairment of goodwill that was not deductible for
tax purposes.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act significantly changed U.S. income tax law by, among
other things, reducing the U.S. federal income tax rate from 35% to 21%, transitioning from a global tax system to a modified territorial tax system,
eliminating the domestic manufacturing deduction, reducing the dividend received deduction, and limiting the tax deductions for interest expense
and executive compensation.
Section 162(m) of the Code limits the deductibility of compensation paid to certain of our executives. Under the Act’s amendments to 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. Although the Act eliminated the prior tax deduction
under Section 162(m) for performance-based executive compensation, it included a transition rule under which the changes to Section 162(m) will
not apply to awards made to our covered employees who had the right to participate in our 2015 Omnibus Incentive Plan pursuant to written binding
contracts in effect as of November 2, 2017, as long as those contracts have not subsequently been modified in any material respect. Accordingly,
subject to further guidance from the Treasury Department and the Internal Revenue Service (“IRS”), we expect that performance-based
compensation paid to our executives under our Omnibus Plan will remain eligible for the Section 162(m) exemption in 2019.
19
Income taxes are discussed in Note 9 in the Notes to the Consolidated Financial Statements.
Net loss
We reported a net loss of $(3,086) or $(0.19) per basic and diluted common share for the year ended December 31, 2018 compared to net loss of
$(346) or $(0.02) per basic and diluted common share in the same period in 2017.
Liquidity and Capital Resources
We expect to meet our foreseeable liquidity and capital resource requirements through anticipated cash flows from operations; our revolving credit
facility; and cash and cash equivalents. 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.
Sources and Uses of Cash
Lifeway had a net decrease in cash and cash equivalents of $1,980 during the year ended December 31, 2018 compared to a net decrease in cash and
cash equivalents of $3,834 in the same period in 2017. The drivers of the year over year change are as follows:
Net cash provided by operating activities was $2,417 during the year ended December 31, 2018 compared to net cash provided by operating
activities of $3,808 in the same period in 2017. The decline in cash provided by operating activities primarily results from lower net income.
Net cash used in investing activities was $2,720 during the year ended December 31, 2018 compared to net cash used in investing activities of
$5,316 in the same period in 2017. The lower level of net cash used in investing activities in 2018 reflects lower capital spending. Capital spending
was $2,824 during the year ended December 31, 2018 compared to $5,341 in 2017. 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 spending
supports manufacturing efficiency, safety and productivity.
Net cash used in financing activities was $1,677 during the year ended December 31, 2018 compared to net cash used in financing activities of
$2,326 in the same period in 2017. On November 1, 2017, Lifeway’s Board approved an increase in the aggregate amount under our previously
announced 2015 stock repurchase program (the “2017 Repurchase Plan Amendment”), by adding to (i.e., exclusive of the shares previously
authorized under the 2015 stock repurchase program) the authorization the lesser of $5,185 or 625 shares. We repurchased approximately 218 shares
of common stock at a cost of $1,379 during the year ended December 31, 2018 under the 2017 Repurchase Plan Amendment. We may execute
transactions from time to time in the open market or by private negotiation, in accordance with all applicable securities laws and regulations. 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.
Revolving credit facility.
On May 7, 2018, Lifeway entered into an Amended and Restated Loan and Security Agreement (the “Revolving Credit Facility”) with its existing
lender. The Revolving Credit Facility provides for a revolving line of credit up to a maximum of $10 million (the “Revolving Loan”) with an
incremental facility not to exceed $5 million (the “Incremental Facility” and together with the Revolving Loan, the “Loans”).
We used the Revolving Credit Facility to retire all the then-outstanding term loans described in Note 7 to the consolidated financial statements. The
Revolving Credit Facility provides us advantages over our prior debt facilities, including that it does not require scheduled principal payments, gives
us access to unused credit capacity, and does not require costly annual amendments or extensions. Additionally, we have no debt maturities until
May 2021.
The Revolving Credit Facility contains financial covenants requiring us to achieve a minimum EBITDA threshold for each of the fiscal quarters
during the year ended December 31, 2018 and maintain (a) a fixed charge coverage ratio of no less than 1.25 to 1.0, and (b) a senior debt to
EBTIDA ratio of not more than 3.0 to 1.0 at December 31, 2018 and for each of the succeeding fiscal quarters ending through the expiration date.
We were not in compliance with the minimum EBITDA ratio and fixed charge coverage ratio covenants at December 31, 2018, but we have
obtained a waiver of those covenants as of that date. The revolving credit facility was amended on April 10, 2019, effective March 31, 2019. See
Note 14 to the consolidated financial statements
20
We believe we have ample access to additional capital under the available borrowings and accordion feature of our revolving credit facility. We may
issue debt or equity securities from time to time when we determine that market conditions and the opportunity to utilize the proceeds from the
issuance of such securities are favorable. Such opportunities could include refinancing existing indebtedness, funding capital expenditures,
extending our debt maturities in a favorable interest rate environment, or taking advantage of acquisition opportunities that generate favorable
returns.
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 Policies and Use of Estimates
Critical accounting policies are defined as those most important to the portrayal of a company’s financial condition and results, and require the most
difficult, subjective, or complex judgments. In many cases, the accounting treatment of a particular transaction is specifically dictated by US GAAP
with no need for the application of our judgement. In certain circumstances, the preparation of our Consolidated Financial Statements in conformity
with US 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.
Goodwill and intangible asset valuation
Our goodwill and intangible assets have resulted from acquisitions. Goodwill and indefinite lived intangible assets are not amortized, but rather
evaluated for impairment annually and on an interim basis when circumstances arise that indicate that impairment may have occurred. Considerable
management judgement is necessary to evaluate goodwill for impairment going forward. Our estimates of fair value for goodwill impairment testing
are determined using widely acceptable valuation techniques including discounted cash flows (income approach) and market multiples analysis
(market approach). Significant assumptions used in the income approach include revenue growth and discount rates, margins, and the Company’s
weighted average cost of capital. We used historical performance and management estimates of future performance to determine revenue growth
rates and margins. Our weighted average cost of capital included a review and assessment of market and capital structure assumptions. Considerable
management judgement is necessary to evaluate the impact of operating changes and to estimate future cash flows. Assumptions used, such as
forecasted growth rates and our cost of capital, are consistent with our internal projections and operating plans. Changes in our estimates or any of
our other assumptions used in our analysis could result in a different conclusion.
In the fourth quarter of 2018, we early adopted ASU 2017-04, Intangibles — Goodwill and Other: Simplifying the Test for Goodwill Impairment,
which simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. We performed a step one
valuation of goodwill as of December 31, 2018, which indicated the carrying value of our reporting unit exceeded its fair value by $1,244.
Accordingly, we recorded a $1,244 non-cash impairment charge in 2018. The goodwill impairment loss is included in Goodwill impairment on the
Consolidated Statements of Operations. As of December 31, 2018, the gross carrying value of goodwill was $10,368 and accumulated goodwill
impairment was $1,244.
We reviewed our indefinite lived intangible assets, which consist of brand names totaling $3,700 as of December 31, 2018, 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 analysis resulted in fair values that are in excess of carrying value by more than
10%. Changes in our estimates or any of our other assumptions used in our analysis could result in a different conclusion.
21
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, 2018, we had $0.8 million 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 10 to our consolidated financial statements.
Income taxes.
We pay income taxes based on tax statutes, regulations, and case law of the various jurisdictions in which we operate. At any one 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.
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 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
Reports of Independent Registered Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the Years ended December 31, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017
Notes to Consolidated Financial Statements
F-1
F-3
F-4
F-5
F-6
F-7
22
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, 2018
and 2017, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period
ended December 31, 2018, 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, 2018 and 2017, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the
United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s
internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013 Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated April 16, 2019 expressed an
adverse opinion on the effectiveness of the company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company changed its method of accounting for revenue from contracts with customers as a
result of the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers effective January 1, 2018, under
the modified retrospective method.
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. 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.
/s/ Mayer Hoffman McCann P.C.
We have served as the Company's auditor since 2015
Chicago, Illinois
April 15, 2019
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Lifeway Foods, Inc. and Subsidiaries
Morton Grove, Illinois
We have audited Lifeway Foods, Inc. and Subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2018, based
on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a
timely basis. The following material weakness has been identified.
Management’s review of the conclusions of the valuation specialist, including the completeness and accuracy of analysis prepared by
management’s specialist in performing the annual goodwill impairment test, were not operating effectively as of December 31, 2018. Specifically,
the review was not sufficient to assess the completeness of the adjustments to enterprise value.
This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2018 financial
statements, and this report does not affect our report dated April 16, 2019, on those financial statements.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the
Company has not maintained effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets and
the related statements of operations, stockholders’ equity, and cash flows of the Company, and our report dated, April 16, 2019, expressed an
unqualified opinion.
/s/ Mayer Hoffman McCann P.C.
Chicago, Illinois
April 16, 2019
F-2
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2018 and 2017
(In thousands)
Current assets
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts and discounts and allowances of
$
$1,220 and $2,010 at December 31, 2018 and 2017, respectively
Inventories, net
Prepaid expenses and other current assets
Refundable income taxes
Total current assets
Property, plant and equipment, net
Intangible assets
Goodwill and indefinite-lived intangibles
Other intangible assets, net
Total intangible assets
Other Assets
Total assets
Current liabilities
Current maturities of notes payable
Accounts payable
Accrued expenses
Accrued income taxes
Total current liabilities
Line of Credit
Notes payable
Deferred income taxes, net
Other long-term liabilities
Total liabilities
$
$
Stockholders’ equity
Preferred stock, no par value; 2,500 shares authorized; no shares issued or outstanding at 2018
and 2017
Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,814 and 16,008
shares outstanding at 2018 and 2017
Paid-in capital
Treasury stock, at cost
Retained earnings
Total stockholders’ equity
December 31,
2018
2017
2,998
$
$
$
6,276
5,817
1,077
2,748
18,916
24,573
12,824
344
13,168
150
56,807
–
4,570
2,777
106
7,453
5,995
–
390
564
14,402
–
6,509
2,303
(12,970)
46,563
42,405
4,978
8,676
7,697
983
2,347
24,681
24,645
14,068
975
15,043
150
64,519
3,166
6,848
2,984
203
13,201
–
3,113
840
775
17,929
–
6,509
2,244
(11,812)
49,649
46,590
Total liabilities and stockholders’ equity
$
56,807
$
64,519
See accompanying notes to consolidated financial statements
F-3
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 2018 and 2017
(In thousands, except per share data)
2018
2017
$
103,350
$
118,893
Net sales
Cost of goods sold
Depreciation expense
Total cost of goods sold
Gross profit
Selling expenses
General and administrative
Goodwill impairment
Amortization expense
Total operating expenses
Loss from operations
Other income (expense):
Interest expense
Gain (loss) on sale of property and equipment
Other income
Total other expense
Loss before provision for income taxes
Benefit for income taxes
Net loss
Basic loss per common share
Diluted loss per common share
Weighted average number of shares outstanding - Basic
Weighted average number of shares outstanding - Diluted
74,646
2,846
77,492
25,858
13,477
13,616
1,244
631
28,968
(3,110)
(271)
54
16
(201)
(3,311)
(225)
(3,086)
(0.19)
(0.19)
15,872
16,319
$
$
$
85,757
2,440
88,197
30,696
16,595
13,955
–
672
31,222
(526)
(242)
(38)
2
(278)
(804)
(458)
(346)
(0.02)
(0.02)
16,105
16,105
$
$
$
See accompanying notes to consolidated financial statements
F-4
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31, 2018 and 2017
(In thousands)
Common Stock
Issued
In treasury
Shares
$
Shares
$
Paid-In
Capital
Retained
Earnings
Total
Equity
Balance, January 1, 2017
17,274
$
6,509
(1,120)
$
(10,340)
$
2,198
$
49,995
$
48,362
Treasury stock purchased
Issuance of common stock in connection
with stock-based compensation
Stock-based compensation
Net income
–
–
–
–
–
–
–
–
(148)
(1,486)
2
–
–
14
–
–
–
(14)
60
–
–
–
–
(1,486)
–
60
(346)
(346)
Balance, December 31, 2017
17,274
$
6,509
(1,266)
$
(11,812)
$
2,244
$
49,649
$
46,590
Treasury stock purchased
Issuance of common stock in connection
with stock-based compensation
Stock-based compensation
Net loss
–
–
–
–
–
–
–
–
(218)
(1,379)
24
–
–
221
–
–
–
(89)
148
–
–
–
–
(1,379)
132
148
(3,086)
(3,086)
Balance, December 31, 2018
17,274
$
6,509
(1,460)
$
(12,970)
$
2,303
$
46,563
$
42,405
See accompanying notes to consolidated financial statements
F-5
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2018 and 2017
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to operating cash flow:
Depreciation and amortization
Non-cash interest expense
Bad debt expense
Deferred Revenue
Reserve for inventory obsolescence
Stock-based compensation
Deferred income taxes
(Gain) loss on sale of property and equipment
Goodwill impairment
(Increase) decrease in operating assets:
Accounts receivable
Inventories
Refundable income taxes
Prepaid expenses and other current assets
Increase (decrease) in operating liabilities:
Accounts payable
Accrued expenses
Accrued income taxes
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of investments
Proceeds from sale of investments
Purchases of property and equipment
Proceeds from sale of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Borrowings under revolving credit facility
Payment of deferred financing costs
Purchase of treasury stock
Repayment of notes payable
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
Supplemental cash flow information:
Cash paid for income taxes, net of refunds
Cash paid for interest
$
$
See accompanying notes to consolidated financial statements
F-6
2018
2017
$
(3,086)
$
3,477
14
21
(97)
558
802
(451)
(54)
1,244
2,379
1,322
(401)
(78)
(2,278)
(858)
(97)
2,417
(500)
500
(2,824)
104
(2,720)
6,050
(69)
(1,379)
(6,279)
(1,677)
(1,980)
4,978
2,998
723
261
$
$
(346)
3,112
–
480
–
374
596
(352)
38
–
780
(29)
(2,038)
(197)
1,130
711
(451)
3,808
(25)
–
(5,341)
50
(5,316)
–
–
(1,486)
(840)
(2,326)
(3,834)
8,812
4,978
2,382
241
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
(In thousands)
Note 1 – Basis of presentation
The accompanying 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”). Our 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.
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 make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant
estimates made in preparing the consolidated financial statements include the reserve for promotional allowances, the valuation of goodwill and
intangible assets, stock-based and incentive compensation, and deferred income taxes.
Revenue Recognition
We sell food and beverage products across select product categories to customers predominantly within the United States (see Note 11, Segments,
Products and Customers). We also sell bulk cream, a byproduct of our fluid milk manufacturing process. In accordance with Accounting Standards
Codification (“ASC”) 606, Revenue from Contracts with Customers, we recognize revenue when control over the products transfers to our
customers, which generally occurs upon delivery to our customers or their common carriers. The Company adopted this standard at the beginning of
fiscal year 2018, with no significant impact to its financial position or results of operations, using the modified retrospective method. The amount of
revenue recognized reflects the consideration to which 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.
Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer, which is the
delivery of food products which provide immediate benefit to the customer.
We account for product shipping and handling as fulfillment activities with revenues for these activities recorded within net revenue and costs
recorded within cost of goods sold. Any taxes collected on behalf of government authorities are excluded from net revenues.
Variable consideration, which typically includes volume-based rebates, known or expected pricing or revenue adjustments, such as trade discounts,
allowances for non-saleable products, product returns, trade incentives and coupon redemption, is estimated utilizing the most likely amount
method.
Key sales terms, such as pricing and quantities ordered, are established on a frequent basis such that most customer arrangements and related
incentives have a one year or shorter duration. As such, we do not capitalize contract inception costs and we capitalize product fulfillment costs in
accordance with U.S. GAAP and our inventory policies. We do not have any significant deferred revenue or unbilled receivables at the end of a
period. We generally do not receive noncash consideration for the sale of goods nor do we grant payment financing terms greater than one year.
F-7
Accounts Receivable
We provide credit terms to customer 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.
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. Lifeway has not
experienced any losses in such accounts and believes it is not exposed to any significant credit risk related to its cash and cash equivalents.
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.
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 and depreciated using the straight-line method over the estimated useful lives of the related
assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs that do not improve or extend the life of the assets
are charged to expense as incurred; significant renewals and betterments are capitalized.
Property, plant and equipment is being depreciated over the following useful lives:
Category
Buildings and improvements
Machinery and equipment
Office equipment
Vehicles
Leasehold improvements
Years
31 and 39
5 – 12
3 – 7
5
Shorter of expected useful life or lease term
F-8
Goodwill and other intangible assets
Goodwill represents the excess purchase price over the fair value of the net tangible and other identifiable intangible assets acquired. Goodwill and
indefinite lived intangible assets are not amortized, but are reviewed for impairment at least annually.
Intangible assets acquired in a business combination are recorded at their estimated fair values at the date of acquisition. Lifeway amortizes other
intangible assets over their estimated useful lives, as disclosed in the table below.
Category
Recipes
Trade names
Formula
Customer lists
Customer relationships
Impairment
Years
4
8-15
10
8-10
8-12
Lifeway reviews intangible assets for impairment at least once per year to determine if any adverse conditions exist that would indicate the carrying
value of these assets may not be recoverable. 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 our products or changes in the size of the market for our products. 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.
Long-lived assets, including property, plant, and equipment, and cost method investments, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable and prior to any goodwill impairment test. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. There were no indicators of tangible asset impairment in 2018 or 2017.
Income taxes
Deferred income taxes are the result of temporary differences that arise from income and expense items reported for financial accounting and tax
purposes in different periods. Deferred tax assets and liabilities are measured 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. Deferred tax assets and liabilities are classified on a net basis as
non-current.
The principal sources of temporary differences are different depreciation and amortization methods for financial statement and tax purposes,
capitalization of indirect costs for tax purposes, purchase price adjustments, incentive compensation, reserves for excess and obsolete inventory, the
allowance for doubtful accounts, and the newly enacted interest expense limitations.
Lifeway has analyzed 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. We recognize 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. We apply a
more likely than not threshold to the recognition and derecognition of uncertain tax positions. Accordingly, we recognize 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 quarter 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-9
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 our stock on the date of grant.
Treasury stock
Treasury stock is recorded using the cost method.
Advertising costs
Lifeway expenses advertising costs as incurred. For the years ended December 31, 2018 and 2017 total advertising expenses were $4,518 and
$7,402, 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 each 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 outstanding during each period. For the years ended December 31, 2018 and 2017, there were 0 common stock
equivalents outstanding.
Recently Adopted Accounting Pronouncements
In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. The new guidance is intended to
simplify aspects of accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to
employees, with certain exceptions. The new guidance is effective for financial statements issued for fiscal years beginning after December 15,
2018, and interim periods within those years. Early adoption is permitted, but no earlier than an entity’s adoptions of Topic 606. We adopted this
new standard in June 2018. The adoption of this amendment had no impact on the consolidated financial statements.
In May 2017, the Financial Accounting Standards Board ("FASB”) issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718):
Scope of Modification Accounting. The new guidance provides clarity and reduces both diversity in practice and cost of complexity when
accounting for a change to the terms of or conditions of a share-based payment award. The amendments in this update provide guidance about
which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This
guidance was effective January 1, 2018. The adoption of this amendment had no impact on the consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. The new
guidance simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires
an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An
entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The
Company adopted the new standard on a prospective basis through our test for goodwill impairment in the fourth quarter of 2018. See note 5 for
further discussion and the results of our test for goodwill impairment.
F-10
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The
new guidance is intended to address the diversity in practice in how certain cash receipts and cash payments are presented and classified in the
statement of cash flows, such as debt prepayment or debt extinguishment costs, contingent consideration payments made after an acquisition,
proceeds from the settlement of insurance claims, and other topics. This guidance was effective January 1, 2018. The adoption of this amendment
had no impact on the consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The new
guidance modifies how entities measure equity investments and present changes in the fair value of financial liabilities. Under the new guidance,
entities will have to measure equity investments that do not result in consolidation and are not accounted under the equity method at fair value and
recognize any changes in fair value in net income unless certain conditions exist. This guidance was effective January 1, 2018. The adoption of this
amendment had no impact on the consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes the
revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific requirements. ASU 2014-09 establishes a
five-step revenue recognition process in which an entity will recognize revenue when it transfers promised goods or services to customers in an
amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The standard allows for
either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning
the standard is applied only to the most current period presented in the financial statements. ASU 2014-09 also requires enhanced disclosures
regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. On August 12, 2015 the FASB
approved a one-year delay of the effective date to reporting periods beginning after December 15, 2017, while permitting companies to voluntarily
adopt the new standard as of the original effective date. In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and
Improvements to Topic 606, Revenue from Contracts with Customers, which clarifies narrow aspects of ASC 606 or corrects unintended application
of the guidance. The effective date and transition requirements for ASU 2016-20 are the same as the effective date and transition requirements for
ASU 2014-09. Under the delayed effective date, this guidance was effective January 1, 2018. We adopted the new standard on January 1, 2018 on a
modified retrospective basis. The adoption of this amendment had no material impact on the consolidated financial statements. The Company has
revised its relevant policies and procedures, as applicable, to meet the new accounting, reporting and disclosure requirements of Topic 606 and has
updated internal controls accordingly. Refer to the Revenue Recognition section above and Note 11, Segment, Products, and Customers for
additional information.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which affects any entity that enters into a lease (as that term is defined
in ASU 2016-02), with some specified scope exceptions. Under ASU 2016-02, companies can adopt the amended guidance using a modified
retrospective transition approach, using an application date of either the beginning of the earliest comparative period presented or the beginning of
the reporting period in which the companies first apply the new standard. We adopted this standard on January 1, 2019 using the an application date
of January 1, 2019, and elected certain practical expedients allowed under the standard. In July 2018, the FASB issued ASU No. 2018-11, Leases
(842), Targeted Improvements, which provides an additional transition election to not restate comparative periods for the effects of applying the
new standard. The guidance requires lessees to recognize lease assets and lease liabilities in the balance sheet and disclose key information about
leasing arrangements, such as information about variable lease payments and options to renew and terminate leases. The amended guidance will
require both operating and finance leases to be recognized in the balance sheet. A lessee should recognize in the statement of financial position a
liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The
new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those years.
Lifeway will elect certain of the practical expedients that are permitted under the transition guidance within ASU 2016-02 and related standards.
Among other things, this practical expedient allows us to carryforward the historical lease classification, and not reassess initial direct costs for any
existing leases as of January 1, 2019 or reassess whether any expired or existing contracts are or contain leases. In addition, we are electing to adopt
the hindsight practical expedient to determine the reasonably certain lease term for existing leases. We will make an accounting policy election to
continue recording leases with an initial term of 12 months or less consistent with our prior financial reporting and elect the practical expedient to
combine lease and non-lease components. The Company has revised its relevant policies and procedures, as applicable, to meet the new accounting,
reporting and disclosure requirements of Topic 842 and has updated internal controls accordingly.
F-11
The main difference between the guidance in ASU 2016-02 and current GAAP is the recognition of lease assets and lease liabilities by lessees for
those leases classified as operating leases under current GAAP. Recognition of the assets and liabilities will have a material impact to our
consolidated balance sheets upon adoption. However, since all of our leases are operating leases under ASC 840 and we will carryforward the
historical lease classification, the new standard will have no immediate, material impact on our Consolidated Statements of Operations,
Consolidated Statements of Stockholders’ Equity, or Consolidated Statements of Cash Flows. We are in the process of finalizing our review of
contracts and calculating the impact of the new standard on our balance sheet. We expect the adoption to result in increase of assets of
approximately $745 and liabilities of $772 as of January 1, 2019.
Note 3 – Inventories, net
Inventories consisted of the following:
Ingredients
Packaging
Finished goods
Total inventories, net
Note 4 – Property, Plant and Equipment, net
Property, plant and equipment consisted of the following:
Land
Buildings and improvements
Machinery and equipment
Vehicles
Office equipment
Construction in process
Less accumulated depreciation
Total property, plant and equipment, net
Note 5 – Goodwill and Intangible Assets
Goodwill and indefinite-lived intangible assets consisted of the following:
Goodwill
Brand names
Goodwill and indefinite lived intangible assets
F-12
December 31,
2018
2017
1,580
2,072
2,165
5,817
$
$
1,717
2,453
3,527
7,697
December 31,
2018
2017
1,747
17,520
29,692
937
838
546
51,280
(26,707)
24,573
$
$
1,747
17,260
27,539
901
734
1,683
49,864
(25,219)
24,645
December 31,
2018
2017
9,124
3,700
12,824
$
$
10,368
3,700
14,068
$
$
$
$
$
$
We conduct impairment tests of goodwill and indefinite-lived intangible assets annually as of the fourth quarter and on an interim basis when
circumstances arise that indicate a possible impairment. In the fourth quarter of 2018, we early adopted ASU 2017-04, Intangibles — Goodwill and
Other: Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by removing the second step of the
two-step impairment test.
We completed our step one goodwill impairment analysis for our single reporting unit during the fourth quarter of 2018. Considerable management
judgment is necessary to evaluate goodwill and indefinite-lived intangible assets for impairment. We estimate fair value using widely accepted
valuation techniques including discounted cash flows and market multiples analysis with respect to our single reporting unit, and the relief-from-
royalty method with respect to our indefinite-lived brand names. These valuation approaches are dependent upon a number of factors, including
estimates of future growth and trends, royalty rates in the category of intellectual property, discount rates and other variables. Assumptions used in
our valuations were consistent with our internal projections and operating plans, as well as other factors and assumptions, and significant
management judgment. Additionally, under the market approach analysis, we used significant other observable inputs including various guideline
company comparisons. We base our fair value estimates on assumptions we believe 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 step one
analysis for our one reporting unit.
Upon completion of the annual goodwill impairment analysis as of December 31, 2018, the Company recorded impairment losses of $1,244. The
goodwill impairment loss is included in Goodwill impairment on the Consolidated Statements of Operations. As of December 31, 2018, the gross
carrying value of goodwill was $10,368 and accumulated goodwill impairment was $1,244.
The Company performed the annual impairment assessment on the indefinite-lived intangible asset as of December 31, 2018 resulting in no
impairment losses.
Finite-lived Intangible Assets
Other intangible assets, net consisted of the following:
Recipes
Customer lists and other customer related intangibles
Customer relationships
Trade names
Formula
Accumulated amortization
Intangible assets, net
December 31,
2018
2017
44
4,529
985
2,248
438
8,244
(7,900)
344
$
$
44
4,529
985
2,248
438
8,244
(7,269)
975
$
$
The estimated annual intangible asset amortization expense related to amortizable intangible assets as of December 31, 2018 is as follows:
2019
2020
Total
$
$
214
130
344
Note 6 – Accrued Expenses
Accrued expenses consisted of the following:
Payroll and incentive compensation
Real estate taxes
Other
Total accrued expenses
December 31,
2018
2017
1,937
398
442
2,777
$
$
2,208
371
405
2,984
$
$
F-13
Note 7 – Debt
Notes payable consisted of the following:
December 31,
2018
2017
Variable rate term loan due May 31, 2018. Principal and interest payable monthly with a balloon
payment due at maturity. Paid in full.
Variable rate term loan due May 31, 2019. Principal and interest payable monthly with a balloon
payment due at maturity. Paid in full.
Total term loans
Less current portion
Total long-term portion
$
$
–
–
–
–
–
$
$
2,832
3,447
6,279
(3,166)
3,113
The variable rate term loans were subject to interest at the prime rate or at the LIBOR plus 2.5% and were collateralized by substantially all of
Lifeway’s assets. The two term loans were refinanced and paid in full on May 7, 2018. See Line of Credit below.
Line of Credit
On May 7, 2018, Lifeway entered into an Amended and Restated Loan and Security Agreement (the “Revolving Credit Facility”) with its existing
lender. The Revolving Credit Facility provides for a revolving line of credit up to a maximum of $10 million (the “Revolving Loan”) with an
incremental facility not to exceed $5 million (the “Incremental Facility” and together with the Revolving Loan, the “Loans”). The proceeds of the
Loans were used to pay off Lifeway’s existing debt with the lender under the Loan and Security Agreement, Revolving Note, and Term Note
entered into on February 6, 2009, and for general working capital purposes. Upon closing, we retired all the then-outstanding term loans described
above.
As of December 31, 2018, we had $5,995, net of $55 of unamortized deferred financing costs, outstanding under the Revolving Credit Facility. We
had approximately $3,950 available under the Borrowing Base for future borrowings as of December 31, 2018.
All outstanding amounts under the Loans bear interest, at Lifeway’s election, at either the lender Base Rate (the greater of either the Federal Funds
Rate plus 0.5%, or the Prime Rate) or the LIBOR plus 2.50%, payable monthly in arrears. Lifeway is also required to pay a quarterly unused line fee
and, in conjunction with the issuance of any letters of credit, a letter of credit fee. Lifeway’s average interest rate on debt outstanding under our
Revolving Credit Facility for the period May 7, 2018 through December 31, 2018 was 4.79%. The weighted-average interest rate on debt
outstanding at December 31, 2018 was 4.98%.
The commitment under the Revolving Credit Facility matures May 7, 2021. The Revolving Credit Facility is presented as a long-term debt
obligation as of December 31, 2018. The Loans and all other amounts due and owed under the Revolving Credit Facility and related documents are
secured by substantially all of our assets.
Amounts available for borrowing under the Revolving Credit Facility equal the lesser of (i) the Borrowing Base (as defined below), or (ii) $10
million (plus the amount of any Incremental Facility requested by Lifeway and approved by lender), in each case, as the same is reduced by the
aggregate principal amount outstanding under the Loans. “Borrowing Base” under the Revolving Credit Facility means, generally, an amount equal
to our cash and cash equivalents plus our eligible accounts receivable and eligible inventory, less certain reserves, divided by 1.5.
F-14
The Revolving Credit Facility contains customary representations, warranties, and covenants on the part of Lifeway, including financial covenants
requiring us to achieve a minimum EBITDA threshold for each of the fiscal quarters through December 31, 2018; maintain (a) a fixed charge
coverage ratio of no less than 1.25 to 1.0, and (b) a Senior Debt to EBITDA ratio of not more than 3.00 to 1.0 at December 31, 2018 and for each of
the succeeding fiscal quarters ending through the expiration date. The Revolving Credit Facility also provides for events of default, including failure
to repay principal and interest when due and failure to perform or violation of the provisions or covenants of the agreement, as a result of which
amounts due under the Revolving Credit Facility may be accelerated. We were not in compliance with the minimum EBITDA and fixed charge
coverage ratio covenants at December 31, 2018, but we have obtained a waiver of those covenants as of that date. The revolving credit facility was
amended on April 10, 2019, effective March 31, 2019. See Note 14 for discussion of this subsequent event.
Note 8 – Commitments and contingencies
Lease obligations
Lifeway leases three retail stores for its Lifeway Kefir Shop subsidiary, certain machinery and equipment, and office space under operating leases.
Total lease expense was $769 and $702 for the years ended December 31, 2018 and 2017, respectively. Future annual minimum base rental
payments under non-cancelable leases with a lease term in excess of one year as of December 31, 2018 were as follows:
Year
2019
2020
2021
2022
2023
Total minimum lease payments
$
$
Operating
Leases
473
171
95
55
4
798
Litigation
Lifeway is engaged in various legal actions, claims, and proceedings arising in the normal course of business, including commercial disputes,
product liabilities, intellectual property matters and employment-related matters resulting from our business activities.
We record accruals for outstanding legal matters when we believe it is probable that a loss will be incurred and the amount of such loss can be
reasonably estimated. We evaluate, on a periodic basis, developments in legal matters that could affect the amount of any accrual and developments
that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable, we do not
establish an accrued liability. Currently, none of our accruals for outstanding legal matters are material individually or in the aggregate to our
financial position and it is management’s opinion that the ultimate resolution of these outstanding legal matters will not have a material adverse
effect on our business, financial condition, results of operations, or cash flows. However, if we ultimately are required to make payments in
connection with an adverse outcome, it is possible that it could have a material adverse effect on our business, financial condition, results of
operations or cash flows.
Lifeway’s contingencies are subject to substantial uncertainties, including for each such contingency the following, among other factors: (i) the
procedural status of the case; (ii) whether the case has or may be certified as a class action suit; (iii) the outcome of preliminary motions; (iv) the
impact of discovery; (v) whether there are significant factual issues to be determined or resolved; (vi) whether the proceedings involve a large
number of parties and/or parties and claims in multiple jurisdictions or jurisdictions in which the relevant laws are complex or unclear; (vii) the
extent of potential damages, which are often unspecified or indeterminate; and (viii) the status of settlement discussions, if any, and the settlement
posture of the parties. Consequently, Lifeway cannot predict with any reasonable certainty the timing or outcome of such contingencies, and we are
unable to estimate a possible loss or range of loss.
F-15
Note 9 – Income taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act significantly changed U.S. income tax law by, among
other things, reducing the U.S. federal income tax rate from 35% to 21%, transitioning from a global tax system to a modified territorial tax system,
eliminating the domestic manufacturing deduction, reduction in the dividend received deduction, and limiting the tax deductions for interest expense
and certain executive compensation.
The SEC issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of US GAAP in situations where a registrant does not
have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain
income tax effects of the Tax Act. To the extent that a company’s accounting for the Tax Act is incomplete but it is able to provide a reasonable
estimate, it must record a provisional amount in the financial statements. SAB 118 provides a measurement period that should not extend beyond
one year from the Tax Act enactment date for companies to complete the accounting under ASC 740.
For the year-ended December 31, 2017, the Company recorded an estimate of the provisions of the Act and recognized a $378 discrete net tax
benefit in our 2017 financial statements arising from revaluing our net deferred tax liabilities to reflect the new tax rate. As of December 31, 2018,
there have been no changes to the provisional estimate.
The provision (benefit) for income taxes consists of the following:
Current:
Federal
State and local
Total current
Deferred
Benefit for income taxes
For the Years Ended December 31,
2018
2017
$
$
(13)
249
236
(461)
(225)
$
$
(359)
193
(166)
(292)
(458)
A reconciliation of the U.S. federal statutory rate to the effective tax rate used in the provision for income taxes is as follows:
Federal income tax computed at the statutory rate
State and local tax, net
Goodwill impairment
U.S. domestic manufacturers’ deduction & other permanent
differences
Changes for tax positions of prior years
Change in tax rates (a)
Change in tax estimate
Benefit for income taxes
(a)
Includes the estimated impact of the Act in 2017.
$
$
F-16
2018
2017
Amount
Percentage
Amount
Percentage
(695)
(47)
324
147
–
(37)
83
(225)
21.0%
1.4%
(9.8)%
(4.4)%
0.0%
1.1%
(2.5)%
6.8%
$
$
(274)
1
–
111
118
(378)
(36)
(458)
34.0%
(0.1)%
0.0%
(13.8)%
(14.6)%
47.0%
4.5%
57.0%
The tax effects of temporary differences giving rise to deferred income tax assets and liabilities are as follows:
Deferred tax liabilities attributable to:
Accumulated depreciation and amortization
Total net deferred tax liabilities
Deferred tax assets attributable to:
Net operating losses
Capital loss carry-forward & investment impairment
Incentive compensation
Inventory
Allowances for doubtful accounts and discounts
Other
Total net deferred tax assets
Net deferred tax liabilities
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at January 1
Additions for tax positions of prior years
Release for tax positions of prior years
Balance at December 31
December 31,
2018
2017
(2,062)
(2,062)
$
595
115
448
355
109
50
1,673
(390)
181
–
(118)
63
$
$
$
2018
(1,784)
(1,784)
14
122
255
335
161
57
944
(840)
2017
63
118
–
181
$
$
$
$
Lifeway is subject to U.S. federal income tax as well as income tax in multiple state and city jurisdictions. With limited exceptions, our calendar
year 2015 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, 2018 and 2017.
The amount of interest and penalties recognized in the consolidated statements of operations was $0 and $152 during 2018 and 2017, respectively.
The amount of accrued interest and penalties recognized in the consolidated balance sheets was $19 and $171 at December 31, 2018 and 2017,
respectively.
Note 10 – Stock-based and Other Compensation
In December 2015, Lifeway stockholders approved the 2015 Omnibus Incentive Plan, which authorized the issuance of an aggregate of 3.5 million
shares to satisfy awards of stock options, stock appreciation rights, unrestricted stock, restricted stock, restricted stock units, performance shares and
performance units to qualifying employees. Under the Plan, the Board or its Audit and Corporate Governance Committee approves stock awards to
executive officers and certain senior executives, generally in the form of restricted stock or performance shares. The number of performance shares
that participants may earn depends on the extent to which the corresponding performance goals have been achieved. Stock awards generally vest
over a three-year performance or service period. At December 31, 2018, 3.467 million shares remain available under the Omnibus Incentive Plan.
While we plan to continue to issue awards pursuant to the Plan at least annually, we may choose to suspend the issuance of new awards in the future
and may grant additional awards at any time including issuing special grants of restricted stock, restricted stock units, and stock options to attract
and retain new and existing executives.
F-17
Stock Options
Pursuant to the Omnibus Incentive Plan, Lifeway granted 26 stock options to certain key employees effective January 1, 2016 and 24 stock options
on July 1, 2016 (the “2016 options”). The 2016 options generally vest over a three-year period, on a relatively accelerated basis. The accelerated
vesting reflects the landmark nature of the awards and the relative tenure of individual participants.
The following table summarizes stock option activity during the year ended December 31, 2018:
Outstanding at December 31, 2017
Granted
Exercised
Forfeited
Outstanding at December 31, 2018
Exercisable at December 31, 2018
Weighted
average
exercise price
Options
Weighted
average
remaining
contractual
life
Aggregate
intrinsic value
45
–
–
(4)
41
36
$
$
$
$
$
$
10.45
–
–
10.73
10.42
10.42
–
–
–
–
7.22
7.23
$
$
–
–
–
–
–
For the years ended December 31, 2018 and 2017 total pre-tax stock-based compensation expense recognized in the consolidated statements of
operations was $9 and $41, respectively. For the years ended December 31, 2018 and 2017 tax-related benefits of $3 and $17 were also recognized.
As of December 31, 2018, the total remaining unearned compensation related to non-vested stock options was $1, which is expected to be amortized
over the weighted-average remaining service period of 0.50 years.
We measure 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. We utilized this simplified method as we do not have sufficient historical
exercise data to provide a reasonable basis upon which to estimate the expected term.
The following assumptions were used for the 2016 stock option grants:
Risk free interest rate
Expected dividend yield
Expected volatility
Expected term (years)
Restricted Stock Awards
1.00 - 1.11%
0.27%
38.96 - 39.94%
5.03 - 5.88
Lifeway’s Board granted 20 Restricted Stock Awards (“RSAs”) to certain non-employee directors in June 2018 vesting over a three-year service
period. We also approved awards of 16 RSA’s to employees during 2018. An RSA represents the right to receive one share of common stock in the
future. RSAs have no exercise price.
The following table summarizes RSA activity during the year ended December 31, 2018:
Outstanding at December 31, 2017
Granted
Shares issued upon vesting
Forfeited
Outstanding at December 31, 2018
Weighted average grant date fair value per share outstanding
$
RSA’s
–
36
(2)
(9)
25
4.77
F-18
We expense RSA’s over the service period. For the years ended December 31, 2018 and 2017 total pre-tax stock-based compensation expense
recognized in the consolidated statements of operations was $47 and $18, respectively. For the years ended December 31, 2018 and 2017 tax-related
benefits of $13 and $7, respectively, were also recognized. As of December 31, 2018, the total remaining unearned compensation related to non-
vested RSA’s was $81, which is expected to be amortized over the weighted-average remaining service period of 1.32 years.
Long-Term Incentive Compensation
Lifeway established a long-term incentive-based compensation program for fiscal year 2017 (the “2017 Plan”) for certain senior executives and key
employees (the “participants”). We established a similar plan for participants for fiscal year 2018 (the “2018 Plan”). Under both the 2017 Plan and
the 2018 Plan, long-term incentive compensation is based on Lifeway’s achievement of certain sales and adjusted EBITDA performance levels
versus respective targets established by the Board for each fiscal year.
Under the 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 senior executive’s 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 year ended December 31, 2018, $636 was expensed under the 2017 Plan as stock-based
compensation expense in the consolidated statements of operations. For the year ended December 31, 2017, incentive compensation earned by
participants and expensed under the plan was $3,589 of which $1,610 will be settled through the issuance of stock, subject to vesting, and $1,979
will be settled in cash. For the year ended December 31, 2017, incentive compensation recognized in the consolidated statement of operations under
the 2017 Plan was $2,516. As of December 31, 2018, the total remaining unearned compensation related to the 2017 Plan was $336, of which $287
and $49 is expected to be recognized in 2019 and 2020, respectively, subject to vesting.
Under the 2018 Plan, collectively the participants have the opportunity to earn cash and equity-based incentive compensation in amounts ranging
from $0 to $11,200 depending on Lifeway’s performance levels compared to the respective targets and the senior executive’s 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 2018 grant dates. For the year ended December 31, 2018, $76 was expensed under the 2018 Plan as cash bonus expense
in the consolidated statements of operations. There were no equity-based incentive earnings under the 2018 plan during the year ended December
31, 2018.
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, 2018 and 2017 total contribution expense recognized in the
consolidated statements of operations was $417 and $376, respectively.
Note 11 – Segments, Products and Customers
Lifeway’s primary product is drinkable kefir, a cultured dairy product. Lifeway Kefir is tart and tangy, high in protein, calcium and vitamin D.
Thanks to our exclusive blend of kefir cultures, each cup of kefir contains 12 live and active cultures and 15 to 20 billion beneficial CFU (Colony
Forming Units) at the time of manufacture.
We manufacture (directly or through co-packers) our products under our own brand, as well as under private labels on behalf of certain customers.
As of December 31, 2018, Lifeway offered approximately 20 varieties of our kefir products including more than 60 flavors. In addition to our core
drinkable kefir products, we offer several lines of products developed through our innovation and development efforts. These include Kefir Cups, a
strained, cupped version of our kefir; and Organic Farmer Cheese Cups, a cupped version of our soft cheeses, both served in resealable 5 oz.
containers. We also offer Skyr, a strained cupped Icelandic yogurt; Plantiful, a plant-based probiotic beverage made from organic and non-GMO pea
protein with 10 vegan kefir cultures; a line of probiotic supplements for adults and children; and a soft serve kefir mix.
F-19
Our product categories are:
•
•
•
•
•
•
Drinkable Kefir, sold in a variety of organic and non-organic sizes, flavors, and types, including low fat, non-fat, whole milk, protein,
BioKefir (a 3.5 oz. kefir with additional probiotic cultures), and Kefir with Oats.
European-style soft cheeses, including farmer cheese in resealable cups.
Cream and other, which consists primarily of cream, a byproduct of making our kefir.
ProBugs, a line of kefir products in drinkable and frozen formats, designed for children.
Other Dairy, which includes Cupped Kefir and Icelandic Skyr, a line of strained kefir and yogurt products in resealable cups.
Frozen Kefir, available in both bars and pint-size containers.
Lifeway has determined that it has one reportable segment based on how our chief operating decision maker manages the business and in a manner
consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for
allocating resources and assessing our performance, has been identified collectively as the Chief Financial Officer, the Chief Operating Officer, the
Chief Executive Officer, and Chairperson of the board of directors. Substantially all of our consolidated revenues relate to the sale of cultured dairy
products that we produce using the same processes and materials and are sold to consumers through a common network of distributors and retailers
in the United States.
Net sales of products by category were as follows for the years ended December 31:
In thousands
Drinkable Kefir other than ProBugs
Cheese
Cream and other
Cupped Kefir and Skyr
ProBugs Kefir
Frozen Kefir (a)
Net Sales
(a)
Includes Lifeway Kefir Shop sales
2018
2017
$
%
$
%
$
$
78,523
11,486
5,276
3,836
2,795
1,434
103,350
76% $
11%
5%
4%
3%
1%
100% $
90,514
11,516
6,527
4,138
4,537
1,661
118,893
76%
10%
5%
4%
4%
1%
100%
Significant Customers – Sales are predominately to companies in the retail food industry located within the United States. Two major customers
accounted for approximately 21% and 22% of net sales for the years ended December 31, 2018 and 2017, respectively. Two major customers
accounted for approximately 17% and 19% of accounts receivable as of December 31, 2018 and 2017, respectively. Our ten largest customers as a
group accounted for approximately 59% of net sales for the years ended December 31, 2018 and 2017.
Note 12 – Share repurchase program
On September 24, 2015, Lifeway’s Board of Directors authorized a stock repurchase program (the “2015 stock repurchase program”) under which
we may, from time to time, repurchase shares of our 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 (i.e., 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 our Board in its discretion at any time.
F-20
Pursuant to the share repurchase program, during the year ended December 31, 2018, the Company repurchased 218 shares at a cost of $1,379 or
approximately $6.33 per share. During the year ended December 31, 2017, the Company repurchased 148 shares at a cost of $1,486 or
approximately $10.07 per share. Approximately $4,503 remained available under this program as of December 31, 2018.
Note 13 – Related party transactions
Lifeway obtains consulting services from the Chairperson of its Board of Directors. Fees earned by the Chairperson are included in general and
administrative expenses in the accompanying consolidated statements of operations and were $1,000 during the years ended December 31, 2018 and
2017, respectively.
Lifeway is also a party to a royalty agreement with the Chairperson under which we pay the Chairperson a royalty based on the sale of certain
Lifeway products, not to exceed $50 in any fiscal month. Royalties earned by the Chairperson are included in selling expenses in the accompanying
consolidated statements of operations and were $587 and $600 during the years ended December 31, 2018 and 2017, respectively.
Note 14 – Subsequent Events
On April 10, 2019, effective March 31, 2019, Lifeway entered into the First Modification to the Amended and Restated Loan and Security
Agreement (the “Modified Revolving Credit Facility”) with its existing lender. Under the amendment, the Modified Revolving Credit Facility
provides for a revolving line of credit up to a maximum of $9 million (the “Revolving Loan”) with an incremental facility not to exceed $5 million
(the “Incremental Facility” and together with the Revolving Loan, the “Loans”).
All outstanding amounts under the Loans bear interest, based on a level of the Senior Debt to EBITDA ratio, at Lifeway’s election, at either the
lender Base Rate (the greater of either the Federal Funds Rate plus 0.0% to 0.5%, or the Prime Rate) or the LIBOR plus 2.25% to 3.00%, payable
monthly in arrears. Lifeway is also required to pay a quarterly unused line fee and, in conjunction with the issuance of any letters of credit, a letter
of credit fee.
As amended, the Modified Revolving Credit Facility contains customary representations, warranties, and covenants on the part of Lifeway,
including financial covenants requiring us to achieve a minimum EBITDA threshold for each of the fiscal quarters through December 31, 2019, and
maintain a fixed charge coverage ratio of no less than 1.25 to 1.0 each of the fiscal quarters ending through the expiration date. The Modified
Revolving Credit Facility also provides for events of default, including failure to repay principal and interest when due and failure to perform or
violation of the provisions or covenants of the agreement, as a result of which amounts due under the Modified Revolving Credit Facility may be
accelerated.
The Company had outstanding borrowings of $4,720 at the time of the modification.
F-21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure material information required to be disclosed in our reports that we file
or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms,
and that such information is accumulated and communicated to our management, including our principal executive officer, principal financial
officer and principal accounting officer, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and
evaluating the disclosure controls and procedures, we recognize that a control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
As of December 31, 2018 (the “Evaluation Date”), we conducted an evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-
15 of the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, our principal executive officer and principal financial
officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective at the reasonable assurance level as
of December 31, 2018 in ensuring that information required to be disclosed by us under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified under the Exchange Act rules and forms due to the material weakness described below. As a result, we
performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with
generally accepted accounting principles, including reviewing the accounting for goodwill impairment. Accordingly, management has concluded,
notwithstanding the material weakness described below, the company’s consolidated financial statements included in this Form 10-K fairly present,
in all material respects, our financial condition, results of operations and cash flows for the periods presented.
The attestation report of Mayer Hoffman McCann P.C., our independent registered public accounting firm, regarding Lifeway’s internal control
over financial reporting is provided under “Financial Statements and Supplementary Data.”
23
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is identified in Exchange
Act Rules 13a-15(f). Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive officer,
principal financial officer and principal accounting officer, and effected by the Board of Directors, management, and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. Our internal control over financial reporting includes those policies
and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;
provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our consolidated financial statements
in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures of the
company are being made only in accordance with authorizations of our management and our directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that
could have a material effect on our consolidated financial statements.
Internal control over financial reporting has inherent limitations which may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the level
of compliance with related policies or procedures may deteriorate.
Management, including our Chief Executive Officer and our Chief Financial Officer, assessed the effectiveness of our internal control over financial
reporting as of December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013).
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Based on this assessment, management has concluded that our internal control over financial reporting was not effective as of December 31, 2018
due to material weakness in our controls over the review of the result of the step one goodwill impairment evaluation performed by the third party
valuation expert that we engaged. When preparing their report on the step one goodwill impairment evaluation, the third party valuation expert made
certain analysis errors that our review controls did not detect. Because we recorded an adjustment to the financial statements, this control deficiency
did not result in a material misstatement to the Company’s consolidated financial statements for the year ended December 31, 2018. However,
management concluded that this control deficiency, if un-remediated, could, in future reporting periods, result in a material misstatement to the
annual or interim consolidated financial statements that our controls may not prevent or detect. Accordingly, management has determined that this
control deficiency constituted a material weakness.
Remediation of the Material Weakness
In response to the material weakness described above, management is currently evaluating our policies and procedures related to the review of the
analysis in goodwill impairment reports prepared by third-party valuation experts and plans to design and implement adequate internal controls and
procedures to ensure that (i) goodwill impairment is properly reviewed, accounted for and disclosed, and (ii) management can more effectively
evaluate analysis conducted by third-party valuation service providers that perform the step one goodwill impairment analysis.
Changes in Internal Control over Financial Reporting
Except as discussed above there were no changes in our internal control over financial reporting that occurred during 2018 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
24
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Corporate Governance Guidelines and Code of Ethics
PART III
We have adopted Corporate Governance Guidelines and a Code of Ethics applicable to all members of the Board, executive officers, and
employees, including our principal executive officer and principal financial officer. The Corporate Governance Guidelines, the Code of Ethics, and
other corporate governance documents are available on Lifeway’s website at www.lifewayfoods.com. Any person may, without charge, request a
copy of the Corporate Governance Guidelines and/or Code of Ethics by contacting Lifeway at (847) 967-1010 or by email at info@lifeway.net.
Other information required by this Item 10 will be included in our definitive Proxy Statement to be filed no later than 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item 11 will be included in our definitive Proxy Statement to be filed no later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
Information required by this Item 12 will be included in our definitive Proxy Statement to be filed no later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
Information required by this Item 13 will be included in our definitive Proxy Statement to be filed no later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Information required by this Item 14 will be included in our definitive Proxy Statement to be filed no later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K and is incorporated herein by reference.
25
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
PART IV
1. A list of the Financial Statements and Financial Statement Schedules filed as part of this Report is set forth in Part II, Item 8, which list is
incorporated herein by reference.
2. Financial Statement Schedules – Separate financial statement schedules have been omitted either because they are not applicable or
because the required information is included in the consolidated financial statements
Form Period
Ending
Exhibit
Filing Date
10-K
12/31/17
3.1
3/30/18
3. Exhibits.
No.
Description
Amended and Restated Bylaws.
3.1
3.2
10.1
10.2
Articles of Incorporation, as amended and currently in effect
10-K
12/31/13
3.2
4/2/14
Stock Purchase Agreement dated October 1, 1999 by and among Danone Foods, Inc.,
Lifeway Foods, Inc., Michael Smolyansky and certain other parties
Stockholders’ Agreement dated October 1, 1999 by and among Danone Foods, Inc., Lifeway
Foods, Inc., Michael Smolyansky and certain other parties
10.3
Letter Agreement dated December 24, 1999
10.4
Employment Agreement, dated September 12, 2002, between Lifeway Foods, Inc. and Julie
Smolyansky
10.10
10/12/99
10.11
10/12/99
10.12
1/12/00
9/30/02
10.14
4/30/03
8-K
8-K
8-K
10-
QSB/A
No. 2
10.5 Consulting Agreement by and between the Company and Ludmila Smolyansky, dated as of
10-K
12/31/15
10.23
3/16/16
March 8, 2016
10.6 Endorsement Agreement by and between the Company and Ludmila Smolyansky, dated as of
10-K
12/31/15
10.24
3/16/16
March 14, 2016
10.7
Employment Agreement by and between the Company and Douglas A. Hass, dated as of
April 21, 2017
10.5 Amended and Restated Loan and Security Agreement dated as of May 7, 2018 among
Lifeway Foods, Inc., Fresh Made, Inc., The Lifeway Kefir Shop, LLC, Lifeway Wisconsin,
Inc., and CIBC Bank USA, as Lender.
10.8
Employment Agreement by and between the Company and Amy Feldman, dated as of
October 29, 2018
8-K
8-K
8-K
10.1
4/26/17
10.1
5/11/18
10.1
11/01/18
26
10.9
Employment Agreement by and between the Company and Eric Hanson, dated as of January
18, 2019
8-K
10.1
1/23/19
10.10 First Modification to Amended and Restated Loan and Security Agreement dated as of April
10, 2019 among Lifeway Foods, Inc., Fresh Made, Inc., The Lifeway Kefir Shop, LLC,
Lifeway Wisconsin, Inc., and CIBC Bank USA, as Lender.
Filed Herewith
14
21
Code of Conduct and Ethics
List of Subsidiaries of the Registrant
23.1 Consent of Mayer Hoffman McCann P.C.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Julie Smolyansky
31.2 Rule 13a-14(a)/15d-14(a) Certification of Eric Hanson
32.1
Section 1350 Certification of Julie Smolyansky
32.2
Section 1350 Certification of Eric Hanson
10-K
12/31/13
14
4/2/14
Filed Herewith
Filed Herewith
Filed Herewith
Filed Herewith
Filed Herewith
Filed Herewith
99.1
Press release dated April 15, 2019 reporting the Company’s financial results for year ended
December 31, 2018.
Furnished Herewith
101
Interactive Data Files
Filed Herewith
ITEM 16.
FORM 10-K SUMMARY.
Not applicable.
27
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: April 15, 2019
Date: April 15, 2019
LIFEWAY FOODS, INC.
By:/s/ Julie Smolyansky
Julie Smolyansky
Chief Executive Officer, President, and
Director
By:/s/ Eric Hanson
Eric Hanson
Chief Financial & Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: April 15, 2019
Date: April 15, 2019
Date: April 15, 2019
Date: April 15, 2019
Date: April 15, 2019
Date: April 15, 2019
Date: April 15, 2019
Date: April 15, 2019
Date: April 15, 2019
/s/ Julie Smolyansky
Julie Smolyansky
Chief Executive Officer, President, and Director
(Principal Executive Officer)
/s/ Edward Smolyansky
Edward Smolyansky
Chief Operating Officer, Treasurer, Secretary, and Director
/s/ Eric Hanson
Eric Hanson
Chief Financial & Accounting Officer
(Principal Financial & Accounting Officer)
/s/ Ludmila Smolyansky
Ludmila Smolyansky
Chairperson of the Board of Directors
/s/ George Sent
George Sent
Lead Independent Director
/s/ Pol Sikar
Pol Sikar
Director
/s/ Renzo Bernardi
Renzo Bernardi
Director
Jason Scher
Director
/s/ Laurent Marcel
Laurent Marcel
Director
28
Exhibit 10.1
FIRST MODIFICATION TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
This First Modification to Amended and Restated Loan and Security Agreement (this “Amendment”) is entered into effective as of March
31, 2019 (the “Effective Date”) by and among CIBC BANK USA, (the “Lender”), LIFEWAY FOODS, INC., an Illinois corporation (“Lifeway”),
FRESH MADE, INC., a Pennsylvania corporation (“FMI”), THE LIFEWAY KEFIR SHOP LLC, an Illinois limited liability company formerly
known as STARFRUIT, LLC (“LKS”), and LIFEWAY WISCONSIN, INC., an Illinois corporation (“LWI” and together with Lifeway, FMI and
LKS being sometimes collectively referred to as the “Borrowers”).
R E C I T A L S
WHEREAS, the Lender and the Borrowers entered into an Amended and Restated Loan and Security Agreement dated May 7, 2018 (as
modified, the “Loan Agreement”), pursuant to which the Lender made available to the Borrowers a credit facility;
WHEREAS, Events of Default (the “Subject Defaults”) have occurred under Section 13.1.5 of the Loan Agreement as a result the failure of
Borrowers to comply with the financial covenants set forth in Section 11.14.1 (EBITDA) for the Fiscal Quarter ending December 31, 2018 and
Section 11.14.2 (Fixed Charge Coverage Ratio) for the Fiscal Quarter ending December 31, 2018;
WHEREAS, the Lender and Borrowers desire to amend the Loan Agreement, among other things, to (a) reduce the Revolving
Commitment, (b) redefine the “Borrowing Base”, (c) amend and restate the financial covenants in Section 11.14 of the Loan Agreement and (d)
waive the Subject Defaults, all upon and subject to the terms and conditions set forth in this Amendment; and
WHEREAS, this Amendment shall constitute a Loan Document and these Recitals shall be construed as part of this Amendment.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties
hereto hereby agree as follows:
1.
Definitions. (a) Undefined Terms. Unless the context otherwise provides or requires, capitalized terms used herein which are
not defined herein shall have the meanings ascribed to them in the Loan Agreement; provided, however, that all references in the Loan Agreement
to (a) “Obligations” shall, in addition to the definition set forth in the Loan Agreement include, but not be limited to, the duties and obligations of
the Borrowers under this Amendment, and (b) “Loan Documents” shall, in addition to the definition set forth in the Loan Agreement include, but
not be limited to, this Amendment and the documents and instruments to be delivered pursuant to this Amendment.
following amended and restated meaning:
(b)
Amended and Restated Defined Term. When used herein and in the Loan Agreement, the following terms shall have the
2018 Non-Recurring Expenses means, in respect of the Fiscal Year ended December 31, 2018 only (i) up to $731,048 of
restructuring and severance expenses related to the closing of Borrowers’ Skokie, Illinois plant and the separation of certain of Borrowers’
executives and sales directors, (ii) up to $217,073 of legal and other expenses incurred in connection with Borrowers’ decision not to
pursue further a possible “going private” transaction, (iii) up to $95,000 of recruiting fees for services rendering in identifying and hiring a
new Chief Financial Officer for the Borrowers and (iv) up to $128,828 of other non-recurring legal fees.
1
Applicable Margin means, for any day, the rate per annum set forth below opposite the level (the “Level”) then in effect, it being
understood that the Applicable Margin for (i) LIBOR Loans shall be the percentage set forth under the column “LIBOR Margin”, (ii) Base
Rate Loans shall be the percentage set forth under the column “Base Rate Margin”, (iii) the Non-Use Fee Rate shall be the percentage set
forth under the column “Non-Use Fee Rate” and (iv) the L/C Fee shall be the percentage set forth under the column “L/C Fee Rate”:
Level
I
II
III
IV
Senior Debt
to EBITDA Ratio
Greater than or equal to 2.00:1.00
Greater than 1.50:1.00 but less than 2.00:1.00
Greater than or equal to 1.00:1.00 but less than or equal to
1.50:1.00
Less than 1.00:1.00
LIBOR
Margin
3.00%
2.75%
2.65%
2.25%
Base Rate
Margin
0.50%
0.25%
0.15%
Non-Use
Fee Rate
0.25%
0.25%
0.25%
L/C Fee
Rate
0.20%
0.20%
0.20%
0.00%
0.25%
0.20%
The LIBOR Margin, the Base Rate Margin, the Non-Use Fee Rate and the L/C Fee Rate shall be adjusted, to the extent applicable,
on the fifth (5th) Business Day after Borrower provides or is required to provide the annual and quarterly financial statements and other
information pursuant to Sections 10.1.1 or 10.1.2, as applicable, and the related Compliance Certificate, pursuant to Section 10.1.3.
Notwithstanding anything contained in this paragraph to the contrary, (a) if Borrowers fail to deliver the financial statements and
Compliance Certificate in accordance with the provisions of Sections 10.1.1, 10.1.2 and 10.1.3, the LIBOR Margin, the Base Rate Margin,
the Non-Use Fee Rate and the L/C Fee Rate shall be based upon Level I above beginning on the date such financial statements and
Compliance Certificate were required to be delivered until the fifth (5th) Business Day after such financial statements and Compliance
Certificate are actually delivered, whereupon the Applicable Margin shall be determined by the then current Level; (b) no reduction to any
Applicable Margin shall become effective at any time when a Default or an Event of Default has occurred and is continuing; and (c) the
initial Applicable Margin on the Closing Date shall be based on Level III until the date on which the financial statements and Compliance
Certificate are required to be delivered for the Fiscal Quarter ending June 30, 2019.
Revolving Commitment means $9,000,000. Annex A to the Loan Agreement is hereby amended and restated in accordance with
Annex A attached to this Amendment.
2.
Amendment to Loan Agreement.
(a)
Commencing the Effective Date, Section 11.14 of the Loan Agreement is amended and restated as follows:
11.14 Financial Covenants.
11.14.1 EBITDA. Not Permit EBITDA to be less than the applicable amount set forth below for the period indicated
below:
Period
3-months ending March 31, 2019
6-months ending June 30, 2019
9-months ending September 30, 2019
12-months ending December 31, 2019
EBITDA
$750,000.00
$1,500,000.00
$2,250,000.00
$3,000,000.00
11.14.2 Fixed Charge Coverage Ratio. Not permit the Fixed Charge Coverage Ratio for any Computation Period to
be less than 1.25 to 1.00 commencing the Fiscal Quarter ending December 31, 2018 and at the end of each Fiscal Quarter
thereafter. For purposes of this Section 11.14.2, with respect to the Fiscal Year ended December 31, 2018 only (a) the 2018 Non-
Recurring Expenses may be added back to Consolidated Net Income to the extent such expenses were deducted in the calculation
of Consolidated Net Income and (b) up to $1,160,000.00 of unfinanced Capital Expenditures incurred during such Fiscal Year
related to plant improvements at the Waukesha, Property may be excluded for purposes of clause (a)(ii) of the definition of “Fixed
Charge Coverage Ratio”.
2
(b) Except as specifically set forth herein, Note and the Loan Documents previously delivered by the Borrowers shall
remain in full force and effect and are hereby ratified and confirmed in all respects. The indebtedness evidenced by the Note (as hereby amended
by this Amendment) is continuing indebtedness of the Borrowers and nothing herein shall be deemed to constitute a payment, settlement or
novation of the Note, or to release or otherwise adversely affect any lien or security interest securing such indebtedness or any rights of the Lender
against any party primarily or secondarily liable for such indebtedness.
3. Waiver of Subject Defaults.
From and after the Effective Date, and pursuant to Section 14.1 of the Loan Agreement the Lender hereby waives (a) the occurrence of the
Subject Defaults, (b) its available rights and remedies with respect to the Subject Defaults, and (c) its right to charge interest at the Default Rate on
account of the Subject Defaults. Such waiver (a) shall not be deemed to extend to any other Event of Default which has arisen or may hereafter
arise, (b) shall not be deemed to effect any amendment of the Loan Agreement or any of the other Loan Documents, all of which shall remain in full
force and effect in accordance with their respective terms except as expressly amended hereby and (c) shall not be deemed to establish a custom or
course of dealing between Borrowers and the Lender.
4. Representations and Warranties of Borrowers.
(a) The Recitals in this Amendment are true and correct in all respects.
(b) All representations and warranties of each Borrower in the Loan Agreement and in the other Loan Documents to
which each Borrower is a party are incorporated herein in full by this reference and are true and correct in all material respects as of the date hereof,
except to the extent that any such representation or warranty expressly relates to an earlier date.
(c) Other than the Subject Defaults, no Event of Default or Unmatured Event of Default has occurred and is continuing.
Amendment. This Amendment has been duly executed by each Borrower.
(d) Each Borrower has the power, and has been duly authorized by all requisite action, to execute and deliver this
(e) This Amendment is the legal, valid and binding obligation of each Borrower, enforceable against each Borrower and
each of the other Borrowers in accordance with their respective terms, except as such enforceability may be limited by any applicable bankruptcy,
insolvency, reorganization, moratorium, or similar law affecting creditors’ rights generally.
(f) The execution, delivery and performance of this Amendment do not and will not (i) violate any law, rule, regulation
or court order to which any of the Borrowers is subject; (ii) conflict with or result in a breach of the certificate of formation or incorporation,
bylaws, limited liability company agreement or other organizational documents of any of the Borrowers or any other agreement or instrument to
which it is party or by which the properties of any of the Borrowers is bound; or (iii) result in the creation or imposition of any Lien on any property
of any of the Borrowers, whether now owned or hereafter acquired, other than Liens in favor of the Lender.
(g) No consent or authorization of, filing with or other act by or in respect of any Person is required in connection with
the execution, delivery or performance by each of the Borrowers, or the validity or enforceability, of this Amendment, or the consummation of the
transactions contemplated hereby.
3
5. Conditions Precedent to Effectiveness. This Amendment shall be effective on the date when each of the following conditions
shall have been satisfied in the sole discretion of the Lender:
Amendment;
(a) Amendment. Each of the Borrowers and the Lender shall have delivered to the Lender executed counterparts of this
in the form attached hereto as Exhibit A;
(b) Amended and Restated Note. The Borrowers shall have delivered to the Lender a First Amended and Restated Note
(c) Secretary and Manager Certificates. With respect to each Borrower (i) good standing certificates in its state of
incorporation (or formation) and in each other state requested by the Lender; and (ii) certification that the certificates delivered by such Borrower on
or about May 7, 2018, remain in full force and effect (it being understood that the Lender may conclusively rely on each such certificate until
formally advised by a like certificate of any changes therein), all certified by its secretary or an assistant secretary or manager (or similar officer) as
being in full force and effect without modification; and
and other documents as the Lender may reasonably request to accomplish the purposes of this Amendment.
(d) Other Documents. The Borrowers shall have delivered to the Lender such other agreements, certificates, instruments
6. Reference to and Effect on Loan Documents.
shall remain in full force and effect and each Borrower hereby ratifies and confirms each such Loan Document.
(a) Ratification. Except as specifically provided in this Amendment, the Loan Agreement and the other Loan Documents
(b) No Waiver. Except as expressly provided herein, the execution, delivery and effectiveness of this Amendment shall
not operate as a waiver or forbearance of any right, power or remedy of either party under the Loan Agreement or any of the other Loan Documents,
or, except as expressly provided in herein, constitute a consent, waiver or modification with respect to any provision of the Loan Agreement or any
of the other Loan Documents. Upon the effectiveness of this Amendment each reference in (a) the Loan Agreement to “this Agreement,”
“hereunder,” “hereof,” or words of similar import and (b) any other Loan Document to “the Agreement” shall, in each case and except as otherwise
specifically stated therein, mean and be a reference to the Loan Agreement as amended and modified hereby.
7. Entire Agreement. This Amendment, including all annexes, exhibits, schedules and other documents incorporated by reference
herein or delivered in connection herewith, constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes
all other understandings, oral or written, with respect to the subject matter hereof.
8. Field Audit and Further Amendment. Borrowers covenant and agree that (a) they shall permit the Lender to complete a field
audit as further described in Section 10.16 of the Loan Agreement, at Borrowers’ expense, after the Effective Date (which field audit Borrowers
and Lender anticipate will be commenced by May 31, 2019) and (b) promptly following the completion of such field audit and the results thereof,
to further amend the Loan Agreement to amend the definitions of Borrowing Base, Eligible Accounts and Eligible Inventory in order for the
Borrowing Base to be calculated based upon a mutually agreed upon percentage of such Eligible Accounts and Eligible Inventory (together with
such other amendments as may be reasonably necessary to implement the foregoing).
9. Fees and Expenses. As provided in the Loan Agreement, the Borrowers agree to pay on demand all reasonable fees, costs and
expenses incurred by the Lender in connection with the preparation, execution and delivery of this Amendment. In addition, in consideration of the
Lender waiving the Subject Defaults, Borrowers shall pay Lender a covenant waiver fee of $15,000 payable on or before the Effective Date.
10. Severability. Wherever possible, each provision of this Amendment shall be interpreted in such a manner as to be effective
and valid under applicable law, but if any provision of this Amendment shall be prohibited by or invalid under applicable law, such provision shall
be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions
of this Amendment.
4
11. Conflict of Terms. Except as otherwise provided in this Amendment, if any provision contained in this Amendment is in
conflict with, or inconsistent with, any provision in any of the other Loan Documents, the provision contained in this Amendment shall govern and
control.
12. Successors and Assigns. This Amendment shall inure to the benefit of and be binding upon the successors and permitted
assigns of the Lender and shall be binding upon the successors and assigns of each Borrower.
13. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed to be an original,
but all of which taken together shall be one and the same instrument. Signature pages may be detached from multiple separate counterparts and
attached to a single counterpart. Delivery of an executed signature page of this Amendment by facsimile transmission or electronic transmission
(such as fax or e-mail) shall be as effective as delivery of a manually executed counterpart thereof.
14. Headings. The paragraph headings used in this Amendment are for convenience only and shall not affect the interpretation of
any of the provisions hereof.
15. Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE LAWS SET FORTH IN THE CREDIT AGREEMENT.
16. Forum Selection and Consent to Jurisdiction. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR
IN CONNECTION WITH THIS AMENDMENT OR ANY OTHER LOAN DOCUMENT, SHALL BE BROUGHT AND MAINTAINED
EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF ILLINOIS; PROVIDED THAT NOTHING IN THIS AMENDMENT SHALL BE DEEMED OR OPERATE TO
PRECLUDE THE LENDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION. THE
PARTIES HEREBY EXPRESSLY AND IRREVOCABLY SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF
ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF
ANY SUCH LITIGATION AS SET FORTH ABOVE. EACH OF THE PARTIES FURTHER CONSENTS TO THE SERVICE OF PROCESS IN
THE MANNER SET FORTH IN THE LOAN AGREEMENT. EACH OF THE PARTIES HEREBY EXPRESSLY AND IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO
THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM
THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
17. Waiver of Jury Trial. THE LENDER AND EACH OF THE BORROWERS, AFTER CONSULTING OR HAVING HAD
THE OPPORTUNITY TO CONSULT WITH COUNSEL, EACH KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE
IRREVOCABLY, ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS
UNDER THIS AMENDMENT, ANY NOTE, ANY OTHER LOAN DOCUMENT, ANY OF THE OTHER OBLIGATIONS, THE
COLLATERAL, OR ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE
FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY LENDING RELATIONSHIP
EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND EACH AGREE THAT ANY SUCH ACTION OR PROCEEDING
SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE
LENDER ENTERING INTO THIS AMENDMENT.
5
18. Release of Claims. In consideration for entering into this agreement, the sufficiency of which is acknowledged, and excepting
only the contractual obligations respecting future performance by the Lender arising under the Loan Agreement and the Loan Documents, each of
the Borrowers hereby irrevocably releases and forever discharges the Lender and each of its affiliates, subsidiaries, successors, assigns, directors,
officers, employees, agents, representatives and attorneys (each, a “Released Person”) of and from all damages, losses, claims, demands, liabilities,
obligations, actions and causes of action whatsoever which such Borrowers may now have or claim to have on and as of the date hereof against any
Released Person, whether presently known or unknown, liquidated or unliquidated, suspected or unsuspected, contingent or non-contingent, and of
every nature and extent to the extent arising out of, under or from the Loan Agreement, Loan Documents and related transactions (collectively,
“Claims”). Each Borrower jointly and severally represents and warrants to the Lender that it has not granted or purported to grant to any other
Person any interest whatsoever in any Claim, as security or otherwise. The Borrowers shall jointly and severally indemnify, defend and hold
harmless each Released Person from and against any and all Claims and any loss, cost, liability, damage or expense (including reasonable
attorneys’ fees and expenses) incurred by any Released Person in investigating, preparing for, defending against, providing evidence or producing
documents in connection with or taking other action in respect of any commenced or threatened Claim.
EACH BORROWER AGREES TO ASSUME THE RISK OF ANY AND ALL UNKNOWN, UNANTICIPATED OR MISUNDERSTOOD
DEFENSES, CLAIMS, CONTRACTS, LIABILITIES, INDEBTEDNESS AND OBLIGATIONS WHICH ARE RELEASED, WAIVED AND
DISCHARGED BY THIS AMENDMENT. EACH BORROWER HEREBY WAIVES AND RELINQUISHES ALL RIGHTS AND BENEFITS
WHICH IT MIGHT OTHERWISE HAVE UNDER ANY CIVIL CODE OR ANY SIMILAR LAW, TO THE EXTENT SUCH LAW MAY BE
APPLICABLE, WITH REGARD TO THE RELEASE OF SUCH UNKNOWN, UNANTICIPATED OR MISUNDERSTOOD DEFENSES,
CLAIMS, CONTRACTS, LIABILITIES, INDEBTEDNESS AND OBLIGATIONS. TO THE EXTENT THAT SUCH LAWS MAY BE
APPLICABLE, EACH BORROWER WAIVES AND RELEASES ANY RIGHT OR DEFENSE WHICH IT MIGHT OTHERWISE HAVE
UNDER ANY OTHER LAW OR ANY APPLICABLE JURISDICTION WHICH MIGHT LIMIT OR RESTRICT THE EFFECTIVENESS OR
SCOPE OF ANY OF THEIR WAIVERS OR RELEASES HEREUNDER.
[SIGNATURE PAGE FOLLOWS]
6
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first written above.
THE LENDER:
CIBC BANK USA FORMERLY KNOWN AS THE PRIVATE
BANK AND TRUST COMPANY
By: s/Christopher M. Trimbach, Associate Managing Director –
Commercial Banking
Authorized Officer
THE BORROWERS:
LIFEWAY FOODS, INC.
s/Douglas A. Hass
By:
Title: General Counsel
FRESH MADE, INC.
s/Douglas A. Hass
By:
Title: General Counsel
THE LIFEWAY KEFIR SHOP LLC
s/Douglas A. Hass
By:
Title: General Counsel
LIFEWAY WISCONSIN, INC.
s/Douglas A. Hass
By:
Title: General Counsel
7
AMENDED AND RESTATED ANNEX A
COMMITMENTS
Lender
Revolving
Commitment Amount
CIBC Bank USA
$9,000,000.00
TOTALS
$9,000,000.00
8
EXHIBIT A
FORM OF FIRST AMENDED AND RESTATED
NOTE
$9,000,000.00
March 31, 2019
Chicago, Illinois
The undersigned, for value received, promises to pay to the order of CIBC Bank USA(“Lender”) and its registered assigns at its principal
office in Chicago, Illinois the aggregate unpaid amount of all Loans made to the undersigned by Lender pursuant to the Loan and Security
Agreement referred to below (as shown on the schedule attached hereto (and any continuation thereof) or in the records of Lender), such principal
amount to be payable on the dates set forth in the Loan and Security Agreement.
The undersigned further promises to pay interest on the unpaid principal amount of each Loan from the date of such Loan until such Loan
is paid in full, payable at the rate(s) and at the time(s) set forth in the Loan and Security Agreement. Payments of both principal and interest are to
be made in lawful money of the United States of America.
This Note evidences indebtedness incurred under, and is subject to the terms and provisions of, the Amended and Restated Loan and
Security Agreement, dated as of May 7, 2018 (as amended, restated, supplemented or otherwise modified from time to time, the “Loan and Security
Agreement”; terms not otherwise defined herein are used herein as defined in the Loan and Security Agreement), between the undersigned and
Lender, to which Loan and Security Agreement reference is hereby made for a statement of the terms and provisions under which this Note may or
must be paid prior to its due date or its due date accelerated.
This Note is made under and governed by the laws of the State of Illinois applicable to contracts made and to be performed entirely within
such State.
This Note amends, restates and replaces in its entirety that certain Note dated May 7, 2018 executed and delivered by the undersigned in
favor of the Lender pursuant to the Loan Agreement (collectively, the “Prior Note”). Neither execution of this Note by the undersigned nor
cancellation of the Prior Note by the Lender shall be deemed or construed as a novation of the obligations of the undersigned evidenced by the Prior
Note, all of which shall be and remain in full force and effect and evidenced by this Note.
[SIGNATURE PAGE FOLLOWS]
9
LIFEWAY FOODS, INC.
s/Douglas A. Hass
By:
Title: General Counsel
FRESH MADE, INC.
s/Douglas A. Hass
By:
Title: General Counsel
THE LIFEWAY KEFIR SHOP LLC
s/Douglas A. Hass
By:
Title: General Counsel
LIFEWAY WISCONSIN, INC.
s/Douglas A. Hass
By:
Title: General Counsel
10
Exhibit 21
Subsidiaries of Lifeway Foods, Inc.
Below is a list of the subsidiaries of Lifeway Foods, Inc. All of the voting stock of each subsidiary is 100% owned directly by Lifeway
Foods, Inc.
Name of Subsidiary
Fresh Made, Inc.
Lifeway Foods Canada, Inc.
Lifeway Foods Europe
The Lifeway Kefir Shop, LLC
Lifeway Wisconsin, Inc.
Jurisdiction of Incorporation or Organization
Pennsylvania
Quebec, Canada
Ireland
Illinois
Illinois
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-210463) of our report dated April 16, 2019, with
respect to the consolidated financial statements of Lifeway Foods, Inc. and Subsidiaries as of December 31, 2018 and 2017 and for each of the years
then ended, and our report dated April 16, 2019, relating to the effectiveness of internal controls over financial reporting as of December 31, 2018 of
Lifeway Foods, Inc. included in the Annual Report on Form 10-K of Lifeway Foods, Inc. as of and for the year ended December 31, 2018.
/s/ Mayer Hoffman McCann P.C.
Chicago, Illinois
April 16, 2019
Exhibit 31.1
SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Julie Smolyansky, certify that:
1.
I have reviewed this annual report on Form 10-K of Lifeway Foods, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: April 15, 2019
By: /s/ Julie Smolyansky
Julie Smolyansky
Chief Executive Officer, President and Director
(Principal Executive Officer)
Exhibit 31.2
SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Eric Hanson, certify that:
1.
I have reviewed this annual report on Form 10-K of Lifeway Foods, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: April 15, 2019
By: /s/ Eric Hanson
Eric Hanson
Chief Financial & Accounting Officer
Exhibit 32.1
SECTION 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Lifeway Foods, Inc. (the “Company”) for the period ended December 31, 2018 as filed with
the SEC (the “Report”), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to her knowledge:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the
Company.
Date:
April 15, 2019
By:
/s/ Julie Smolyansky
Julie Smolyansky
Chief Executive Officer, President and Director
(Principal Executive Officer)
Exhibit 32.2
SECTION 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Lifeway Foods, Inc. (the “Company”) for the period ended December 31, 2018 as filed with
the SEC (the “Report”), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the
Company.
Date: April 15, 2019
By: /s/ Eric Hanson
Eric Hanson
Chief Financial & Accounting Officer