Submission Data File
General Information
Form Type*
Contact Name
Contact Phone
Filer Accelerated Status*
Filer File Number
Filer CIK*
Filer CCC*
Filer is Shell Company*
Filer is Smaller Reporting Company
Filer is Voluntary Filer*
Filer is Well Known Seasoned Issuer*
Confirming Copy
Notify via Website only
Return Copy
SROS*
Depositor CIK
Period*
ABS Asset Class Type
ABS Sub Asset Class Type
Sponsor CIK
Emerging Growth Company
Elected not to use extended transition period
10-K
Eric Hanson
847-779-8954
Non-Accelerated Filer
0000814586 (Lifeway Foods, Inc.)
**********
N
Yes
N
N
No
No
No
NASD
12-31-2019
No
No
(End General Information)
Document Information
File Count*
Document Name 1*
Document Type 1*
Document Description 1
Document Name 2*
Document Type 2*
Document Description 2
Document Name 3*
Document Type 3*
Document Description 3
Document Name 4*
Document Type 4*
Document Description 4
Document Name 5*
Document Type 5*
Document Description 5
Document Name 6*
15
lifeway_10k-123119.htm
10-K
Form 10-K
lifeway_ex2100.htm
EX-21
Subsidiaries of Lifeway Foods, Inc.
lifeway_ex2301.htm
EX-23.1
Consent of Independent Registered Public
Accounting Firm
lifeway_ex3101.htm
EX-31.1
Section 302 Certification of Chief Executive Officer
lifeway_ex3102.htm
EX-31.2
Section 302 Certification of Chief Financial Officer
lifeway_ex3201.htm
Document Type 6*
Document Description 6
Document Name 7*
Document Type 7*
Document Description 7
Document Name 8*
Document Type 8*
Document Description 8
Document Name 9*
Document Type 9*
Document Description 9
Document Name 10*
Document Type 10*
Document Description 10
Document Name 11*
Document Type 11*
Document Description 11
Document Name 12*
Document Type 12*
Document Description 12
Document Name 13*
Document Type 13*
Document Description 13
Document Name 14*
Document Type 14*
Document Description 14
Document Name 15*
Document Type 15*
Document Description 15
Notify via Website only
E-mail 1
E-mail 2
Table of Contents
EX-32.1
Section 906 Certification of Chief Executive Officer
lifeway_ex3202.htm
EX-32.2
Section 906 Certification of Chief Financial Officer
lifeway_ex9901.htm
EX-99.1
Press Release
image_001.gif
GRAPHIC
Graphic
lway-20191231.xml
EX-101.INS
XBRL Instance File
lway-20191231.xsd
EX-101.SCH
XBRL Schema File
lway-20191231_cal.xml
EX-101.CAL
XBRL Calculation File
lway-20191231_def.xml
EX-101.DEF
XBRL Definition File
lway-20191231_lab.xml
EX-101.LAB
XBRL Label File
lway-20191231_pre.xml
EX-101.PRE
XBRL Presentation File
(End Document Information)
Notifications
No
rakheen@lifeway.net
erich@lifeway.net
(End Notifications)
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, 2019
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
Trading Symbol
Common Stock, No Par Value
LWAY
Name of each exchange on which
registered
Nasdaq Global Market
Securities registered under Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T(§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit such files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
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
Emerging growth
company
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, 2019 ($3.64 per share as quoted on the Nasdaq
Global Market) was $15,486,977.
As of March 16, 2020, 15,584,847 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 18, 2019,
are incorporated by reference into Part III.
Table of Contents
PART I
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Item 8.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
i
Page
1
7
17
17
17
17
18
19
20
26
26
27
27
28
29
29
29
29
29
30
31
32
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;
the impact of the COVID-19 outbreak on our business, suppliers, consumers, customers, and
employees;
disruptions to our supply chain, or our manufacturing and distribution capabilities, including those
due to cybersecurity threats and the COVID-19 outbreak; and
the other risks and uncertainties that are set forth in Item 1, “Business”, Item 1A “Risk Factors”
and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and that are described from time to time in our filings with the SEC.
These factors are not necessarily all of the important factors that could cause actual results to differ materially from
those expressed in any of our forward looking statements. Other unknown or unpredictable factors could also have
material adverse effects on future results. We intend these forward looking statements to speak only at the date
made. Except as otherwise required to be disclosed in periodic reports required to be filed by public companies with
the 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 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, 2019, 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, and BioKefir (a 3.5 oz. kefir with additional probiotic cultures).
• 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 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 soft serve and pint-size containers.
1
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
ProBugs Kefir
Other dairy
Frozen Kefir (a)
Net Sales
2019
2018
$
%
$
%
$
$
71,822
11,459
4,228
2,780
1,756
1,617
93,662
77% $
12%
4%
3%
2%
2%
100% $
78,523
11,486
5,276
2,795
3,836
1,434
103,350
76%
11%
5%
3%
4%
1%
100%
(a)
Includes Lifeway Kefir Shop sales
Product innovation and new product development
Lifeway is committed to maintaining its positions as the leading producer of kefir and a recognized leader in the
market for probiotic products. We routinely evaluate opportunities for new product flavors and formulations,
improved package design, new product configurations and other innovation opportunities. Beyond our core
drinkable kefir products, we have an ongoing effort to extend the strength of the Lifeway brand and leverage the
capabilities of the Lifeway organization into categories both inside and outside of the dairy aisle, including into non-
food categories and into additional channels, such as gyms and fitness studios. In 2019, we maintained the level of
focus on product innovations, packaging innovations, and growth opportunities. As noted above, these product
innovation and development efforts have led to additional revenue opportunities from Plantiful and Kefir minis.
New items introduced or expanded through our innovation efforts were offset by lower volumes of our core
drinkable kefir products in 2019.
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. In 2020, in light of the Covid-19 outbreak, and our focus on expanding sales of our current
products, we don’t expect to focus on new product development.
PRODUCTION
Manufacturing
During 2019 and 2018, approximately 99% and 98%, respectively 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, from which we
store and distribute 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.
2
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 2019 and 2018, approximately 1% 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.
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 Trader Joe’s. Under the retail direct model, optimal product merchandising, assortments and product
presentation are attended to by the retailer with limited support from Lifeway’s broker network. Sales to our retail-
direct customers represent approximately 43% of our total net sales for the year ended 2019.
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 52% of our total net sales for year ended 2019.
3
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 3% of our total net sales for the year
ended 2019.
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 approximately 1% of net
sales for the year ended 2019.
Distribution outside of the U.S.
Substantially all of Lifeway’s products are distributed within the United States; however, certain of our distributors
sell our products to retailers in Mexico and portions of South America and the Caribbean. Additionally, Lifeway
products reach consumers in the United Kingdom, Ireland, 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 approximately 1% of net sales for the year ended 2019.
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.
4
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.
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, 2019, two customers, United Natural Foods, Inc. (UNFI) and one other
customer, collectively accounted for approximately 22% of our total net sales. These customers collectively
accounted for approximately 17% of net accounts receivable as of December 31, 2019.
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.
5
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 believe that our rights in our trademarks and service marks are important to our marketing efforts to develop
brand recognition and differentiate our brand from our competitors and are a valuable part of our business. We own
many domestic and international trademarks and service marks. In addition, we own numerous registered and
unregistered copyrights, registered domain names, and proprietary trade secrets, trade dress, technology, know-how,
processes, and other proprietary rights that are not registered. Depending on the jurisdiction, trademarks are
generally valid as long as they are in use and/or their registrations are properly maintained and they have not been
found to have become generic. Registrations of trademarks can also generally be renewed indefinitely as long as the
trademarks are in use. We also have licenses to use certain trademarks inside and outside of the United States and to
certain product formulas, all subject to the terms of the agreements under which such licenses are granted. Lifeway’s
policy is to pursue registration of intellectual property whenever appropriate. We protect our intellectual property
rights by relying on a combination of trademark, copyright, trade dress, trade secret and other intellectual property
laws, and domain name dispute resolution systems; as well as licensing agreements, third-party confidentiality,
nondisclosure, and assignment agreements; and by policing third-party misuses of our intellectual property. We
regard the Lifeway family of trademarks and other intellectual property as having substantial value and as being an
important factor in the marketing of our products. The loss of such protection would have a material adverse impact
on our operations and share price.
REGULATION
Lifeway is subject to extensive regulation by federal, state, and local governmental authorities. In the United States,
agencies governing the manufacture, marketing, and distribution of our products include, among others, the Federal
Trade Commission (“FTC”), the United States Food & Drug Administration (“FDA”), the United States Department
of Agriculture (“USDA”), the United States Environmental Protection Agency (“EPA”), the Occupational Safety
and Health Administration (“OSHA”), and their state and local equivalents. Under various statutes, these agencies
prescribe, among other things, the requirements and standards for quality, safety, and representation of our products
to consumers. We are also subject to federal laws and regulations relating to our products and production. For
example, as required by the National Organic Program (“NOP”), we rely on third parties to certify certain of our
products and production locations as organic. Additionally, our facilities are subject to various laws and regulations
regarding the release of material into the environment and the protection of the environment in other ways.
Internationally, we are subject to the laws and regulatory authorities of the foreign jurisdictions in which we
manufacture and sell our products, including the Food Standards Agency in the United Kingdom; the National
Service of Health, Food Safety and Agro-Food Quality (known by its Spanish-language acronym “SENASICA”)
and the Federal Commission for the Protection from Sanitary Risks (“COFEPRIS”) in Mexico; the Food Safety
Authority in Ireland; and the European Food Safety Authority, which supports the European Commission, as well as
individual country, province, state, and local regulations.
MILK INDUSTRY REGULATION
Our primary raw material is 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.
6
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, 2019, we employed approximately 307 employees, approximately 101 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.
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.
7
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, 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;
enter into strategic arrangements with third-party suppliers to obtain necessary raw materials;
identify suitable acquisition candidates or joint venture partners and accurately assess their value, growth
potential, strengths, weaknesses, contingent and other liabilities, and potential profitability;
negotiate acquisitions and joint ventures on terms acceptable to us; and
•
integrate acquired brands, products, or joint ventures into our company and our business strategy.
8
If we fail to execute these and other important elements of our business strategy, our business and results of
operations could be adversely affected.
One key element of our business strategy is to introduce timely, new, cost-effective, and appealing products and to
innovate successfully within our existing product categories. New items introduced through our innovation efforts
partially offset lower volumes in 2019 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.
9
Two of our customers together accounted for 22% of our net sales in the fiscal year ended December 31, 2019.
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.
10
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 2019 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.
11
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.
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.
12
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.
As of December 31, 2019, we had outstanding borrowings of approximately $2,745, net of $32 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.
13
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.
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.
14
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.
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.
15
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.
Because the Smolyansky family, collectively, controls a majority of our common stock (approximately 50.5%), 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.
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 remediated the material weakness identified as of December 31, 2018 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.
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.
Pandemics or disease outbreaks, such as the novel coronavirus (COVID-19 virus), may disrupt consumption and
trade patterns, supply chains, and production processes, which could materially affect our operations and results
of operations.
The impact that the recent COVID-19 outbreak will have on our consolidated results of operations is uncertain.
While we have seen increased orders from retail customers in North America and Europe in March 2020 in response
to increased consumer demand for food at home, near-term elevated retail customer orders may decrease in the
coming months, and we are unable to predict the nature and timing of when that impact may occur, if at all.
Restrictions on public gatherings or interactions may also limit the opportunity for our customers and consumers to
purchase our products. If a significant percentage of our workforce or the workforce of our suppliers is unable to
work, including because of illness or travel or government restrictions in connection with pandemics or disease
outbreaks, our operations may be negatively impacted. In addition, pandemics or disease outbreaks could result in a
widespread health crisis that could adversely affect the economies and financial markets, consumer spending and
confidence levels resulting in an economic downturn that could affect customers’ demand for our products. The
recent outbreak of the coronavirus has recently become a pandemic, and neither the duration nor scope of the
disruption can be predicted. Therefore, the financial impact cannot be reasonably estimated at this time.
16
ITEM 1B UNRESOLVED STAFF COMMENTS
None.
ITEM 2 PROPERTIES
We operate the following facilities:
Location
Morton Grove, Illinois
Waukesha, Wisconsin
Niles, Illinois
Philadelphia, Pennsylvania
Owned / Leased
Owned
Owned
Owned
Owned
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
Chicago, Illinois
Chicago, Illinois
New York, New York
Leased
Leased
Leased
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
Not applicable.
17
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 16, 2020, there were approximately 147 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
2018
Low
High
$
$
$
$
$
$
$
$
5.99 $
4.79 $
2.66 $
1.88 $
2019
Low
High
1.98 $
1.94 $
2.19 $
1.87 $
8.40
6.48
4.63
3.39
2.75
4.00
3.59
2.44
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 2019 or 2018.
18
Issuer Purchases of Equity Securities
Period
1/1/2018 to 1/31/2018
2/1/2018 to 2/28/2018
4/1/2018 to 4/30/2018
6/1/2018 to 6/30/2018
8/1/2018 to 8/31/2018
9/1/2018 to 9/30/18
11/1/2018 to 11/30/18
12/1/2018 to 12/31/18
Fiscal Year 2018
1/1/2019 to 1/31/2019
2/1/2019 to 2/28/2019
3/1/2019 to 3/31/2019
4/1/2019 to 4/30/2019
5/1/2019 to 5/31/2019
6/1/2019 to 6/30/2019
8/1/2019 to 8/31/2019
9/1/2019 to 9/30/2019
Fiscal Year 2019
Approximate
Dollar Value
of Shares that
may yet be
Purchased
Under the
Plans or
Programs
($ in
thousands)
Total number
of shares
purchased as
part of a
publicly
announced
program (a)
Total number
of shares
purchased
Average price
paid per share
106,441 $
24,486 $
15,433 $
4,143 $
1,332 $
40,364 $
17,228 $
8,305 $
217,732 $
46,743 $
9,100 $
26,932 $
4,300 $
57,817 $
11,146 $
37,567 $
17,531 $
211,136 $
8.22
7.21
6.09
5.46
3.96
3.35
2.99
2.25
6.33
2.54
2.75
2.24
2.24
2.49
2.32
2.69
2.98
2.55
106,441 $
24,486 $
15,433 $
4,143 $
1,332 $
40,364 $
17,228 $
8,305 $
217,732 $
46,743 $
9,100 $
26,932 $
4,300 $
57,817 $
11,146 $
37,567 $
17,531 $
211,136 $
5,007
4,830
4,736
4,714
4,709
4,573
4,522
4,503
4,503
4,384
4,358
4,298
4,288
4,145
4,119
4,018
3,965
3,965
(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
19
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, 2019
and December 31, 2018 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.
Results of Operations
Comparison of Year Ended December 31, 2019 to Year Ended December 31, 2018 (in 000’s)
December 31,
2019
2018
Change
$
%
Net sales
$
93,662 $
103,350 $
(9,688 )
(9.4% )
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
$
$
$
$
$
68,367 $
3,146
71,513 $
74,646 $
2,846
77,492 $
6,279
(300 )
5,979
–
7.7%
22,149 $
23.6%
25,858 $
25.0%
11,062 $
11.8%
13,477 $
13.0%
12,828 $
13.7%
13,616 $
13.2%
(3,709 )
(14.3% )
2,415
17.9%
788
5.8%
Goodwill and intangible asset impairment
–
1,244
1,244
100.0%
Amortization expense
Total operating expenses
Total operating expense % to net sales
Loss from operations
Loss from operations % to net sales
$
$
$
192 $
631 $
439
69.6%
24,082 $
25.7%
(1,933 ) $
(2.1% )
28,968 $
28.0%
(3,110 ) $
(3.0% )
4,886
16.9%
1,177
(37.8% )
20
Net Sales
Net sales were $93,662 for the year ended December 31, 2019, a decrease of $9,688 or 9.4% versus prior year. The
net sales softness continued to reflect the overall lower consumption in the dairy and cultured dairy product
categories. Versus prior year, the decline was primarily driven by lower volumes of our branded drinkable kefir and
cupped kefir and Skyr sales, partially offset by the incremental volume of new item introductions.
Gross Profit
Gross profit as a percentage of net sales decreased to 23.6% during the year ended December 31, 2019 from 25.0%
during the same period in 2018. The lower gross profit percentage primarily reflects category sales softness, the
unfavorable impact of operating leverage that arises from lower net sales relative to fixed costs, and increased
freight costs and depreciation, partially offset by a reduction in variable costs.
Selling Expenses
Selling expenses decreased by $2,415 or 17.9% to $11,062 during the year ended December 31, 2019 from $13,477
during the same period in 2018. The decreased selling expenses primarily reflect the reduction in advertising and
marketing programs with lower efficiency and compensation savings from organizational changes made in 2018.
Selling expenses as a percentage of net sales were 11.8% during the year ended December 31, 2019 compared to
13.0% for the same period in 2018.
General and Administrative Expenses
General and administrative expenses decreased $788 or 5.8% to $12,828 during the year ended December 31, 2019
from $13,616 during the same period in 2018. The decrease is primarily a result of lower compensation expense due
to organizational changes made in 2018, and lower professional fees, partially offset by increased legal expenses.
Goodwill and Intangible Asset Impairment
During the fourth quarter of fiscal 2018, we recorded a goodwill impairment charge of $1,244. 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 taxes includes federal, state and local income taxes. Income tax expense was $782 during
the year ended December 31, 2019, compared to a benefit for income taxes of $225 during the same period in 2018.
Our effective income tax rate (ETR) for the year ended December 31, 2019 was 63.3% compared to an ETR of 6.8%
in the same period last year. The increase in the effective tax rate was primarily due to the separate state tax rates,
non-deductible officer compensation expense, non-deductible compensation expense related to equity incentive
awards, and the provision for unrecognized tax benefits. The increase in the effective tax rate from 2018 to 2019 is
due to the fact that the company has a number of items that are nondeductible or are discrete adjustments to tax
expense. Although similar items were reflected in 2018, the percentage effect is substantially different due to the
difference in pre-tax income in 2019 compared to the pre-tax loss in 2018.
21
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”), the performance-based
compensation paid to our executives under our Omnibus Plan remained eligible for the Section 162(m) exemption in
2019.
Income taxes are discussed in Note 10 in the Notes to the Consolidated Financial Statements.
Net Income (Loss)
We reported a net income of $453 or $0.03 per basic and diluted common share for the year ended December 31,
2019 compared to a net loss of $(3,086) or $(0.19) per basic and diluted common share in the same period in 2018.
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 to ensure the continuation of the Company as
a going concern. 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.
The impact that the recent COVID-19 outbreak will have on our consolidated results of operations is uncertain.
Lifeway has seen increased orders from retail customers in North America and Europe in March 2020 in response to
increased consumer demand for food at home in response to government mandated social distancing and shelter in
place orders in the United States and the immune boosting quality of our products. However near-term elevated
retail customer orders may decrease in the coming months, and we are unable to predict the nature and timing of
when that impact may occur, if at all. As a result of the Covid-19 pandemic, restrictions on public gatherings or
interactions, a decrease in available workforce at our facilities or our suppliers, adverse effects the economies and
financial markets, consumer spending and confidence levels could affect customers’ demand for our products or our
ability to produce, transport and sell our products. Neither the duration nor scope of any disruption can be predicted.
Therefore, the financial impact cannot be reasonably estimated at this time.
To date, our manufacturing facilities have not been significantly impacted. We have full production capacity
available at all locations at this time. On March 16, 2020, the food industry, including grocery stores and their
suppliers, and transportation were classified by the U.S. federal government as critical infrastructure industry. As a
result, our employees and facilities, as well as the retailers and distributors that sell our products, will be able to
remain in operation. During the first quarter of 2020, Management, anticipating the spread of Covid-19 and its
effects, implemented a plan to mitigate effects of Covid-19 on supply and transportation of materials used to make
and package our products, staffing, and transportation of our products to customers. While the situation is fluid, we
have evaluated all manufacturing locations and do not anticipate any staffing shortages or interruption of our
production, transportation and sale of products in the near term.
22
Sources and Uses of Cash
Lifeway had a net increase in cash and cash equivalents of $838 during the year ended December 31, 2019
compared to a net decrease in cash and cash equivalents of $1,980 in the same period in 2018. The drivers of the
year over year change are as follows:
Net cash provided by operating activities was $3,811 during the year ended December 31, 2019 compared to net
cash provided by operating activities of $2,417 in the same period in 2018. The increase in cash provided by
operating activities is primarily due to the change in working capital and income tax refunds received in 2019.
Net cash used in investing activities was $838 during the year ended December 31, 2019 compared to net cash used
in investing activities of $2,720 in the same period in 2018. The lower level of net cash used in investing activities in
2019 reflects lower capital spending. Capital spending was $1,178 during the year ended December 2019 compared
to $2,824 in 2018. 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. We received net proceeds of $474 related to
the sale of our Skokie, IL facility during Q3 2019. During Q4 2019, the Company tendered approximately 45.6% of
one of its investments recorded under the cost method on the consolidated balance sheets for cash proceeds of
$1,509. See financing section below for use of those proceeds.
Net cash used in financing activities was $3,811 during the year ended December 31, 2019 compared to net cash
used in financing activities of $1,677 in the same period in 2018. Under the terms of its line of credit agreement (see
Note 7), we utilized proceeds from our federal and state income tax refunds to repay $1,330 on our revolving line of
credit during the first quarter of 2019. We utilized the proceeds from the sale of our Skokie, IL facility to repay $459
on our revolving line of credit during the third quarter of 2019. We utilized proceeds from the sale of our investment
described in the investing section above to make a mandatory prepayment of $1,484 on our revolving line of credit
during the fourth quarter of 2019. 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 211 shares of common stock at a
cost of $538 during the year ended December 31, 2019 under the 2017 Repurchase Plan Amendment. 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 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”).
On December 10, 2019, Lifeway entered into the Second Modification to the Amended and Restated Loan and
Security Agreement, as amended, (the “Second Modification”) with its existing lender. The Second Modification
amends the Amended and Restated Loan and Security Agreement, as amended, by redefining the “Borrowing Base”
and further clarifying the definitions of “Eligible Accounts” and “Eligible Inventory.” The “Borrowing Base” under
this amendment means, generally, an amount equal to the sum of (a) 85% of the unpaid amount of all eligible
accounts receivable, plus (b) 50% of the value of all eligible inventory. The Second Modification also addresses the
calculation of interest after the potential discontinuance of LIBOR and its replacement with a replacement
benchmark interest rate.
23
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 of 0.25% 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. We were in compliance with the applicable covenants as of December
31, 2019.
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
Goodwill totaled $9,124 as of December 31, 2019. The Company completed its annual goodwill impairment
analysis as of December 31, 2019. Our assessment did not result in an impairment. The fair value exceeded the
carrying value by 2.4%. Goodwill represents the excess purchase price over the fair value of the net tangible and
other identifiable intangible assets acquired. We estimate the fair value of our one reporting unit annually (as of
December 31), or more frequently if certain conditions exist, using a combination of the fair values derived from
both the income approach and the market approach. Under the income approach, we calculate the fair value of a
reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on our
estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions.
The discount rate used to determine the present value of future cash flows is based on the weighted-average cost of
capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to
the business's ability to execute on the projected cash flows. The market approach estimates fair value based on
market multiples of revenue and earnings derived from comparable publicly-traded companies with similar
operating and investment characteristics. The resulting fair value, based on the income and market approaches, is
then compared to the carrying value to determine if impairment is necessary.
24
The Company completed its annual goodwill impairment analysis 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 and intangible asset impairment
on the Consolidated Statements of Operations.
We reviewed our indefinite lived intangible assets, which consist of brand names totaling $3,700 as of December 31,
2019, using the relief from royalty method. Significant assumptions include the royalty rate, revenue growth rates,
and discount rates. Our assumptions were based on historical performance and management estimates of future
performance. Our assessment did not result in an impairment in 2019 and 2018.
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, 2019, we had $.7 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 11 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.
25
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, 2019 and 2018
Consolidated Statements of Operations for the Years Ended December 31, 2019 and 2018
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019 and 2018
Notes to Consolidated Financial Statements
F-1
F-3
F-4
F-5
F-6
F-7
26
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, 2019 and 2018, the related consolidated statements of operations, stockholders’
equity, and cash flows for each of the years in the two-year period ended December 31, 2019, 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, 2019 and 2018, and the results of its
operations and its cash flows for each of the two years in the period ended December 31, 2019, 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, 2019, 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 14, 2020 expressed an unqualified
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 leases as a
result of the adoption of Accounting Standards Codification Topic 842, Leases effective January 1, 2019, 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 14, 2020
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Lifeway Foods, Inc. and Subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited Lifeway Foods, Inc. and Subsidiaries’ (“Company”) internal control over financial reporting as of
December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO criteria). In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, 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, 2019 and the related notes to the to the consolidated financial statements
(collectively referred to as the “financial statements”) of the Company and our report dated April 14, 2020 expressed
an unqualified opinion that included an explanatory paragraph regarding the Company’s change in method of
accounting for leases as a result of the adoption of Accounting Standards Codification Topic 842, Leases, effective
January 1, 2019, under the modified retrospective method.
Basis for Opinion
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 are a public accounting firm
registered with the 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 audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
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 accounting principles generally accepted in the United States of America. 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.
/s/ Mayer Hoffman McCann P.C.
Chicago, Illinois
April 14, 2020
F-2
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2019 and 2018
(In thousands)
Current assets
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts and discounts &
$
allowances of $1,100 and $1,220 at December 31, 2019 and 2018,
respectively
Inventories, net
Prepaid expenses and other current assets
Refundable income taxes
Total current assets
Property, plant and equipment, net
Operating lease right-of use asset
Intangible assets
Goodwill and indefinite-lived intangibles
Other intangible assets, net
Total intangible assets
Other Assets
Total assets
Current liabilities
Accounts payable
Accrued expenses
Accrued income taxes
Total current liabilities
Line of credit
Operating lease liabilities
Deferred income taxes, net
Other long-term liabilities
Total liabilities
$
$
December 31,
2019
2018
3,836 $
2,998
6,692
6,392
1,598
681
19,199
22,274
738
12,824
152
12,976
1,800
56,987 $
5,282 $
4,087
154
9,523
2,745
488
922
58
13,736
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
Stockholders’ equity
Preferred stock, no par value; 2,500 shares authorized; no shares issued or
outstanding at 2019 and 2018
Common stock, no par value; 40,000 shares authorized; 17,274 shares
issued; 15,710 and 15,814 shares outstanding at 2019 and 2018
Paid-in capital
Treasury stock, at cost
Retained earnings
Total stockholders’ equity
–
–
6,509
2,380
(12,601 )
46,963
43,251
6,509
2,303
(12,970 )
46,563
42,405
Total liabilities and stockholders’ equity
$
56,987 $
56,807
See accompanying notes to consolidated financial statements
F-3
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 2019 and 2018
(In thousands, except per share data)
Net sales
Cost of goods sold
Depreciation expense
Total cost of goods sold
Gross profit
Selling expenses
General and administrative
Goodwill and intangible asset impairment
Amortization expense
Total operating expenses
Loss from operations
Other income (expense):
Interest expense
Fair value gain on investments
Realized gain on investments, net
Gain on sale of property and equipment
Other income
Total other income (expense)
2019
2018
$
93,662 $
103,350
68,367
3,146
71,513
74,646
2,846
77,492
22,149
25,858
11,062
12,828
–
192
24,082
13,477
13,616
1,244
631
28,968
(1,933 )
(3,110 )
(249 )
1,731
1,413
189
84
3,168
(271 )
–
–
54
16
(201 )
Income (loss) before provision for income taxes
1,235
(3,311 )
Provision (benefit) for income taxes
Net income (loss)
Basic loss per common share
Diluted loss per common share
782
(225 )
453 $
(3,086 )
0.03 $
(0.19 )
0.03 $
(0.19 )
$
$
$
Weighted average number of shares outstanding - Basic
15,748
15,872
Weighted average number of shares outstanding - Diluted
15,804
16,319
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, 2019 and 2018
(In thousands)
Common Stock
Issued
Shares
$
In treasury
$
Shares
Paid-In Retained Total
Capital Earnings Equity
Balance, January 1, 2018 17,274 $ 6,509 (1,266 ) $ (11,812 ) $ 2,244 $ 49,649 $ 46,590
Treasury stock purchased
–
–
(218 )
(1,379 )
–
–
(1,379 )
Issuance of common stock
in connection with stock-
based compensation
–
–
24
221
(89 )
–
132
Stock-based compensation
–
–
–
–
148
–
148
Net Loss
–
–
–
–
–
(3,086 )
(3,086 )
Balance, December 31,
2018
Cumulative impact of
change in accounting
principles, net of tax
17,274 $ 6,509 (1,460 ) $ (12,970 ) $ 2,303 $ 46,563 $ 42,405
–
–
–
–
–
(53 )
(53 )
Treasury stock purchased
–
–
(211 )
(538 )
–
–
(538 )
Issuance of common stock
in connection with stock-
based compensation
–
–
107
907
(438 )
–
469
Stock-based compensation
–
–
–
–
515
–
515
Net Income
–
–
–
–
–
453
453
Balance, December 31,
2019
17,274 $ 6,509 (1,564 ) $ (12,601 ) $ 2,380 $ 46,963 $ 43,251
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, 2019 and 2018
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to operating cash flow:
2019
2018
$
453 $
(3,086 )
Depreciation and amortization
Non-cash interest expense
Non-cash rent expense
Bad debt expense
Deferred Revenue
Reserve for inventory obsolescence
Stock-based compensation
Deferred income taxes
Fair value gain on investment
Net gain on sale of investment
Gain 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
Operating lease asset amortization/liability
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:
Purchase of treasury stock
Borrowings under revolving credit facility
Repayment of line of credit
Payment of deferred financing costs
Repayment of notes payable
Net cash used in financing activities
Net increase (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
$
3,338
23
(17 )
7
(97 )
(52 )
838
533
(1,731 )
(1,413 )
(189 )
–
(423 )
(523 )
2,067
(526 )
710
783
(17 )
47
3,811
(15 )
1,509
(1,178 )
522
838
(538 )
–
(3,273 )
–
–
(3,811 )
838
2,998
3,836 $
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 )
(1,379 )
6,050
–
(69 )
(6,279 )
(1,677 )
(1,980 )
4,978
2,998
Supplemental cash flow information:
Cash paid for income taxes, net of (refunds)
Cash paid for interest
Right-of-use assets and operating lease obligations recognized at ASU
$
2016-02 transition
Right-of-use assets and operating lease obligations recognized after ASU
2016-02 transition
(1,865 ) $
259
997
305
723
261
–
–
See accompanying notes to consolidated financial statements
F-6
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
(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.
Going Concern
The Company follows the guidance in Accounting Standards Codification (“ASC”) 205-40, Presentation of
Financial Statements - Going Concern which requires management to assess an entity’s ability to continue as a
going concern and to provide related disclosure in certain circumstances. There were no conditions or events, when
considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern
within one year after the date the financial statements are issued.
Revenue Recognition
We sell food and beverage products across select product categories to customers predominantly within the United
States (see Note 12, Segments, Products and Customers). We also sell bulk cream, a byproduct of our fluid milk
manufacturing process. In accordance with 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.
F-7
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.
Accounts Receivable
We provide credit terms to customers in-line with industry standards and maintain allowances for potential credit
losses based on historical experience. Customer balances are written off after all collection efforts are exhausted.
Estimated product returns, which have not been material, are deducted from sales at the time of revenue recognition.
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.
Inventories
Inventories are stated at the lower of cost or net realizable value, valued on a first in, first out basis (“FIFO”). The
costs of finished goods inventories include raw materials, direct labor, and overhead costs. Inventories are stated net
of reserves for excess or obsolete inventory.
Property, plant and equipment
Property, plant and equipment are recorded at cost. Depreciation and amortization are calculated using the straight-
line method over the estimated useful lives of the assets as follows:
Asset
Buildings and improvements
Machinery and equipment
Office equipment
Vehicles
Leasehold improvements
Useful Life
31 and 39 years
5 – 12 years
3 – 7 years
5 years
Shorter of expected useful life or lease term
We perform impairment tests when circumstances indicate that the carrying value of an asset may not be
recoverable. Expenditures for repairs and maintenance, which do not improve or extend the life of the assets, are
expensed as incurred.
F-8
Intangible Assets
Goodwill and indefinite-lived intangible assets
Goodwill represents the excess purchase price over the fair value of the net tangible and other identifiable intangible
assets acquired. We estimate the fair value of our one reporting unit annually (as of December 31), or more
frequently if certain conditions exist, using a combination of the fair values derived from both the income approach
and the market approach. Under the income approach, we calculate the fair value of a reporting unit based on the
present value of estimated future cash flows. Cash flow projections are based on our estimates of revenue growth
rates and operating margins, taking into consideration industry and market conditions. The discount rate used to
determine the present value of future cash flows is based on the weighted-average cost of capital adjusted for the
relevant risk associated with business-specific characteristics and the uncertainty related to the business's ability to
execute on the projected cash flows. The market approach estimates fair value based on market multiples of revenue
and earnings derived from comparable publicly-traded companies with similar operating and investment
characteristics. The resulting fair value, based on the income and market approaches, is then compared to the
carrying value to determine if impairment is necessary. 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 assess whether indefinite-lived intangible asset impairment exists using both qualitative and quantitative
assessments annually in the fourth quarter or more frequently, if certain conditions exist. The qualitative assessment
involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value
of an indefinite-lived intangible asset is less than its carrying amount. If, based on this qualitative assessment, we
determine it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying
amount or if we elect not to perform a qualitative assessment, a quantitative assessment is performed to determine
whether an indefinite-lived intangible asset impairment exists. We test the indefinite-lived intangible assets for
impairment by comparing the carrying value to the fair value based on current revenue projections of the related
operations, under the relief from royalty method. Any excess of the carrying value over the amount of fair value is
recognized as an impairment. Any such impairment would be recognized in full in the reporting period in which it
has been identified.
Definite lived intangible assets
Intangible assets acquired in a business combination are recorded at their estimated fair values at the date of
acquisition. Identifiable intangible assets with finite lives are amortized over their estimate useful lives as follows:
Asset
Recipes
Trade names
Formula
Customer lists
Customer relationships
Useful Life
4 years
8-15 years
10 years
8-10 years
8-12 years
All amortization expense related to intangible assets is recorded in Amortization expense in the Consolidated
Statements of Operations.
Amortizable intangible assets are evaluated for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Lifeway conducts more frequent impairment assessments if certain
conditions exist, such as a change in the competitive landscape, any internal decisions to pursue new or different
strategies, a loss of a significant customer, or a significant change in the market place including changes in the prices
paid for our products or changes in the size of the market for our products. If an evaluation of the undiscounted cash
flows indicates impairment, the asset is written down to its estimated fair value, which is generally based on
discounted future cash flows. If the estimated remaining useful life of an intangible asset is changed, the remaining
carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life.
F-9
Fair Value Measurements
Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value
into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and
significant to the fair value measurement:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted
prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3. Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that
market participants would use in pricing the asset or liability.
Lifeway’s financial assets and liabilities that are not carried at fair value on a recurring basis include cash and cash
equivalents, accounts receivable, other receivables, accounts payable, accrued expenses and revolving line of credit
for which carrying value approximates fair value.
The Company records its investments in equity securities without a readily determinable fair value at cost minus
impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the
identical or a similar investment of the same issuer. During October 2019, the Company sold approximately 45.6%
of one of its investments recorded under the cost method and recognized a $1,438 gain on sale of investment, which
is recorded in other income (expense) on the consolidated statements of operations. The Company also recorded an
unrealized gain of $1,731 resulting from the observable price change of this transaction, which is recorded in other
income (expense) on the consolidated statements of operations. As of December 31, 2019, the Company has one
investment without a readily determinable fair value which is recorded at $1,800 in other assets on the consolidated
balance sheet.
Income taxes
The Provision for income taxes includes federal, state, local and foreign income taxes currently payable, and those
deferred because of temporary differences between the financial statement and tax bases of assets and liabilities.
Deferred tax assets or liabilities are computed based on the difference between the financial statement and income
tax bases of assets and liabilities using enacted tax rates expected to apply to taxable income in the year in which the
deferred tax assets or liabilities are expected to be realized or settled. The principal sources of temporary differences
are different depreciation and amortization methods for financial statement and tax purposes, net operating
carryforwards, incentive compensation, unrealized gain, capitalization of indirect inventory costs for tax purposes,
reserves for excess and obsolete inventory, the allowance for doubtful accounts, and interest expense limitations.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely not that a tax benefit will not
be realized. Deferred income tax expense or benefit is based on the changes in the asset or liability from period to
period.
Lifeway 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 period of
such change. For those income tax positions where it is not more likely than not that a tax benefit will be sustained,
no tax benefit has been recognized in the financial statements. The total amount of unrecognized tax benefits can
change due to audit settlements, tax examination activities, statute expirations and the recognition and measurement
criteria under accounting for uncertainty in income taxes. Lifeway recognizes penalties and interest related to
unrecognized tax benefits in the provision (benefit) for income taxes in the consolidated statements of operations.
F-10
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 and reported in Selling expense in our Consolidated Statements of
Operations. For the years ended December 31, 2019 and 2018 total advertising expenses were $3,394 and $4,518,
respectively.
Earnings (loss) per common share
Basic earnings (loss) per common share is computed by dividing net income (loss) available to common
stockholders by the weighted average number of common shares issued and outstanding during the reporting period.
Diluted earnings (loss) per common share is computed by dividing net income (loss) available to common
stockholders by the weighted average number of common shares issued and outstanding and the effect of all dilutive
common stock equivalents related to the Company’s outstanding stock-based compensation awards outstanding
during the reporting period. For the years ended December 31, 2019 and 2018, there were 56 and 0 common stock
equivalents outstanding, respectively.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which
affects any entity that enters into a lease (as that term is defined in ASU 2016-02), with some specified scope
exceptions. Under ASU 2016-02, companies can adopt the amended guidance using a modified retrospective
transition approach, using an application date of either the beginning of the earliest comparative period presented or
the beginning of the reporting period in which the companies first apply the new standard. We adopted this standard
on January 1, 2019 using the application date of January 1, 2019, and elected certain practical expedients allowed
under the standard. In July 2018, the FASB issued ASU No. 2018-11, Leases (842), Targeted Improvements, which
provides an additional transition election to not restate comparative periods for the effects of applying the new
standard. The guidance requires lessees to recognize right-of-use assets and lease liabilities in the balance sheet and
disclose key information about leasing arrangements, such as information about variable lease payments and options
to renew and terminate leases. The amended guidance will require both operating and finance leases to be
recognized in the balance sheet. A lessee should recognize in the statement of financial position a liability to make
lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the
lease term.
Lifeway elected certain of the practical expedients that are permitted under the transition guidance within ASU
2016-02 and related standards. Among other things, this practical expedient allowed us to carryforward the historical
lease classification, and not reassess initial direct costs for any existing leases as of January 1, 2019 or reassess
whether any expired or existing contracts are or contain leases. In addition, we elected to adopt the hindsight
practical expedient to determine the reasonably certain lease term for existing leases. We made an accounting policy
election to continue recording leases with an initial term of 12 months or less consistent with our prior financial
reporting and elect the practical expedient to combine lease and non-lease components. We have revised our
relevant policies and procedures, as applicable, to meet the new accounting, reporting and disclosure requirements
of Topic 842 and have updated internal controls accordingly.
F-11
The main difference between the guidance in ASU 2016-02 and prior GAAP is the recognition of right-of-use assets
and lease liabilities by lessees for those leases classified as operating leases under current GAAP. Recognition of the
right-of-use assets and liabilities had a material impact to our consolidated balance sheet upon adoption. However,
since all our leases are operating leases under ASC 840 and we will carryforward the historical lease classification,
the new standard did not have a material impact on our Consolidated Statements of Operations, Consolidated
Statements of Stockholders’ Equity, or Consolidated Statements of Cash Flows for the year ended December 31,
2019. The adoption resulted in an increase of the right-of-use assets of approximately $944 and lease liabilities of
$997, and an adjustment to beginning retained earnings of $53 as of January 1, 2019.
Recently Issued Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects
of Reference Rate Reform on Financial Reporting. The new guidance provides optional expedients and exceptions
for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other
transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate
reform. The guidance will be effective prospectively as of March 12, 2020 through December 31, 2022 and interim
periods within those fiscal years. Management is currently evaluating the impact that the new guidance will have on
the consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for
Income Taxes. The new guidance is intended to enhance and simplify various aspects of the accounting for income
taxes. The new guidance eliminates certain exceptions to the general approach to the income tax accounting model,
and adds new guidance to reduce the complexity in accounting for income taxes. The guidance will be effective for
fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption of the
amendments is permitted, including adoption in any interim period for public business entities for periods for which
financial statements have not yet been issued. Management is currently evaluating the impact that the new guidance
will have on the consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments, in November 2018 issued an amendment, ASU 2018-19, Codification
Improvements to Topic 326, Financial Instruments - Credit Losses, and in November 2019 issued two amendments,
ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases
(Topic 842): Effective Dates, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—
Credit Losses. The series of new guidance amends the impairment model by requiring entities to use a forward-
looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of
financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses.
The guidance should be applied on either a prospective transition or modified-retrospective approach depending on
the subtopic. The guidance is effective for annual periods beginning after December 15, 2022, including interim
periods within those fiscal years, with early adoption permitted. Management is currently evaluating the impact that
the new guidance will have on the consolidated financial statements.
Note 3 – Inventories, net
Inventories consisted of the following:
Ingredients
Packaging
Finished goods
Total inventories, net
December 31,
2019
2018
$
$
1,942 $
2,230
2,220
6,392 $
1,580
2,072
2,165
5,817
F-12
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
Accumulated impairment losses
Goodwill
Brand names
Goodwill and indefinite lived intangible assets
Goodwill
December 31,
2019
2018
1,565 $
17,332
30,670
778
851
362
51,558
(29,284 )
22,274 $
1,747
17,520
29,692
937
838
546
51,280
(26,707 )
24,573
December 31,
2019
2018
10,368 $
(1,244 )
9,124
3,700
12,824 $
10,368
(1,244 )
9,124
3,700
12,824
$
$
$
$
The Company performed the annual impairment assessment of goodwill for our single reporting unit as of
December 31, 2019, noting no impairment loss. The fair value exceeded the carrying value by 2.4%. Considerable
management judgment is necessary to evaluate goodwill 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. These valuation approaches are dependent upon a number of factors, including estimates of
future growth rates, our cost of capital, capital expenditures, income tax rates, and other variables. Assumptions used
in our valuations were consistent with our internal projections and operating plans. Our discounted cash flows
forecast could be negatively impacted by a change in the competitive landscape, any internal decisions to pursue
new or different strategies, a loss of a significant customer, or a significant change in the market place including
changes in the prices paid for our products or changes in the size of the market for our products. 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 quantitative goodwill test for our one reporting unit.
F-13
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 and intangible asset impairment
on the Consolidated Statements of Operations.
Indefinite-lived Intangible Assets
The Company performed the annual impairment assessment on the indefinite-lived intangible asset as of December
31, 2019 and 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,
2019
2018
44 $
4,529
985
2,248
438
8,244
(8,092 )
152 $
44
4,529
985
2,248
438
8,244
(7,900 )
344
$
$
The remaining $152 of intangible asset at December 31, 2019 is expected to be amortized in 2020.
Note 6 – Accrued Expenses
Accrued expenses consisted of the following:
Payroll and incentive compensation
Current portion of operating lease liabilities
Real estate taxes
Other
Total accrued expenses
December 31,
2019
2018
$
$
3,009 $
285
398
395
4,087 $
1,937
–
398
442
2,777
F-14
Note 7 – Debt
Notes Payable
The two term loans were refinanced and paid in full on May 7, 2018. The term loans were subject to interest at the
prime rate or at the LIBOR plus 2.5% and were collateralized by substantially all of Lifeway’s assets. 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, 2019, we had $2,745 net of $32 of unamortized deferred financing costs, outstanding under the
Revolving Credit Facility. We had approximately $5,412 available under the Borrowing Base for future borrowings
as of December 31, 2019.
All outstanding amounts under the Loans bear interest, at Lifeway’s election, at either the lender Base Rate (the
greater of either the Federal Funds Rate plus 0.5%, or the Prime Rate) or the LIBOR plus 2.50%, payable monthly in
arrears. Lifeway is also required to pay a quarterly unused line fee and, in conjunction with the issuance of any
letters of credit, a letter of credit fee.
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, 2019. The Loans and all other amounts due and owed
under the Revolving Credit Facility and related documents are secured by substantially all of our assets.
Amounts available for borrowing under the Revolving Credit Facility equal the lesser of (i) the Borrowing Base (as
defined below), or (ii) $10 million (plus the amount of any Incremental Facility requested by Lifeway and approved
by lender), in each case, as the same is reduced by the aggregate principal amount outstanding under the Loans.
“Borrowing Base” under the Revolving Credit Facility means, generally, an amount equal to our cash and cash
equivalents plus our eligible accounts receivable and eligible inventory, less certain reserves, divided by 1.5.
The Revolving Credit Facility contains customary representations, warranties, and covenants on the part of Lifeway,
including financial covenants requiring us to achieve a minimum EBITDA threshold for each of the fiscal quarters
through December 31, 2018; maintain (a) a fixed charge coverage ratio of no less than 1.25 to 1.0, and (b) a Senior
Debt to EBITDA ratio of not more than 3.00 to 1.0 at December 31, 2018 and for each of the succeeding fiscal
quarters ending through the expiration date. The Revolving Credit Facility also provides for events of default,
including failure to repay principal and interest when due and failure to perform or violation of the provisions or
covenants of the agreement, as a result of which amounts due under the Revolving Credit Facility may be
accelerated.
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”).
F-15
On December 10, 2019, Lifeway entered into the Second Modification to the Amended and Restated Loan and
Security Agreement, as amended, (the “Second Modification”) with its existing lender. The Second Modification
amends the Amended and Restated Loan and Security Agreement, as amended, by redefining the “Borrowing Base”
and further clarifying the definitions of “Eligible Accounts” and “Eligible Inventory.” The “Borrowing Base” under
this amendment means, generally, an amount equal to the sum of (a) 85% of the unpaid amount of all eligible
accounts receivable, plus (b) 50% of the value of all eligible inventory. The Second Modification also addresses the
calculation of interest after the potential discontinuance of LIBOR and its replacement with a replacement
benchmark interest rate.
As amended, 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 of 0.25% and, in conjunction with the issuance of any letters of credit, a letter of
credit fee. Lifeway’s interest rate on debt outstanding under our Revolving Credit Facility as of December 31, 2019
was 4.36%.
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 1.00 for 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.
We were in compliance with the minimum EBITDA and fixed charge coverage ratio covenants at December 31,
2019.
Note 8 – Leases
Lifeway has operating leases for three retail stores for its Lifeway Kefir Shop subsidiary and office space which
includes fixed base rent payments as well as variable rent payments to reimburse the landlord for operating expenses
and taxes. The Company also lease certain machinery and equipment with fixed base rent payments and variable
costs based on usage. Remaining lease terms for these leases range from less than 1 year to 5 years. Some of our
leases include options to extend the leases for up to 5 years and have been included in our calculation of the right-of-
use asset and lease liabilities. Lifeway includes only fixed payments for lease components in the measurement of the
right-of-use asset and lease liability. Variable lease payments are those that vary because of changes in facts or
circumstances occurring after the commencement date, other than the passage of time. There are no residual value
guarantees. We do not currently have leases which meet the finance lease classification as defined under ASC 842.
We do not record leases with an initial term of 12 months or less on the balance sheet. Expense for these short-term
leases is recorded on a straight-line basis over the lease term. Total lease expense was $688 and $769 (including
short term leases) for the period ended December 31, 2019 and 2018, respectively.
Lifeway treats contracts as a lease when the contract conveys the right to use a physically distinct asset for a period
of time in exchange for consideration, we direct the use of the asset and obtain substantially all the economic
benefits of the asset.
Right-of-use assets and lease liabilities are measured and recognized based on the present value of the future
minimum lease payments over the lease term at the commencement date. We have elected the practical expedient to
combine lease and non-lease components into a single component for all of its leases. For many of our leases such as
real estate leases, we are unable to determine an implicit rate; therefore, we use our incremental borrowing rate
based on the information available at the commencement date in determining the present value of future payments
for those leases. We include options to extend or terminate the lease in the measurement of the right-of-use asset and
lease liability when it is reasonably certain that we will exercise such options. Lease expense for minimum lease
payments is recognized on a straight-line basis over the lease term.
F-16
Future maturities of lease liabilities were as follows
Year
2020
2021
2022
2023
Thereafter
Total lease payments
Less: Interest
Present value of lease liabilities
Operating
Leases
$
$
312
238
197
71
7
825
(51 )
774
The weighted-average remaining lease term for our operating leases was 2.8 years as of December 31, 2019. The
weighted average discount rate of our operating leases was 5.44% as of December 31, 2019. Cash paid for amounts
included in the measurement of lease liabilities was $583 for the year ended December 31, 2019.
Note 9 – Commitments and Contingencies
Litigation
Lifeway is engaged in various legal actions, claims, and proceedings arising in the normal course of business,
including commercial disputes, product liabilities, intellectual property matters and employment-related matters
resulting from our business activities.
We record accruals for outstanding legal matters when we believe it is probable that a loss will be incurred and the
amount of such loss can be reasonably estimated. We evaluate, on a periodic basis, developments in legal matters
that could affect the amount of any accrual and developments that would make a loss contingency both probable and
reasonably estimable. If a loss contingency is not both probable and estimable, we do not establish an accrued
liability. Currently, none of our accruals for outstanding legal matters are material individually or in the aggregate to
our financial position and it is management’s opinion that the ultimate resolution of these outstanding legal matters
will not have a material adverse effect on our business, financial condition, results of operations, or cash flows.
However, if we ultimately are required to make payments in connection with an adverse outcome, it is possible that
it could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Lifeway’s contingencies are subject to substantial uncertainties, including for each such contingency the following,
among other factors: (i) the procedural status of the case; (ii) whether the case has or may be certified as a class
action suit; (iii) the outcome of preliminary motions; (iv) the impact of discovery; (v) whether there are significant
factual issues to be determined or resolved; (vi) whether the proceedings involve a large number of parties and/or
parties and claims in multiple jurisdictions or jurisdictions in which the relevant laws are complex or unclear; (vii)
the extent of potential damages, which are often unspecified or indeterminate; and (viii) the status of settlement
discussions, if any, and the settlement posture of the parties. Consequently, Lifeway cannot predict with any
reasonable certainty the timing or outcome of such contingencies, and we are unable to estimate a possible loss or
range of loss.
F-17
Note 10 – Income taxes
The provision (benefit) for income taxes consists of the following:
Current:
Federal
State and local
Total current
Deferred
Provision (benefit) for income taxes
For the Years Ended December 31,
2019
2018
$
$
(27 ) $
276
249
533
782 $
(13 )
249
236
(461 )
(225 )
A reconciliation of the U.S. federal statutory rate to the effective tax rate used in the provision for income taxes is as
follows:
Amount
2019
Percentage
Amount
Federal income tax at statutory rate
State and local tax, net
Goodwill impairment
Oher permanent differences
Section 162m
Stock based compensation
Uncertain tax positions
Change in tax rates
Change in tax estimate
Benefit for income taxes
$
$
259
180
–
14
105
149
79
8
(12 )
782
21.0% $
14.5%
0.0%
1.1%
8.5%
12.1%
6.4%
0.7%
(1.0)%
63.3% $
F-18
2018
Percentage
21.0%
1.4%
(9.8)%
(4.4)%
0.0%
0.0%
0.0%
1.1%
(2.5)%
6.8%
(695 )
(47 )
324
147
–
–
–
(37 )
83
(225 )
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
Unrealized gains
Total deferred tax liabilities
Deferred tax assets attributable to:
Net operating losses
Capital loss carry-forward & investment impairment
Accrued compensation
Incentive compensation
Inventory
Allowances for doubtful accounts and discounts
Deferred revenue
Other
Total net deferred tax assets
Net deferred tax liabilities
$
December 31,
2019
2018
(2,015 ) $
(465 )
(2,480 )
507
–
89
473
312
115
40
22
1,558
(922 ) $
(2,062 )
–
(2,062 )
595
115
–
448
355
109
–
50
1,672
(390 )
The following table details the Company's tax attributes related to net operating losses for which it has recorded
deferred tax assets.
Tax Attributes
U.S. net operating losses
Illinois net operating losses
Other state net operating losses
Net
Attribute
Amount
Net
Attribute
Amount
Expiration
Years
$
1,759 $
1,762
119
$
No
expiration
370
132 2030 - 2031
5 2034 - 2038
507
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at January 1
Additions based on tax positions of prior years
Reduction for tax positions of prior years
Balance at December 31
2019
2018
63 $
79
–
142 $
181
–
(118 )
63
$
$
F-19
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 2016 and subsequent federal and state tax years remain open by statute. The
annual effective tax rate would have decreased by 11.5% as of December 31, 2019 if the unrecognized tax benefits
were recognized. The amount of unrecognized tax benefits that, if recognized, would impact the annual effective tax
rate was not significant as of December 31, 2018.
The amount of interest and penalties recognized in the consolidated statements of operations was $41 and $0 during
2019 and 2018, respectively. The amount of accrued interest and penalties recognized in the consolidated balance
sheets was $60 and $19 at December 31, 2019 and 2018, respectively.
Note 11 – Stock-based and Other Compensation
In December 2015, Lifeway stockholders approved the 2015 Omnibus Incentive Plan, which authorized the issuance
of an aggregate of 3.5 million shares to satisfy awards of stock options, stock appreciation rights, unrestricted stock,
restricted stock, restricted stock units, performance shares and performance units to qualifying employees. Under the
Plan, the Board or its Audit and Corporate Governance Committee approves stock awards to executive officers and
certain senior executives, generally in the form of restricted stock or performance shares. The number of
performance shares that participants may earn depends on the extent to which the corresponding performance goals
have been achieved. Stock awards generally vest over a three-year performance or service period. At December 31,
2019, 3.377 million shares remain available under the Omnibus Incentive Plan. While we plan to continue to issue
awards pursuant to the Plan at least annually, we may choose to suspend the issuance of new awards in the future
and may grant additional awards at any time including issuing special grants of restricted stock, restricted stock
units, and stock options to attract and retain new and existing executives.
Stock Options
The following table summarizes stock option activity during the year ended December 31, 2019:
Weighted
average
exercise price
Options
Weighted
average
remaining
contractual
life
Aggregate
intrinsic
value
41 $
– $
– $
– $
41 $
41 $
10.42
–
–
–
10.42
10.42
7.23
–
–
–
6.22 $
6.22 $
–
–
–
–
–
Outstanding at December 31, 2018
Granted
Exercised
Forfeited
Outstanding at December 31, 2019
Exercisable at December 31, 2019
For the years ended December 31, 2019 and 2018 total pre-tax stock-based compensation expense recognized in the
consolidated statements of operations was $1 and $9, respectively. For the years ended December 31, 2019 and 2018
tax-related benefits of $0 and $3 were also recognized. As of December 31, 2019, all outstanding options are vested
and there is no remaining unearned compensation expense.
F-20
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 did not have sufficient historical exercise data to provide a reasonable basis upon
which to estimate the expected term.
Restricted Stock Awards
A Restricted Stock Award (“RSA”) represents the right to receive one share of common stock in the future. RSAs
have no exercise price. The grant date fair value of the awards is equal to our closing stock price on the grant date.
The following table summarizes RSA activity during the year ended December 31, 2019.
Outstanding at December 31, 2018
Granted
Shares issued upon vesting
Forfeited
Outstanding at December 31, 2019
Weighted average grant date fair value per share outstanding
RSA’s
25
39
(18 )
–
47
4.01
$
We expense RSA’s over the service period. For the years ended December 31, 2019 and 2018 total pre-tax stock-
based compensation expense recognized in the consolidated statements of operations was $109 and $47,
respectively. For the years ended December 31, 2019 and 2018 tax-related benefits of $30 and $13, respectively,
were also recognized. As of December 31, 2019, the total remaining unearned compensation related to non-vested
RSA’s was $107, which is expected to be amortized over the weighted-average remaining service period of 1.38
years.
Long-Term Incentive Plan Compensation
Lifeway established long-term incentive-based compensation programs for fiscal year 2017 (the “2017 Plan”), fiscal
year 2018 (the “2018 Plan”), and for fiscal year 2019 (the “2019 Plan”) for certain senior executives and key
employees (the “participants”). Under both the 2017 Plan and the 2018 Plan, long-term incentive compensation is
based on Lifeway’s achievement of certain sales and adjusted EBITDA performance levels versus respective targets
established by the Board for each fiscal year. Under the 2019 Plan, long-term equity incentive compensation is
based on Lifeway’s achievement of four strategic milestones over a three-year period from Fiscal 2019 through
Fiscal 2021.
2017 Plan
Under the 2017 Plan, collectively the participants had the opportunity to earn cash and equity-based incentive
compensation in amounts ranging from $0 to $11,025 depending on Lifeway’s performance levels compared to the
respective targets and the participants performance compared to their individual objectives. The equity portion of the
incentive compensation is payable in restricted stock that vests one-third in each of the three years from the 2017
grant dates. For the year ended December 31, 2019 and 2018, $288 and $636 was expensed under the 2017 Plan as
stock-based compensation expense in the consolidated statements of operations, respectively. As of December 31,
2019, the total remaining unearned compensation related to the 2017 Plan was $49, which is expected to be
recognized in 2020, subject to vesting.
F-21
2018 Plan
Under the 2018 Plan, collectively the participants had the opportunity to earn cash and equity-based incentive
compensation in amounts ranging from $0 to $11,200 depending on Lifeway’s performance levels compared to the
respective targets and the participants performance compared to their individual objectives. The equity portion of the
incentive compensation was payable in restricted stock that vests one-third in each of the three years from the 2018
grant dates. Due to the final fiscal 2018 financial results, there were no equity-based incentives awarded under the
2018 Plan.
2019 Plan
Under the 2019 Plan, collectively the participants have the opportunity to earn equity-based incentive compensation
in amounts ranging from $0 to $1,733 depending on Lifeway’s performance levels compared to the respective
targets. The equity-based incentive compensation is payable in restricted stock that vests 50% of unvested shares in
year one, 50% of unvested shares in year two, and 100% of remaining unvested shares in year three from the 2019
grant date. For the year ended December 31, 2019, $51 was expensed under the 2019 Plan as stock-based
compensation expense in the consolidated statements of operations.
2019 Retention Award
During Q1 2019, we awarded a special retention grant (the “2019 Retention Award”) of restricted stock to senior
executives and key employees (the “participants”). The equity-based incentive compensation is payable in restricted
stock that vests one-third in March 2019, one-third in March 2020 and one-third in March 2021. For the period
ended December 31, 2019, $342 was expensed under the 2019 Retention Award as stock-based compensation
expense in the consolidated statements of operations.
Retirement Benefits
Lifeway has a defined contribution plan which is available to substantially all full-time employees. Under the terms
of the plan we match employee contributions under a prescribed formula. For the years ended December 31, 2019
and 2018 total contribution expense recognized in the consolidated statements of operations was $367 and $417,
respectively.
Note 12 – Segments, Products and Customers
Lifeway’s primary product is drinkable kefir, a cultured dairy product. Lifeway Kefir is tart and tangy, high in
protein, calcium and vitamin D. Thanks to our exclusive blend of kefir cultures, each cup of kefir contains 12 live
and active cultures and 15 to 20 billion beneficial CFU (Colony Forming Units) at the time of manufacture.
We manufacture (directly or through co-packers) our products under our own brand, as well as under private labels
on behalf of certain customers. As of December 31, 2019, 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-22
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, and BioKefir (a 3.5 oz. kefir with additional probiotic cultures).
• 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 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 soft serve 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
ProBugs Kefir
Other dairy
Frozen Kefir (a)
Net Sales
(a) Includes Lifeway Kefir Shop sales
2019
2018
$
%
$
%
$
$
71,822
11,459
4,228
2,780
1,756
1,617
93,662
77% $
12%
4%
3%
2%
2%
100% $
78,523
11,486
5,276
2,795
3,836
1,434
103,350
76%
11%
5%
3%
4%
1%
100%
F-23
Significant Customers – Sales are predominately to companies in the retail food industry located within the United
States. Two major customers accounted for approximately 22% and 21% of net sales for the years ended December
31, 2019 and 2018, respectively. Two major customers accounted for approximately 17% of accounts receivable as
of December 31, 2019 and 2018. Our ten largest customers as a group accounted for approximately 57% and 59% of
net sales for the years ended December 31, 2019 and 2018, respectively.
Note 13 – Share repurchase program
On September 24, 2015, Lifeway’s Board of Directors authorized a stock repurchase program (the “2015 stock
repurchase program”) under which 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.
Pursuant to the share repurchase program, during the year ended December 31, 2019, the Company repurchased 211
shares at a cost of $538 or approximately $2.55 per share. During the year ended December 31, 2018, the Company
repurchased 218 shares at a cost of $1,379 or approximately $6.33 per share. Approximately $3,965 remained
available under this program as of December 31, 2019.
Note 14 – Related party transactions
Lifeway obtains consulting services from the Chairperson of its board of directors. Fees earned are included in
general and administrative expenses in the accompanying consolidated statements of operations and were $1,000
during the years ended December 31, 2019 and 2018.
Lifeway is also a party to a royalty agreement with the Chairperson of its board of directors under which we pay the
Chairperson a royalty based on the sale of certain Lifeway products, not to exceed $50 in any fiscal month.
Royalties earned are included in selling expenses in the accompanying consolidated statements of operations and
were $588 and $587 during the years ended December 31, 2019 and 2018, respectively.
Note 15 – Subsequent events
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a
pandemic, which continues to spread throughout the United States. On March 16, 2020, the food industry, including
grocery stores and their suppliers, and transportation were classified by the U.S. federal government as critical
infrastructure industry. The Company is closely monitoring the impact of the pandemic on all aspects of its business,
including how it will impact its customers, team members, suppliers, vendors, business partners and distribution
channels. While the Company has not incurred significant disruptions subsequent to December 31, 2019 from
COVID-19, it is unable to predict the impact that COVID-19 will have on its financial position and operating results
due to numerous uncertainties.
F-24
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, 2019 (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 effective at the reasonable
assurance level as of December 31, 2019 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.
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.”
27
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, 2019. 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). Based on this assessment, management has concluded that our
internal control over financial reporting was effective as of December 31, 2019.
Remediation of the Material Weakness
During 2019, management evaluated our policies and procedures related to the review of the analysis in goodwill
impairment reports prepared by third-party valuation experts and designed and implemented 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
2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None.
28
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Corporate Governance Guidelines and Code of Ethics
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.
29
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
3. Exhibits.
No.
3.1
3.2
10.1
10.2
10.3
10.4
10.5
10.6
Description
Form
Period
Ending
Exhibit
Filing Date
Amended and Restated Bylaws.
10-K
12/31/2017
3.1
3/30/2018
Articles of Incorporation, as amended
and currently in effect
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
Letter Agreement dated December 24,
1999
10-K
12/31/2013
3.2
4/2/2014
8-K
8-K
8-K
0
0
0
10.1
10/12/1999
10.11
10/12/1999
10.12
1/12/2000
Employment Agreement, dated
September 12, 2002, between Lifeway
Foods, Inc. and Julie Smolyansky
10-QSB/A
No. 2
9/30/2002
10.14
4/30/2003
Consulting Agreement by and
between the Company and Ludmila
Smolyansky, dated as of March 8,
2016
Endorsement Agreement by and
between the Company and Ludmila
Smolyansky, dated as of March 14,
2016
10-K
12/31/2015
10.23
3/16/2016
10-K
12/31/2015
10.24
3/16/2016
10.7
Amended and Restated Loan and
Security Agreement dated as of May
8-K
10.1
5/11/2018
7, 2018 among Lifeway Foods, Inc.,
Fresh Made, Inc., The Lifeway Kefir
Shop, LLC, Lifeway Wisconsin, Inc.,
and CIBC Bank USA, as Lender.
30
10.8
10.9
10.10
10.11
14
21
23.1
31.1
31.2
32.1
32.2
99.1
Employment Agreement by and
between the Company and Amy
Feldman, dated as of October 29,
2018
Employment Agreement by and
between the Company and Eric
Hanson, dated as of January 18, 2019
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.
Second Modification to Amended and
Restated Loan and Security
Agreement, effective as of December
10, 2019 by and among Lifeway
Foods, Inc., Fresh Made, Inc., The
Lifeway Kefir Shop, LLC, Lifeway
Wisconsin, Inc., and CIBC Bank
USA, as Lender.
8-K
10.1
11/1/2018
1/23/2019
10-K
10.1
4/15/2019
8-K
10.1
12/10/2019
Code of Conduct and Ethics
10-K
12/31/13
14
4/2/2014
List of Subsidiaries of the Registrant
Consent of Mayer Hoffman McCann
P.C.
Rule 13a-14(a)/15d-14(a)
Certification of Julie Smolyansky
Rule 13a-14(a)/15d-14(a)
Certification of Eric Hanson
Section 1350 Certification of Julie
Smolyansky
Section 1350 Certification of Eric
Hanson
Press release dated April 14, 2020
reporting the Company’s financial
results for year ended December 31,
2019.
101
Interactive Data Files
ITEM 16. FORM 10-K SUMMARY.
Not applicable.
31
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 14, 2020
Date: April 14, 2020
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
32
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 14, 2020
Date: April 14, 2020
Date: April 14, 2020
Date: April 14, 2020
Date: April 14, 2020
Date: April 14, 2020
Date: April 14, 2020
Date: April 14, 2020
Exhibit 21
/s/ Julie Smolyansky
Julie Smolyansky
Chief Executive Officer, President, and Director
(Principal Executive Officer)
/s/ Edward Smolyansky
Edward Smolyansky
Chief Operating Officer 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/ Jason Scher
Jason Scher
Lead Independent Director
/s/ Pol Sikar
Pol Sikar
Director
/s/ Renzo Bernardi
Renzo Bernardi
Director
/s/ Jody Levy
Jody Levy
Director
33
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.
Jurisdiction of Incorporation or Organization
Pennsylvania
Lifeway Foods Canada, Inc.
Quebec, Canada
Lifeway Foods Europe
The Lifeway Kefir Shop, LLC
Lifeway Wisconsin, Inc.
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 14, 2020, with respect to the consolidated financial statements of Lifeway Foods, Inc. and
Subsidiaries as of December 31, 2019 and 2018 and for each of the years then ended, and our report dated April 14,
2020, relating to the effectiveness of internal controls over financial reporting as of December 31, 2019 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, 2019.
/s/ Mayer Hoffman McCann P.C.
Chicago, Illinois
April 14, 2020
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 14, 2020
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 14, 2020
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, 2019 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 14, 2020
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/A of Lifeway Foods, Inc. (the “Company”) for the period
ended December 31, 2019 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 14, 2020
By: /s/ Eric Hanson
Eric Hanson
Chief Financial & Accounting Officer
Exhibit 99.1
Lifeway Foods, Inc. Increases Production to Support Accelerated Demand and
Local Communities during COVID-19 Health Crisis
Expects First Quarter 2020 Preliminary, Unaudited Net Sales to Increase 2% to
4% from 1Q19 with the Month of March Net Sales Up Over 13% Year-over-Year
Delivers Second Consecutive Sequential Quarter of Sales Improvement with
Strong Industry Tailwinds
Morton Grove, IL — April 14, 2020—Lifeway Foods, Inc. (Nasdaq: LWAY) (“Lifeway” or “the Company”), the
leading U.S. supplier of kefir and fermented probiotic products to support the microbiome, today provided a
business update in conjunction with reporting its fourth quarter and full year results for the period ended December
31, 2019 which was filed today with the Securities and Exchange Commission. Lifeway also announced that it
expects preliminary, unaudited first quarter 2020 net sales to increase 2% to 4% as compared to the first quarter of
2019 with the month of March net sales up 13% year-over-year.
“We are pleased with our solid end to the year and strong start to 2020. Our team’s execution of our long-term
strategic plan, Lifeway 2.0, is demonstrated by the sequential improvement in our sales trends in the fourth quarter
resulting in our ability to reinvigorate growth which has accelerated into the first quarter of 2020 with net sales
expected to be up 2% to 4% year-over-year including a really strong March monthly sales” commented Julie
Smolyansky, Lifeway’s Chief Executive Officer. “Our current focus is the health, safety and wellbeing of our
employees, as well as local and national communities during this time of unprecedented uncertainty and crisis
related to COVID-19. At Lifeway, we are committed to supporting the accelerated demand for retail sales and
community aid donations through an increase in our kefir production, and we are instituting the Lifeway Heroes
Commitment Award, an hourly bonus for employees in our production and warehouse facilities in recognition of
their incredible work. In addition, Lifeway is providing donations to Singer and songwriter Jewel’s Inspiring
Children, Mount Sinai Hospital, Meals on Wheels Chicago, Food Bank for New York City and other local and
national food pantries to help ensure first responders and those in need have access to microbiome-supporting
products and are able to nourish themselves and their families. To date, Lifeway has donated over 45,000 servings of
kefir, and we plan to continue providing additional product for as long as needed.”
Ms. Smolyansky continued, “During this time of shelter-in-place as a result of COVID-19, 40% of Americans are
more proactively taking care of their physical and emotional health and 17% are consuming more immunity and
overall self-care supporting products such as probiotics and vitamins, according to IRI. In the first quarter of 2020,
we have increased our production to meet accelerated demand at both grocery retail and online grocery as more
consumers focus on self-care and nutrition to aid in their overall health and wellness needs. Kefir has emerged as a
top 2020 consumer choice for gut health and it continues to rise with people becoming increasingly educated on the
importance of a healthy, functioning gut and how it can determine consumers overall well-being. Based on a 2017
study from The Nutrition Society the health benefits of fermented milk drinks such as kefir included improved
digestion, anti-inflammatory effects and the stimulation of antioxidants which can aid disease prevention. We
believe Lifeway is well positioned for long-term growth and value creation with strong industry tailwinds to fuel our
business as we increasingly serve consumers looking for more self-care, immunity and gut health options during this
time of global health crisis and uncertainty.”
Lifeway expects to continue to benefit in 2020 from strong industry tailwinds including lower dairy and oil prices as
well as the following highlights:
• According to IRI:
o Dairy is up 11% on a dollar basis for the Total U.S. MULO for the year-to-date 2020 period ended
March 22, 2020
o Social Chatter is increasingly focused on self-care with a 438% Surge vs. the average in mentions
o
as U.S. COVID-19 confirmed cases increase
In the 52 weeks ended March 8, 2020, the total supplement market was up more than 6%. For the
one-week period ended March 8, 2020, during which coronavirus concerns in the U.S. began to
scale, sales growth for overall dietary supplements skyrocketed to more than 35%
1
• According to Mordor Intelligence:
o For fermented dairy, including kefir, a 9% compound annual growth rate is expected between
2019 and 2029
• According to the New York Times analysis of data from Earnest Research:
o
In a 7-day period that ended on March 18, grocery sales were up 79% from the previous year
o Between March 26 and April 1, sales were up 7%. Among the biggest winners: online grocery
delivery services and meal kit companies
Conference Call
A pre-recorded conference call and webcast with Julie Smolyansky discussing these results with additional
comments and details will be available today at 5:00 p.m. ET. The webcast will be available over the Internet
through the “Investor Relations” section of the Company’s website at https://lifewaykefir.com/webinars-reports/. An
audio replay will be available through April 28, 2020. North American listeners may dial 844-512-2921 and
international listeners may dial 412-317-6671. The passcode is 1139162.
About Lifeway Foods, Inc.
Lifeway Foods, Inc., which has been recognized as one of Forbes’ Best Small Companies, is America’s leading
supplier of the probiotic, fermented beverage known as kefir. In addition to its line of drinkable kefir, the company
also produces cupped kefir and cheese, frozen kefir, specialty cheeses, probiotic supplements and a ProBugs line for
kids. Lifeway’s tart and tangy fermented dairy and non-dairy products are now sold across the United States,
Mexico, Ireland and the United Kingdom. Learn how Lifeway is good for more than just you at
www.lifewaykefir.com.
Forward-Looking Statements
This release (and oral statements made regarding the subjects of this release) contains “forward-looking statements”
as defined in the Private Securities Litigation Reform Act of 1995 regarding, among other things, future operating
and financial performance, product development, market position, business strategy and objectives. These
statements use words, and variations of words, such as “continue,” “build,” “future,” “increase,” “drive,” “believe,”
“look,” “ahead,” “confident,” “deliver,” “outlook,” “expect,” and “predict.” Other examples of forward looking
statements may include, but are not limited to, (i) statements of Company plans and objectives, including the
introduction of new products, or estimates or predictions of actions by customers or suppliers, (ii) statements of
future economic performance, and (III) statements of assumptions underlying other statements and statements about
Lifeway or its business. You are cautioned not to rely on these forward-looking statements. These statements are
based on current expectations of future events and thus are inherently subject to uncertainty. If underlying
assumptions prove inaccurate or known or unknown risks or uncertainties materialize, actual results could vary
materially from Lifeway’s expectations and projections. These risks, uncertainties, and other factors include: price
competition; the decisions of customers or consumers; the actions of competitors; changes in the pricing of
commodities; the effects of government regulation; possible delays in the introduction of new products; and
customer acceptance of products and services. A further list and description of these risks, uncertainties, and other
factors can be found in Lifeway’s Annual Report on Form 10-K for the full year ended December 31, 2019, and the
Company’s subsequent filings with the SEC. Copies of these filings are available online at https://www.sec.gov,
http://lifewaykefir.com/investor-relations/, or on request from Lifeway. Information in this release is as of the dates
and time periods indicated herein, and Lifeway does not undertake to update any of the information contained in
these materials, except as required by law. Accordingly, YOU SHOULD NOT RELY ON THE ACCURACY OF
ANY OF THE STATEMENTS OR OTHER INFORMATION CONTAINED IN ANY ARCHIVED PRESS
RELEASE.
Contact:
Lifeway Foods, Inc.
Phone: 847-967-1010
Email: info@lifeway.net
2
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2019 and 2018
(In thousands)
Current assets
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts and discounts &
$
allowances of $1,100 and $1,220 at December 31, 2019 and 2018,
respectively
Inventories, net
Prepaid expenses and other current assets
Refundable income taxes
Total current assets
Property, plant and equipment, net
Operating lease right-of use asset
Intangible assets
Goodwill and indefinite-lived intangibles
Other intangible assets, net
Total intangible assets
Other Assets
Total assets
Current liabilities
Accounts payable
Accrued expenses
Accrued income taxes
Total current liabilities
Line of credit
Operating lease liabilities
Deferred income taxes, net
Other long-term liabilities
Total liabilities
$
$
December 31,
2019
2018
3,836 $
2,998
6,692
6,392
1,598
681
19,199
22,274
738
12,824
152
12,976
1,800
56,987 $
5,282 $
4,087
154
9,523
2,745
488
922
58
13,736
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
Stockholders’ equity
Preferred stock, no par value; 2,500 shares authorized; no shares issued or
outstanding at 2019 and 2018
Common stock, no par value; 40,000 shares authorized; 17,274 shares
issued; 15,710 and 15,814 shares outstanding at 2019 and 2018
Paid-in capital
Treasury stock, at cost
Retained earnings
Total stockholders’ equity
–
–
6,509
2,380
(12,601 )
46,963
43,251
6,509
2,303
(12,970 )
46,563
42,405
Total liabilities and stockholders’ equity
$
56,987 $
56,807
3
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 2019 and 2018
(In thousands, except per share data)
Net sales
Cost of goods sold
Depreciation expense
Total cost of goods sold
Gross profit
Selling expenses
General and administrative
Goodwill and intangible asset impairment
Amortization expense
Total operating expenses
Loss from operations
Other income (expense):
Interest expense
Fair value gain on investments
Realized gain on investments, net
Gain on sale of property and equipment
Other income
Total other income (expense)
2019
2018
$
93,662 $
103,350
68,367
3,146
71,513
74,646
2,846
77,492
22,149
25,858
11,062
12,828
–
192
24,082
13,477
13,616
1,244
631
28,968
(1,933 )
(3,110 )
(249 )
1,731
1,413
189
84
3,168
(271 )
–
–
54
16
(201 )
Income (loss) before provision for income taxes
1,235
(3,311 )
Provision (benefit) for income taxes
Net income (loss)
Basic loss per common share
Diluted loss per common share
782
(225 )
453 $
(3,086 )
0.03 $
(0.19 )
0.03 $
(0.19 )
$
$
$
Weighted average number of shares outstanding - Basic
15,748
15,872
Weighted average number of shares outstanding - Diluted
15,804
16,319
4
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2019 and 2018
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to operating cash flow:
2019
2018
$
453 $
(3,086 )
Depreciation and amortization
Non-cash interest expense
Non-cash rent expense
Bad debt expense
Deferred Revenue
Reserve for inventory obsolescence
Stock-based compensation
Deferred income taxes
Fair value gain on investment
Net gain on sale of investment
Gain 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
Operating lease asset amortization/liability
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:
Purchase of treasury stock
Borrowings under revolving credit facility
Repayment of line of credit
Payment of deferred financing costs
Repayment of notes payable
Net cash used in financing activities
Net increase (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
$
3,338
23
(17 )
7
(97 )
(52 )
838
533
(1,731 )
(1,413 )
(189 )
–
(423 )
(523 )
2,067
(526 )
710
783
(17 )
47
3,811
(15 )
1,509
(1,178 )
522
838
(538 )
–
(3,273 )
–
–
(3,811 )
838
2,998
3,836 $
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 )
(1,379 )
6,050
–
(69 )
(6,279 )
(1,677 )
(1,980 )
4,978
2,998
Supplemental cash flow information:
Cash paid for income taxes, net of (refunds)
Cash paid for interest
$
(1,865 ) $
259
Right-of-use assets and operating lease obligations recognized at ASU
2016-02 transition
Right-of-use assets and operating lease obligations recognized after
ASU 2016-02 transition
997
305
723
261
–
–
5