LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009 and 2008
and
December 31, 2008
Note
1 – NATURE OF BUSINESS
Lifeway
Foods, Inc. (The “Company”) commenced operations in February 1986 and
incorporated under the laws of the state of Illinois on May 19, 1986. The
Company’s principal business activity is the production of dairy products.
Specifically, the Company produces Kefir, a drinkable product which is similar
to but distinct from yogurt, in several flavors sold under the name “Lifeway’s
Kefir;” a plain farmer’s cheese sold under the name “Lifeway’s Farmer’s Cheese;”
a fruit sugar-flavored product similar in consistency to cream cheese sold under
the name of “Sweet Kiss;” and a dairy beverage, similar to Kefir, with increased
protein and calcium, sold under the name “Basics Plus.” The Company
also produces several soy-based products under the name “Soy Treat” and a
vegetable-based seasoning under the name “Golden Zesta.” The Company currently
distributes its products throughout the Chicago Metropolitan area and various
cities in the East Coast through local food stores. In addition, the
products are sold throughout the United States and Ontario, Canada by
distributors. The Company also distributes some of its products to Eastern
Europe.
Note
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary
of the significant accounting policies applied in the preparation of the
accompanying financial statements follows:
Principles of
consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, LFI Enterprises, Inc., Helios Nutrition, Ltd., Pride
of Main Street, L.L.C., Starfruit, L.L.C., Fresh Made, Inc and Starfruit
Franchise, L.L.C. All significant intercompany accounts and
transactions have been eliminated.
Use of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates. Significant estimates made in preparing the consolidated
financial statements include the allowance for doubtful accounts, the valuation
of investment securities, the valuation of goodwill, intangible assets and
deferred taxes.
Revenue
Recognition
Sales
represent sales of Company produced dairy products that are recorded at the time
of shipment and the following four criteria have been met: (i) The
product has been shipped and the Company has no significant remaining
obligations; (ii) Persuasive evidence of an agreement exists;
(iii) The price to the buyer is fixed or determinable and
(iv) Collection is probable. In addition, shipping costs
invoiced to the customers are included in net sales and the related cost in cost
of sales.
Cash and cash
equivalents
All
highly liquid investments purchased with an original maturity of three months or
less are considered to be cash equivalents.
The
Company maintains cash deposits at several institutions located in the greater
Chicago, Illinois and Philadelphia, Pennsylvania metropolitan
areas.
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009 and 2008
and
December 31, 2008
Note
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Bank
balances of amounts reported by financial institutions are categorized as
follows:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Amounts
insured
|
|
$
|
1,787,108
|
|
|
$
|
138,913
|
|
|
$
|
847,711
|
|
Uninsured
and uncollateralized amounts
|
|
|
—
|
|
|
|
846,239
|
|
|
|
—
|
|
Total
bank balances
|
|
$
|
1,787,108
|
|
|
$
|
985,152
|
|
|
$
|
847,711
|
|
Marketable
securities
All
investment securities are classified as available-for-sale, are carried at fair
value or quoted market prices. Unrealized gains and losses on available-for-sale
securities are reported as a separate component of stockholders’ equity.
Amortization, accretion, interest and dividends, realized gains and losses, and
declines in value judged to be other-than-temporary on available-for-sale
securities are recorded in other income. All of the Company's securities are
subject to a periodic impairment evaluation. This evaluation depends on the
specific facts and circumstances. Factors that we consider in determining
whether an other-than-temporary decline in value has occurred include: the
market value of the security in relation to its cost basis; the financial
condition of the investee; and the intent and ability to retain the investment
for a sufficient period of time to allow for possible recovery in the market
value of the investment.
Accounts
receivable
Credit
terms are extended to customers in the normal course of business. The
Company performs ongoing credit evaluations of its customers’ financial
condition and generally requires no collateral.
Accounts
receivable are recorded at invoice amounts, and reduced to their estimated net
realizable value by recognition of an allowance for doubtful
accounts. The Company’s estimate of the allowance for doubtful
accounts is based upon historical experience, its evaluation of the current
status of specific receivables, and unusual circumstances, if
any. Accounts are considered past due if payment is not made on a
timely basis in accordance with the Company’s credit terms. Accounts
considered uncollectible are charged against the allowance.
Inventories
Inventories
are stated at the lower of cost or market, cost being determined by the
first-in, first-out method.
Property and
equipment
Property
and equipment are stated at depreciated cost or fair value where depreciated
cost is not recoverable. Depreciation is computed using the
straight-line method. When assets are retired or otherwise disposed
of, the cost and related accumulated depreciation are removed from the accounts,
and any resulting gain or loss is recognized in income for the
period. The cost of maintenance and repairs is charged to income as
incurred; significant renewals and betterments are capitalized.
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009 and 2008
and
December 31, 2008
Note
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Property
and equipment are being depreciated over the following useful
lives:
Category
|
|
Years
|
Buildings
and improvements
|
|
31
and 39
|
Machinery
and equipment
|
|
5 –
12
|
Office
equipment
|
|
5 –
7
|
Vehicles
|
|
5
|
Intangible
assets
The
Company accounts for intangible assets at historical cost. Intangible
assets acquired in a business combination are recorded under the purchase method
of accounting at their estimated fair values at the date of
acquisition. Goodwill represents the excess purchase price over the
fair value of the net tangible and other intangible assets
acquired. Goodwill is not amortized and is reviewed for impairment at
least annually. Brand assets represent the fair value of brands
acquired. Brand assets have an indefinite life, therefore are not
amortized, rather are reviewed periodically for impairment. The
Company amortizes other intangible assets over their estimated useful lives, as
disclosed in the table below.
The
Company reviews intangible assets and their related useful lives at least once a
year to determine if any adverse conditions exist that would indicate the
carrying value of these assets may not be recoverable. The
Company conducts more frequent impairment assessments if certain conditions
exist, including: a change in the competitive landscape, any internal
decisions to pursue new or different strategies, a loss of a significant
customer, or a significant change in the market place including changes in the
prices paid for the Company’s products or changes in the size of the market for
the Company’s products.
If the
estimate of an intangible asset’s remaining useful life is changed, the
remaining carrying amount of the intangible asset is amortized prospectively
over the revised remaining useful life.
Intangible
assets are being amortized over the following useful lives:
Category
|
|
Years
|
Recipes
|
|
4
|
Customer
lists and other
customer
related intangibles
|
|
7-10
|
Lease
agreement
|
|
7
|
Trade
names
|
|
15
|
Formula
|
|
10
|
Customer
relationships
|
|
12
|
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009 and 2008
and
December 31, 2008
Note
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Income
taxes
Deferred
income taxes arise from temporary differences resulting from income and expense
items reported for financial accounting and tax purposes in different periods.
Deferred taxes are classified as current or non-current, depending on the
classification of the assets and liabilities to which they
relate. Deferred taxes arising from temporary differences that are
not related to an asset or liability are classified as current or non-current
depending on the periods in which the temporary differences are expected to
reverse.
The
principal sources of temporary differences are different depreciation and
amortization methods for financial statement and tax purposes, unrealized gains
or losses related to marketable securities, capitalization of indirect costs for
tax purposes, and the recognition of an allowance for doubtful accounts for
financial statement purposes.
As of
January 1, 2007, the Company adopted “Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement No. 109,” which clarifies the
accounting and disclosure for uncertainty in tax positions, as defined. Pursuant
to the adoption the Company has analyzed filing positions in all of the federal
and state jurisdictions where it is required to file income tax returns, as well
as all open tax years in these jurisdictions. The only periods subject to
examination for the Company’s federal return are the 2004 through 2007 tax
years. The Company believes that its income tax filing positions and deductions
would be sustained on audit and does not anticipate any adjustments that would
result in a material change to its financial position. Therefore, no reserves
for uncertain income tax positions have been recorded pursuant to the adoption.
In addition, the Company did not record a cumulative effect adjustment related
to the adoption of the standard.
The
Company’s policy for recording interest and penalties associated with audits is
to record such items as a component of income before taxes. There were no such
items during the periods covered in this report.
Treasury
stock
Treasury
stock is recorded using the cost method.
Advertising
costs
The
Company expenses advertising costs as incurred. During the year ended
December 31, 2008 and for the nine months ended September 30, 2009 and 2008,
approximately $1,530,207, $1,288,844 and $1,241,442 of such costs respectively,
were expensed.
Earning per common
share
Earnings
per common share were computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding during
the period. For the nine months ended September 30, 2009 and 2008
and the year ended December 31, 2008, diluted and basic earnings per share
were the same, as the effect of dilutive securities options outstanding was not
significant.
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009 and 2008
and
December 31, 2008
Note
3 – ACQUISITION
On
February 6, 2009, Lifeway Foods, Inc., a Illinois corporation (“Lifeway”)
completed a Stock Purchase Agreement (the “Stock Agreement”) by and among
Lifeway, Ilya Mandel, an individual and Michael Edelson, an individual (each a
“Seller” and collectively “Sellers”).
Lifeway
purchased from Sellers all of the issued and outstanding stock (the “Shares”) of
Fresh Made, Inc., a Pennsylvania corporation (“Fresh”). The
consideration for the Shares was an aggregate of $8,048,000, less certain
offsets for any selling expenses in excess of certain limits set forth in the
Stock Agreement and other payments and funded debt all as set forth in the Stock
Agreement, a note in the principal amount of $2,735,000, due on February 6,
2011, 128,948 shares of common stock of Lifeway valued at a total of $980,000
(“Lifeway’s Common Stock”), the cancellation of a loan in the principal amount
of $265,000 and not more than $98,000 in funds held in Fresh’s two accounts with
Vist Financial Corp. The issuance of Lifeway’s Common Stock was
exempted from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended.
Also on
February 6, 2009, Lifeway entered into and consummated a Real Property Purchase
Agreement (the “Real Property Agreement”) by and among Sellers and
Lifeway. Pursuant to the Real Property Agreement, Lifeway acquired
1.1355 acres of land in Philadelphia, PA (the “Property”) from
Sellers. The consideration for the Property was approximately
$2,089,000.
The
acquisition was accounted for using the purchase accounting method of
accounting, and accordingly, the purchase price was allocated to assets acquired
and the liabilities assumed based on the fair value as of the merger
date. Acquisition costs for legal and professional fees have been
included in General and Administrative costs.
The
estimated fair value of assets acquired, including the real property, and
liabilities assumed consisted of the following:
Cash
and cash equivalents
|
|
$
|
226,000
|
|
Accounts
receivable (contractual amounts totaling $545,958)
|
|
|
546,000
|
|
Other
current assets
|
|
|
361,000
|
|
Building
and other fixed assets
|
|
|
2,617,000
|
|
Customer
list
|
|
|
4,000,000
|
|
Non
amortizable goodwill and brand asset
|
|
|
6,739,000
|
|
Current
liabilities
|
|
|
( 461,000
|
)
|
Total
fair value of assets acquired and liabilities assumed
|
|
$
|
14,028,000
|
|
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009 and 2008
and
December 31, 2008
Note
4 – INTANGIBLE ASSETS
Intangible
assets, and the related accumulated amortization, consist of the
following:
|
|
September
30, 2009
|
|
|
September
30, 2008
|
|
|
December
31, 2008
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
Recipes
|
|
$
|
43,600
|
|
|
$
|
43,600
|
|
|
$
|
43,600
|
|
|
$
|
42,009
|
|
|
$
|
43,600
|
|
|
$
|
43,600
|
|
Customer
lists and other customer related intangibles
|
|
|
4,305,200
|
|
|
|
486,280
|
|
|
|
305,200
|
|
|
|
172,583
|
|
|
|
305,200
|
|
|
|
182,938
|
|
Lease
acquisition
|
|
|
87,200
|
|
|
|
64,359
|
|
|
|
87,200
|
|
|
|
51,904
|
|
|
|
87,200
|
|
|
|
55,019
|
|
Other
|
|
|
6,638
|
|
|
|
6,638
|
|
|
|
6,638
|
|
|
|
4,317
|
|
|
|
6,638
|
|
|
|
4,647
|
|
Customer
relationship
|
|
|
985,000
|
|
|
|
259,932
|
|
|
|
985,000
|
|
|
|
177,848
|
|
|
|
985,000
|
|
|
|
198,368
|
|
Contractual
backlog
|
|
|
12,000
|
|
|
|
12,000
|
|
|
|
12,000
|
|
|
|
12,000
|
|
|
|
12,000
|
|
|
|
12,000
|
|
Trade
names
|
|
|
1,980,000
|
|
|
|
418,000
|
|
|
|
1,980,000
|
|
|
|
286,000
|
|
|
|
1,980,000
|
|
|
|
319,000
|
|
Formula
|
|
|
438,000
|
|
|
|
138,700
|
|
|
|
438,000
|
|
|
|
94,900
|
|
|
|
438,000
|
|
|
|
105,850
|
|
|
|
$
|
7,857,638
|
|
|
$
|
1,429,509
|
|
|
$
|
3,857,638
|
|
|
$
|
841,561
|
|
|
$
|
3,857,638
|
|
|
$
|
921,422
|
|
Amortization
expense is expected to be as follows for the 12 months ending September
30:
2010
|
|
$
|
667,716
|
|
2011
|
|
|
667,631
|
|
2012
|
|
|
651,800
|
|
2013
|
|
|
624,550
|
|
2014
|
|
|
624,550
|
|
Thereafter
|
|
|
3,191,882
|
|
|
|
$
|
6,428,129
|
|
Amortization
expense during the nine months ended September 30, 2009 and 2008 and for the
year ended December 31, 2008 was $508,086, $239,585 and $319,446,
respectively.
Goodwill
and brand assets increased during the period ending September 30, 2009 due to
the acquisition of Fresh Made (See Note 3).
Note
5 – MARKETABLE SECURITIES
The cost
and fair value of marketable securities classified as available for sale are as
follows:
September 30, 2009
|
|
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
1,383,083
|
|
|
$
|
127,024
|
|
|
|
( 137,790
|
)
|
|
$
|
1,372,317
|
|
Mutual
Funds
|
|
|
178,166
|
|
|
|
2,018
|
|
|
|
( 25,885
|
)
|
|
|
154,299
|
|
Preferred
Securities
|
|
|
388,705
|
|
|
|
7,080
|
|
|
|
( 135,301
|
)
|
|
|
260,484
|
|
Corporate
Bonds
|
|
|
1,559,094
|
|
|
|
48,181
|
|
|
|
( 9,246
|
)
|
|
|
1,598,029
|
|
Government
Agency Obligations
|
|
|
933,760
|
|
|
|
9,212
|
|
|
|
( 6,764
|
)
|
|
|
936,208
|
|
Certificate
of Deposits
|
|
|
652,005
|
|
|
|
—
|
|
|
|
( 22,885
|
)
|
|
|
629,120
|
|
Total
|
|
$
|
5,094,813
|
|
|
$
|
193,515
|
|
|
$
|
( 337,871
|
)
|
|
$
|
4,950,457
|
|
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009 and 2008
and
December 31, 2008
Note
5 – MARKETABLE SECURITIES - Continued
September 30, 2008
|
|
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
3,077,340
|
|
|
$
|
55,002
|
|
|
$
|
( 639,374
|
)
|
|
$
|
2,492,968
|
|
Mutual
Funds
|
|
|
940,322
|
|
|
|
—
|
|
|
|
( 287,919
|
)
|
|
|
652,403
|
|
Preferred
Securities
|
|
|
1,714,758
|
|
|
|
—
|
|
|
|
( 509,150
|
)
|
|
|
1,205,608
|
|
Corporate
Bonds
|
|
|
917,990
|
|
|
|
—
|
|
|
|
( 75,144
|
)
|
|
|
842,846
|
|
Municipal
Bonds
|
|
|
4,586
|
|
|
|
374
|
|
|
|
—
|
|
|
|
4,960
|
|
Government
agency
Obligations
|
|
|
478,507
|
|
|
|
—
|
|
|
|
( 8,352
|
)
|
|
|
470,155
|
|
Total
|
|
$
|
7,133,503
|
|
|
$
|
55,376
|
|
|
$
|
( 1,519,939
|
)
|
|
$
|
5,668,940
|
|
December 31, 2008
|
|
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
2,116,004
|
|
|
$
|
75,333
|
|
|
$
|
( 279,487
|
)
|
|
$
|
1,911,850
|
|
Mutual
Funds
|
|
|
888,182
|
|
|
|
202
|
|
|
|
( 339,970
|
)
|
|
|
548,414
|
|
Preferred
Securities
|
|
|
1,541,423
|
|
|
|
13,075
|
|
|
|
( 308,963
|
)
|
|
|
1,245,535
|
|
Corporate
Bonds
|
|
|
783,761
|
|
|
|
1,559
|
|
|
|
( 19,289
|
)
|
|
|
766,031
|
|
Municipal
Bonds
|
|
|
4,586
|
|
|
|
414
|
|
|
|
—
|
|
|
|
5,000
|
|
Government
agency
Obligations
|
|
|
778,140
|
|
|
|
8,668
|
|
|
|
( 1,470
|
)
|
|
|
785,338
|
|
Total
|
|
$
|
6,112,096
|
|
|
$
|
99,251
|
|
|
$
|
( 949,179
|
)
|
|
$
|
5,262,168
|
|
Proceeds
from the sale of marketable securities were $5,323,423, $6,792,962 and
$4,659,350 during the year ended December 31, 2008 and for the nine months ended
September 30, 2009 and 2008 respectively.
Gross
gains of $384,574, $346,407 and $376,751 and gross losses of $1,118,221,
$620,702 and $523,155 were realized on these sales during the year ended
December 31, 2008 and for the nine months ended September 30, 2009 and 2008,
respectively.
The
following table shows the gross unrealized losses and fair value of Company's
investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position, at September 30, 2009:
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009 and 2008
and
December 31, 2008
Note
5 – MARKETABLE SECURITIES - Continued
|
|
Less
Than 12 Months
|
|
|
12
Months or Greater
|
|
|
Total
|
|
Description
of Securities
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
304,784
|
|
|
$
|
( 82,750
|
)
|
|
$
|
87,596
|
|
|
$
|
( 55,040
|
)
|
|
$
|
392,380
|
|
|
$
|
( 137,790
|
)
|
Mutual
Funds
|
|
|
86,194
|
|
|
|
( 17,854
|
)
|
|
|
39,061
|
|
|
|
( 8,031
|
)
|
|
|
125,255
|
|
|
|
( 25,885
|
)
|
Preferred
Securities
|
|
|
3,264
|
|
|
|
( 1,101
|
)
|
|
|
235,390
|
|
|
|
( 134,200
|
)
|
|
|
238,654
|
|
|
|
( 135,301
|
)
|
Corporate
Bonds
|
|
|
409,307
|
|
|
|
( 6,405
|
)
|
|
|
101,403
|
|
|
|
( 2,841
|
)
|
|
|
510,710
|
|
|
|
( 9,246
|
)
|
Government
Agency
Obligations
|
|
|
259,936
|
|
|
|
( 5,085
|
)
|
|
|
76,297
|
|
|
|
( 1,679
|
)
|
|
|
336,233
|
|
|
|
( 6,764
|
)
|
Certificates
of
Deposit
|
|
|
379,120
|
|
|
|
( 22,885
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
379,120
|
|
|
|
( 22,885
|
)
|
|
|
$
|
1,442,605
|
|
|
$
|
( 136,080
|
)
|
|
$
|
539,747
|
|
|
$
|
( 201,791
|
)
|
|
$
|
1,982,352
|
|
|
$
|
( 337,871
|
)
|
For the
year ended December 31, 2008, we recorded other than temporary impairments
related to investments in marketable securities in certain investments of
$958,879. The impairments recognized relate to securities that were
in an unrealized loss position at December 31, 2008 that were subsequently sold
and equity holdings that we consider other than temporarily impaired due to the
recent performance of the issuers of those securities.
Equities,
Mutual Funds, Corporate Bonds and Government Agency Obligations -
The Company's
investments in equity securities, mutual funds, corporate bonds and government
agency obligations consist of investments in common stock, preferred stock and
debt securities of companies in various industries. The Company
evaluated the near-term prospects of the issuer in relation to the severity and
duration of the impairment. Based on that evaluation and the Company's ability
and intent to hold these investments for a reasonable period of time sufficient
for a forecasted recovery of fair value, the Company does not consider any
material investments to be other-than-temporarily impaired at September 30,
2009.
Preferred
Securities - The Company's investments in preferred securities consist of
investments in preferred stock of companies in various
industries. The Company evaluated the continuing performance of the
securities, the credit worthiness of the issuers as well as the near-term
prospects of the security in relation to the severity and duration of the
impairment. Based on that evaluation and the Company's ability and intent to
hold these investments for a reasonable period of time sufficient for a
forecasted recovery of fair value, the Company does not consider any material
investments to be other-than-temporarily impaired at September 30,
2009.
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009 and 2008
and
December 31, 2008
Note
6 – INVENTORIES
Inventories
consist of the following:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Finished
goods
|
|
$
|
1,626,092
|
|
|
$
|
1,375,304
|
|
|
$
|
1,343,811
|
|
Production
supplies
|
|
|
1,718,779
|
|
|
|
1,604,106
|
|
|
|
1,291,484
|
|
Raw
materials
|
|
|
761,760
|
|
|
|
1,227,684
|
|
|
|
462,247
|
|
Total
inventories
|
|
$
|
4,106,631
|
|
|
$
|
4,207,094
|
|
|
$
|
3,097,542
|
|
Note
7 – PROPERTY AND EQUIPMENT
Property
and equipment consist of the following:
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Land
|
|
$
|
1,178,160
|
|
|
$
|
969,232
|
|
|
$
|
969,232
|
|
Buildings
and improvements
|
|
|
9,967,295
|
|
|
|
7,102,608
|
|
|
|
7,138,042
|
|
Machinery
and equipment
|
|
|
12,292,030
|
|
|
|
8,227,558
|
|
|
|
8,229,202
|
|
Vehicles
|
|
|
961,245
|
|
|
|
610,558
|
|
|
|
610,558
|
|
Office
equipment
|
|
|
238,029
|
|
|
|
137,120
|
|
|
|
180,351
|
|
Construction
in process
|
|
|
—
|
|
|
|
2,120,346
|
|
|
|
2,309,045
|
|
|
|
|
24,636,759
|
|
|
|
19,167,422
|
|
|
|
19,436,430
|
|
Less
accumulated depreciation
|
|
|
10,824,720
|
|
|
|
8,177,922
|
|
|
|
8,373,716
|
|
Total
property and equipment
|
|
$
|
13,812,039
|
|
|
$
|
10,989,500
|
|
|
$
|
11,062,714
|
|
Depreciation
expense during the year ended December 31, 2008 and for the nine months ended
September 30, 2009 and 2008 was $777,715, $859,044 and $581,920,
respectively.
Note
8
–
ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Accrued
payroll and payroll taxes
|
|
$
|
234,269
|
|
|
$
|
111,631
|
|
|
$
|
98,089
|
|
Accrued
property tax
|
|
|
376,840
|
|
|
|
363,672
|
|
|
|
291,819
|
|
Other
|
|
|
72,576
|
|
|
|
57,359
|
|
|
|
68,374
|
|
|
|
$
|
683,685
|
|
|
$
|
532,662
|
|
|
$
|
458,282
|
|
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009 and 2008
and
December 31, 2008
Note
9 – NOTES PAYABLE
Notes
payable consist of the following:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Mortgage
note payable to a bank, payable in monthly installments of $3,273
including interest at 7%, with a balloon payment of $416,825 due September
25, 2011. Collateralized by real estate.
|
|
|
—
|
|
|
$
|
440,874
|
|
|
$
|
438,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
note payable to a bank, payable in monthly installments of $19,513
including interest at 5.6%, with a balloon payment of $2,652,143 due July
14, 2010. Collateralized by real estate.
|
|
|
—
|
|
|
|
2,779,572
|
|
|
|
2,760,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable to Amani Holding LLC, payable in quarterly installments of
$262,500 plus interest at the floating prime rate per annum (7.25% at
December 31, 2007) due September 1, 2010 secured by letter of
credit.
|
|
|
—
|
|
|
|
1,124,500
|
|
|
|
837,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable to Private Bank in monthly installments of $42,222, plus variable
interest rate, currently at 2.945%, with a balloon payment of $5,066,667
due February 6, 2014. Collateralized by substantially all
assets of the Company.
|
|
|
7,262,222
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line
of credit with Private Bank at variable interest rate, currently at
2.945%, due on February 6, 2010. Collateralized by real
estate.
|
|
|
2,400,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line
of credit with Morgan Stanley at variable interest rate, currently at
2.40%. Secured by marketable securities.
|
|
|
1,957,040
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
notes payable to Ilya Mandel & Michael Edelson, payable in quarterly
installments of $341,875, plus interest at the floating rate per annum
(3.3% at September 30, 2009) due February 6, 2011.
|
|
|
2,012,515
|
|
|
|
—
|
|
|
|
—
|
|
Total
notes payable
|
|
|
13,631,777
|
|
|
|
4,344,946
|
|
|
|
4,036,458
|
|
Less
current maturities
|
|
|
6,231,204
|
|
|
|
1,125,608
|
|
|
|
928,444
|
|
Total
long-term portion
|
|
$
|
7,400,573
|
|
|
$
|
3,219,338
|
|
|
$
|
3,108,014
|
|
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009 and 2008
and
December 31, 2008
Note
9 – NOTES PAYABLE - Continued
Maturities
of notes payables are as follows:
For
the Period Ended September 30,
|
|
|
2010
|
|
$
|
6,231,204
|
|
2011
|
|
|
1,151,682
|
|
2012
|
|
|
506,667
|
|
2013
|
|
|
506,667
|
|
2014
|
|
|
5,235,557
|
|
Total
|
|
$
|
13,631,777
|
|
Note
10 – PROVISION FOR INCOME TAXES
The
provision for income taxes consists of the following:
|
|
|
|
|
For
the
|
|
|
|
For
the Nine Months Ended
|
|
|
Year
Ended
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,293,323
|
|
|
$
|
1,267,998
|
|
|
$
|
1,005,159
|
|
State
and local
|
|
|
494,875
|
|
|
|
235,855
|
|
|
|
184,016
|
|
Total
current
|
|
|
2,788,198
|
|
|
|
1,503,853
|
|
|
|
1,189,175
|
|
Deferred
|
|
|
236,063
|
|
|
|
( 125,221
|
)
|
|
|
( 509,386
|
)
|
Provision
for income taxes
|
|
$
|
3,024,261
|
|
|
$
|
1,378,632
|
|
|
$
|
679,789
|
|
A
reconciliation of the provision for income taxes and the income tax computed at
the statutory rate is as follows:
|
|
|
|
|
For
the
|
|
|
|
For
the Nine Months Ended
|
|
|
Year
Ended
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Federal
income tax expense
computed
at the statutory rate
|
|
$
|
2,881,286
|
|
|
$
|
1,463,625
|
|
|
$
|
881,302
|
|
State
and local tax expense, net
|
|
|
406,770
|
|
|
|
206,629
|
|
|
|
124,419
|
|
Permanent
differences
|
|
|
( 263,795
|
)
|
|
|
( 291,622
|
)
|
|
|
( 150,772
|
)
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
( 175,160
|
)
|
Provision
for income taxes
|
|
$
|
3,024,261
|
|
|
$
|
1,378,632
|
|
|
$
|
679,789
|
|
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009 and 2008
and
December 31, 2008
Note
10 – PROVISION FOR INCOME TAXES - Continued
Amounts
for deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Non-current
deferred tax liabilities
arising
from:
Temporary
differences -
|
|
|
|
|
|
|
|
|
|
accumulated
depreciation and amortization
|
|
$
|
(2,010,273
|
)
|
|
$
|
(1,615,421
|
)
|
|
$
|
(1,607,155
|
)
|
Current
deferred tax assets arising from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on marketable securities
|
|
|
59,619
|
|
|
|
716,749
|
|
|
|
351,020
|
|
Impairment
of marketable securities
|
|
|
59,003
|
|
|
|
—
|
|
|
|
396,017
|
|
Inventory
|
|
|
174,013
|
|
|
|
178,271
|
|
|
|
127,177
|
|
Allowance
for doubtful accounts
|
|
|
14,460
|
|
|
|
14,459
|
|
|
|
14,460
|
|
Allowance
for promotions
|
|
|
30,975
|
|
|
|
—
|
|
|
|
30,975
|
|
Total
current deferred tax assets
(liabilities)
|
|
|
338,070
|
|
|
|
909,479
|
|
|
|
919,649
|
|
Net
deferred tax liability
|
|
$
|
(1,672,203
|
)
|
|
$
|
(705,942
|
)
|
|
$
|
(687,506
|
)
|
Note
11 – SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid
for interest and income taxes are as follows:
|
|
|
|
|
For
the
|
|
|
|
For
the Nine Months Ended
|
|
|
Year
Ended
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Interest
|
|
$
|
330,095
|
|
|
$
|
222,166
|
|
|
$
|
307,620
|
|
Income
taxes
|
|
$
|
2,458,149
|
|
|
$
|
937,967
|
|
|
$
|
1,288,428
|
|
Note
12 – STOCK AWARD AND STOCK OPTION PLANS
The
Company has a registration statement filed with the Securities and Exchange
Commission in connection with a Consulting Service Compensation Plan covering up
to 1,200,000 of the Company’s common stock shares. Pursuant to such Plan, the
Company may issue common stock or options to purchase common stock to certain
consultants, service providers, and employees of the Company. The
option price, number of shares, grant date, and vesting terms are determined at
the discretion of the Company’s Board of Directors.
As of
December 31, 2008 and at September 30, 2009 and 2008, there were no stock
options outstanding or exercisable. There were approximately 940,000 shares
available for issuance under the Plan at September 30, 2009.
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009 and 2008
and
December 31, 2008
Note
12 – STOCK AWARD AND STOCK OPTION PLANS - Continued
On June
13, 2008, Lifeway's Board of Directors approved awards of an aggregate amount
of 10,500 shares to be awarded under its Employee and Consulting Services
and Compensation Plan to certain key employees and consultants for services
rendered to the Company. The stock awards were made on June 13,
2008 and have vesting periods of one year. The expense for the awards is
measured as of July 1, 2008 at $11.87 per share for 10,500 shares, or
a total stock award expense of $124,635. This expense will be recognized as the
stock awards vest in 12 equal portions of $10,386, or 875 shares per month
for one year.
On May
18, 2007, Lifeway's Board of Directors approved awards of an aggregate amount of
8,400 shares to be awarded under its Employee and Consulting Services and
Compensation Plan to certain key employees and consultants for services rendered
to the Company. The stock awards were made on June 1, 2007 and have
vesting periods of one year. The expense for the awards is measured as of June
1, 2007 at $9.90 per share for 8,400 shares, or a total stock award expense of
$83,160. This expense will be recognized as the stock awards vest in 12 equal
portions of $6,930, or 700 shares per month for one year.
Note
13 – FAIR VALUE MEASUREMENTS
In
September 2006, the FASB issued SFAS No. 157,
“Fair Value
Measurements.”
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with U.S. GAAP, and expands
disclosures about fair value measurements. The statement clarifies
that the exchange price is the price in an orderly transaction between market
participants to sell an asset or transfer a liability at the measurement
date. The statement emphasizes that fair value is a market-based
measurement and not an entity-specific measurement. The statement
establishes a fair value hierarchy used in fair value measurements and expands
the required disclosures of assets and liabilities measured at fair
value.
Level 1 –
Inputs use quoted prices in active markets for identical assets or liabilities
that the Company has the ability to access.
Level 2 –
Inputs use other inputs that are observable, either directly or
indirectly. These inputs include quoted prices for similar assets and
liabilities in active markets, and other inputs such as interest rates and yield
curves that are observable at commonly quoted intervals.
Level 3 –
Inputs are unobservable inputs, including inputs that are available in
situations where there is little, if any, market activity for the related asset
or liability.
In
instances where inputs used to measure fair value fall into different levels in
the above fair value hierarchy, fair value measurements in their entirety are
categorized based on the lowest level input that is significant to the
valuation. The Company’s assessment of the significance of particular
inputs to these fair measurements requires judgment and considers factors
specific to each asset or liability.
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009 and 2008
and
December 31, 2008
Note
13 – FAIR VALUE MEASUREMENTS - Continued
Disclosures
concerning assets and liabilities measured at fair value are as
follows:
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance
at
September
30,
2009
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities- available - for - sale
|
|
$
|
4,950,457
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
4,950,457
|
|
Note
14 – RECENT ACCOUNTING PRONOUNCEMENTS
In
December 2007, the FASB issued SFAS No. 141(R) “Business
Combinations.” SFAS No. 141(R) states that all business combinations
(whether full, partial or step acquisitions) will result in all assets and
liabilities of an acquired business being recorded at their acquisition date
fair values. Earn-outs and other forms of contingent consideration
and certain acquired contingencies will also be recorded at fair value at the
acquisition date. SFAS No. 141(R) also states acquisition costs will
generally be expensed as incurred; in-process research and development will be
recorded at fair value as an indefinite-lived intangible asset at the
acquisition date; changes in deferred tax asset valuation allowances and income
tax uncertainties after the acquisition date generally will affect income tax
expense; and restructuring costs will be expensed in periods after the
acquisition date. This statement is effective for financial
statements issued for fiscal years beginning after December 15,
2008. The Company will apply the provisions of this standard to any
acquisitions that it completes on or after December 15, 2008.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51.” This
statement amends ARB No. 51 to establish accounting and reporting
standards for the noncontrolling interest (minority interest) in a subsidiary
and for the deconsolidation of a subsidiary. Upon its adoption, noncontrolling
interests will be classified as equity in the consolidated balance
sheets. This statement also provides guidance on a subsidiary
deconsolidation as well as stating that entities need to provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. This statement is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. The adoption of this standard did not have a
material impact on the Company’s financial condition, results of operations or
liquidity.
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009 and 2008
and
December 31, 2008
Note
14 – RECENT ACCOUNTING PRONOUNCEMENTS - Continued
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS No.
161”). This statement requires enhanced disclosures about (a) how and
why an entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows. SFAS No. 161 also requires that objectives for using
derivative instruments be disclosed in terms of underlying risk and accounting
designation and requires cross-referencing within the footnotes. This
statement also suggests disclosing the fair values of derivative instruments and
their gains and losses in a tabular format. This statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The adoption of this standard did
not have a material impact on the Company’s financial condition, results of
operations or liquidity.
On
April 9, 2009, the FASB finalized three FASB Staff Positions (“FSPs”)
regarding the accounting treatment for investments including mortgage-backed
securities. These FSPs changed the method for determining if an
other-than-temporary impairment (“OTTI”) exists and the amount of OTTI to be
recorded through an entity’s income statement. The changes brought about by the
FSPs provide greater clarity and reflect a more accurate representation of the
credit and noncredit components of an OTTI event. The three FSPs are as
follows:
|
●
|
|
FASB
ASC 820-10-65-4, Fair Value Measurements and Disclosures provides
guidelines for making fair value measurements that determine fair value
when the volume and level of activity for assets or liabilities have
significantly decreased and identify transactions that are not
orderly.
|
|
|
|
|
|
●
|
|
FASB
ASC 320-10-65, Investments — Debt and Equity Securities provides
additional guidance designed to create greater clarity and consistency in
accounting for and presenting impairment losses on
securities.
|
|
|
|
|
|
●
|
|
FASB
ASC 825-10-65, Financial Instruments enhances consistency in financial
reporting by increasing the frequency of fair value
disclosures.
|
The
adoption of these did not have a material effect on the Company’s results of
operations or financial position.
In
May 2009, FASB issued FASB ASC 855, Subsequent Events with the objective to
establish general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. FASB ASC 855 sets forth: (i) the period after
the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements; (ii) the circumstances under which
an entity should recognize events or transactions occurring after the balance
sheet date in its financial statements; and (iii) the disclosures that an
entity should make about events or transactions that occurred after the balance
sheet date. FASB ASC 855 is effective for interim and annual financial periods
ending after June 15, 2009. The adoption of FASB ASC 855 on June 30, 2009,
did not have an impact on the Company’s consolidated financial
statements.
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
30, 2009 and 2008
and
December 31, 2008
Note
14 – RECENT ACCOUNTING PRONOUNCEMENTS - Continued
In
June 2009, FASB issued FASB ASC 810, Consolidation. The objective of FASB
ASC 810 is to improve financial reporting by enterprises involved with variable
interest entities and to provide more relevant and reliable information to users
of financial statements. FASB ASC 810 shall be effective as of the beginning of
each reporting entity’s first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. Earlier
application is prohibited. The Company is currently evaluating the impact of the
adoption of this standard, but does not expect it have a material effect on the
Company’s financial position or results of operation.
In
June 2009, the Financial Accounting Standards Board (FASB) issued SFAS No.
168, “The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles.” SFAS No. 168 approved the FASB Accounting
Standards Codification (the Codification) as the single source of authoritative
nongovernmental GAAP. All existing accounting standard documents, such as FASB,
American Institute of Certified Public Accountants, Emerging Issues Task Force
and other related literature, excluding guidance from the Securities and
Exchange Commission, have been superseded by the Codification. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification has become nonauthoritative. The Codification is effective for
interim or annual periods ending after September 15, 2009. There have been
no changes to the content of our financial statements or disclosures as a result
of implementing the Codification during the quarter ended September 30, 2009.
However, as a result of implementation of the Codification, previous references
to new accounting standards and literature are no longer applicable. All
future references to authoritative accounting literature in our consolidated
financial statements will be referenced in accordance with the
Codification.
Note
15 – SUBSEQUENT EVENTS
Comparison
of Quarter Ended September 30, 2009 to Quarter Ended September 30,
2008
The
following analysis should be read in conjunction with the unaudited financial
statements of the Company and related notes included elsewhere in this quarterly
report and the audited financial statements and Management’s Discussion and
Analysis contained in our Form 10-K, for the fiscal year ended December 31,
2008, and in the Management’s Discussion and Analysis contained in our Form
10-Q, for the fiscal quarters ended March 31, 2009 and June 30,
2009.
Results
of Operations
Total
consolidated group sales increased by $4,193,594, (approximately 37%) to
$15,433,876 during the three-month period ended September 30, 2009 from
$11,240,282 during the same three-month period in 2008. This increase is
primarily attributable to increased sales and awareness of Lifeway’s flagship
line, Kefir, as well as ProBugs
®
Organic Kefir for
kids. Additionally, Lifeway recorded revenues from its February 6,
2009 acquisition of Fresh Made Dairy. Included in the total group
sales was approximately $2,190,000 of revenue related to this acquisition and
recorded during the third quarter of 2009.
Cost of
goods sold as a percentage of sales, excluding depreciation was approximately
58% during the third quarter 2009, compared to about 67% during the same period
in 2008. The decrease was primarily attributable to the decreased cost of
conventional milk, our largest raw material, and the cost of transportation and
other petroleum based production supplies.
The cost
of conventional milk was approximately 30% less during the 3
rd
quarter
2009, when compared to the same period in 2008.
Gross
profit increased approximately 77% during the third quarter of 2009, when
compared with the same period in 2008.
Operating
expenses as a percentage of sales were approximately 20% during the third
quarter 2009, compared to about 18% during the same period in
2008. This increase is primarily attributable to a 111%
increase in amortization expense, a non cash expense, related to the February 6,
2009 acquisition of Fresh Made Dairy.
Total
operating income increased by $1,772,193, (approximately 121%) to
$3,239,432
during
the third quarter 2009, from $1,467,239 during the same period in
2008.
Interest
expense during the third quarter 2009 was $99,864 compared with interest expense
of $71,928 during the same period a year ago. This higher interest
expense is primarily attributable to the issuance of the note payable related to
the February 6, 2009 Fresh Made Dairy acquisition. Notes payable are
discussed in Note 9 of the Notes to Consolidated Financial
Statements.
Total
income before taxes increased by $1,884,819 (approximately 168%) to
$3,007,652
during
the third quarter 2009, from $1,122,833 during the same period in
2008.
Provision
for income taxes was $1,636,911, or a 54% tax rate, for the third quarter ended
September 30, 2009, compared with a provision for income taxes of $267,917, or a
24% tax rate, for the same period in 2008. This increase was due to
an under estimate of income tax liability in the third quarter 2008, which
resulted in an increased adjustment to the provision for income taxes during the
third quarter 2009.
Total net
income was $1,370,741
or $.08 per share for
the third quarter ended September 30, 2009, compared with $854,916
or $.05 per share in the
same period in 2008. This represents a 60% increase in net income
from the third quarter 2009 when compared to the same period in
2008.
Comparison of Nine-Month
Period Ended September 30, 2009 to Nine-Month Period Ended September 30,
2008
Results
of Operations
Sales
increased by $9,763,471, (approximately 29%) to $43,649,383 during the
nine-month period ended September 30, 2009 from $33,885,912 during the same
nine-month period in 2008. This increase is primarily attributable to increased
sales and awareness of Lifeway’s flagship line, Kefir, as well as Lifeway’s kids
Kefir drink, ProBugs®. Additionally, Lifeway recorded revenues from
its February 6, 2009 acquisition of Fresh Made Dairy. Included in the
total group sales was approximately $5,733,600 of revenue related to this
acquisition and recorded during the nine-month period ended September 30,
2009.
Cost of
goods sold as a percentage of sales, excluding depreciation expense, was
approximately 57% during the nine-month period ended September 30, 2009,
compared to about 66% during the same period in 2008. The decrease
was primarily attributable to the decreased cost of conventional milk, our
largest raw material, and the cost of transportation and other petroleum based
production supplies.
Operating
expenses as a percentage of sales for Lifeway Foods were approximately 20%
during the nine-month period ended September 30, 2009, compared to about 19%
during the same period in 2008. This increase is primarily
attributable to the increase in professional fees related to the February 6,
2009 acquisition of Fresh Made Dairy and a 112% increased amortization expense,
a non cash expense, also related to the Fresh Made Dairy acquisition.
Professional
fees related to the acquisition were approximately $260,000.
Many
of the acquisition related professional fees are non recurring
expenses.
Total
operating income increased by $4,557,531, (approximately 104%) to
$8,937,589
during
the nine-month period ending September 30, 2009, from $4,380,058 during the same
period in 2008.
Total
other expenses during the nine-month period ending September 30, 2009 were
$463,219, compared with total other expenses of $346,186 during the same period
in 2008. This increase is primarily attributable to a higher interest
expense related to the February 6, 2009 Fresh Made Dairy
acquisition. Interest expenses during the nine-month period ending
September 30, 2009 were $364,337, which includes approximately a $55,000 pre
-payment penalty on one of Lifeway’s real estate mortgages related to the
financing of the acquisition. This pre-payment expense is a non
recurring expense.
Total
income before taxes increased by $4,440,498, (approximately 110%) to
$8,474,370
during
the nine-month period ended September 30, 2009, from $4,033,872 during the same
period in 2008.
Provision
for income taxes was $3,024,261, or a 36% tax rate, for the nine-month period
ended September 30, 2009, compared with a provision for income taxes of
$1,378,632, or a 34% tax rate, for the same period in 2008.
Total net
income was $5,450,109, or $.32 per share for the nine-month period ended
September 30, 2009, compared with $2,655,240, or $.16 per share in the same
period in 2008. This represents a 105% increase in net income from
the nine-month period ended September 30, 2009 when compared to the same period
in 2008.
Sources
and Uses of Cash
Net cash
provided by operating activities was $5,504,144
during the nine-months
ended September 30, 2009, which is an increase of $1,872,155 when compared to
the same period in 2008. This increase is primarily attributable to
the increase in net income of $2,794,869.
Net cash used in investing activities was $3,720,562 during the
nine-months ended September 30, 2009, which is an increase of $2,051,518 when
compared to the same period in 2008. This increase is primarily due
to the Company’s acquisition of Fresh Made Dairy, net of cash
acquired. The Company purchased $1,020,776 worth of property, plant
and equipment during the first nine-months of 2009 when compared to the purchase
of $1,892,472 worth of property, plant in equipment during the same period in
2008. This represents a decrease of $871,696 in the purchase of
equipment during the nine-months ended September 30, 2009, when compared to the
same period in 2008. The Company also repaid certain of its short
term liabilities in the form of a margin loan in the amount of $407,479 during
its second quarter of 2009.
Lifeway
had a net increase in cash and cash equivalents of $527,139
during the nine-months
ended September 30, 2009, compared to a net decrease in cash and cash
equivalents of $65,019
during the same period
in 2008.
Assets
and Liabilities
Total
assets
were
$50,515,216
during
the nine-months ended September 30, 2009, which is an increase of $14,067,206
when compared to the same period in 2008. This is primarily due the
Company’s acquisition of Fresh Made Dairy, which increased intangible assets by
$10,151,285 as of September 30, 2009 when compared to September 30,
2008. Additionally, the value of the Company’s property, plant and
equipment was
$13,812,039
as of September 30,
2009, which is an increase of $2,822,539 from September 30, 2008.
Total
current liabilities
were $9,095,186
during the nine-months
ended September 30, 2009, which is an increase of $4,338,387 when compared to
the same period in 2008. This is primarily due the Company’s
acquisition of Fresh Made, which increased current maturities of notes payable
by $5,105,596 as of September 30, 2009 when compared to September 30,
2008.
Significant
portions of our assets are held in marketable securities. The majority of our
marketable securities are classified as available-for-sale on our balance sheet,
while the mortgage-backed securities are classified as trading. All
of these securities are stated thereon at market value as of the end of the
applicable period. Gains and losses on the portfolio are determined by the
specific identification method.
We
anticipate being able to fund the Company’s foreseeable liquidity requirements
internally. We continue to explore potential acquisition opportunities in our
industry in order to boost sales while leveraging our distribution system to
consolidate and lower costs.
Other
Developments
On May
28, 2009, Lifeway's Board of Directors approved awards of an aggregate amount of
18,000 shares to be awarded under its Employee and Consulting Services and
Compensation Plan to certain key employees and consultants for services rendered
to the Company. The stock awards were made on May 28, 2009 and have
vesting periods of one year. The expense for the awards is measured as of July
14, 2009 at $14.69 per share for 18,000 shares, or a total stock award expense
of $264,420. This expense will be recognized as the stock awards vest in 12
equal portions of $22,035, or 1500 shares per month for one year.