Notes to Consolidated Financial Statements
June 30, 2017 and December 31, 2016
(Unaudited)
(In thousands, except per share data)
Note 1 – Basis of Presentation
Basis of presentation
The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”)
for interim financial information, and do not include all of the information and disclosures required for complete, audited financial
statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary
for a fair presentation, have been included. For further information, refer to the consolidated financial statements and disclosures
included in Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2016. Certain amounts in prior-year
financial statements were reclassified to conform to the current-year presentation. The results for the period are not necessarily
indicative of the results to be expected for other interim periods or the full year.
Principles of consolidation
Our consolidated financial statements include
the accounts of Lifeway Foods, Inc. and all its wholly owned subsidiaries (collectively “Lifeway” or the “Company”).
All significant intercompany accounts and transactions have been eliminated.
Note 2 – Significant Accounting Policies
Use of estimates
The preparation of consolidated financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates
made in preparing the consolidated financial statements include the reserve for promotional allowances, the valuation of goodwill
and intangible assets, stock-based and incentive compensation, and deferred income taxes.
Revenue Recognition
The Company records sales when 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 costs are included in cost of sales.
The Company routinely offers sales allowances
and discounts to our customers and consumers. These programs include rebates, in-store display and demo allowances, allowances
for non-salable product, coupons and other trade promotional activities. These allowances are considered reductions in the price
of our products and thus are recorded as reductions to gross sales. Some of these incentives are recorded by estimating incentive
costs based on our historical experience and expected levels of performance of the trade promotion. We maintain a reserve for the
estimated allowances incurred but unpaid. Differences between estimated and actual allowances are normally insignificant and are
recognized in income in the period such differences are determined. Product returns have historically not been material.
Bulk cream is a by-product of the Company’s
fluid milk manufacturing process. The Company does not use its by-product bulk cream in any of its end products, but rather disposes
of it through sales to other companies. Bulk cream by-product sales are included in net sales.
Advertising and promotional costs
The Company expenses advertising costs as
incurred. For the six months ended June 30, 2017 and 2016 total advertising expenses were $2,811 and $2,753 respectively. For
the three months ended June 30, 2017 and 2016 total advertising expenses were $1,043 and $1,811 respectively.
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards
Board ("FASB") issued ASU No. 2016-09, Compensation-Stock Compensation – Improvements to Employee Share-Based Payment
Accounting. The new guidance simplifies several aspects of the accounting for employee share-based payment transactions, including
the accounting for income taxes, forfeitures, statutory tax withholding requirements, classification of awards as either equity
or liabilities, and classification in the statement of cash flows. Under this ASU, excess tax benefits and deficiencies are no
longer recognized as additional paid-in capital in the consolidated balance sheets. This guidance was effective on January 1, 2017.
The adoption of this amendment had no impact on the consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes – Balance Sheet Classification of Deferred Taxes. This new guidance simplifies the presentation of deferred
income taxes and requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified
as noncurrent on the balance sheet. Previous guidance required deferred tax assets and liabilities to be separated into current
and noncurrent amounts on the balance sheet. This guidance was effective on January 1, 2017. The Company elected to adopt this
guidance as of the first fiscal quarter in 2017 and has applied the update on a retrospective basis. The Company changed its accounting
principle to reduce the cost and complexity inherent in recording deferred taxes as current and noncurrent on the consolidated
balance sheets. As a result, the Company has reclassified $662 of current deferred tax asset to noncurrent deferred tax liability
in the consolidated balance sheet as of December 31, 2016.
In July 2015, the FASB issued ASU 2015-11,
Inventory – Simplifying the Measurement of Inventory. The core principal of the guidance is that an entity should measure
inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course
of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance was effective on January
1, 2017. The adoption of this amendment had no impact on the consolidated financial statements.
Recently Issued Accounting Pronouncements
In May 2017, the FASB issued ASU No. 2017-09,
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. The new guidance provides clarity and reduces
both diversity in practice and cost of complexity when accounting for a change to the terms of or conditions of a share-based payment
award. The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award
require an entity to apply modification accounting in Topic 718. The new guidance will be effective for fiscal years beginning
on or after December 15, 2017 and interim periods within those years. Early adoption of the guidance is permitted. The adoption
of this amendment is not expected to have a material impact on the consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. The new guidance simplifies the subsequent measurement
of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual
or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has
the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
The new guidance will be effective for annual periods or any interim goodwill impairment tests in fiscal years beginning after
December 15, 2019. The amendment should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017. The adoption of this amendment is not expected to have a material
impact on the consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to address the
diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows,
such as debt prepayment or debt extinguishment costs, contingent consideration payments made after an acquisition, proceeds from
the settlement of insurance claims, and other topics. The new guidance will be effective for fiscal years beginning on or after
December 15, 2017 and interim periods within those years. Early adoption of the guidance is permitted. Management is currently
evaluating the impact that the new guidance will have on the consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases. The guidance requires lessees to recognize lease assets and lease liabilities in the balance sheet and disclose key information
about leasing arrangements, such as information about variable lease payments and options to renew and terminate leases. The amended
guidance will require both operating and finance leases to be recognized in the balance sheet. A lessee should recognize in the
statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing
its right to use the underlying asset for the lease term. The new guidance is effective for financial statements issued for fiscal
years beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. The amendments in
this ASU should be adopted using a modified retrospective transition approach, which requires application of the new guidance at
the beginning of the earliest comparative period presented in the year of adoption. We do not intend to early adopt the standard.
Management is currently evaluating the impact that the new guidance will have on the consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance modifies how entities measure equity
investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will have to measure
equity investments that do not result in consolidation and are not accounted under the equity method at fair value and recognize
any changes in fair value in net income unless certain conditions exist. The new guidance will be effective for fiscal years beginning
on or after December 15, 2017 and interim periods within those years. Early adoption of the guidance is not permitted. The adoption
of this amendment is not expected to have an impact on the consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which supersedes the revenue recognition requirements
in Topic 605, Revenue Recognition, including most industry-specific requirements. ASU 2014-09 establishes a five-step revenue recognition
process in which an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects
the consideration to which the company expects to be entitled in exchange for those goods or services. The standard allows for
either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified
retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements.
ASU 2014-09 also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows
from contracts with customers. On August 12, 2015, the FASB approved a one year delay of the effective date to reporting periods
beginning after December 15, 2017, while permitting companies to voluntarily adopt the new standard as of the original effective
date. In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts
with Customers, which clarifies narrow aspects of ASC 606 or corrects unintended application of the guidance. The effective date
and transition requirements for ASU 2016-20 are the same as the effective date and transition requirements for ASU 2014-09. Under
the delayed effective date, the Company is required to adopt the new standard not later than January 1, 2018.
Management is currently evaluating the impact
the adoption of this amendment will have on the Company's consolidated financial position, results of operations or cash flows
and the method of retrospective application, either full or modified. Our completed evaluation will include the impact of the new
standard on certain common practices currently employed by us, such as rebates, in-store display and demo allowances, allowances
for non-saleable product, and coupons. We currently expect to utilize the modified retrospective transition method and to adopt
the ASU on January 1, 2018. Based on our findings to date, we do not expect the standard to have a material impact on our results
of operations or financial position; however, our assessment is not yet complete. During 2017, we plan to finalize our review and
method of adoption.
Note 3 – Inventories, net
Inventories consisted of the following:
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Ingredients
|
|
$
|
1,992
|
|
|
$
|
2,256
|
|
Packaging
|
|
|
2,731
|
|
|
|
2,770
|
|
Finished goods
|
|
|
3,374
|
|
|
|
3,016
|
|
Total inventories
|
|
$
|
8,097
|
|
|
$
|
8,042
|
|
Note 4 – Property, Plant and Equipment, net
Property, plant and equipment consisted of the following:
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Land
|
|
$
|
1,747
|
|
|
$
|
1,747
|
|
Buildings and improvements
|
|
|
16,533
|
|
|
|
16,428
|
|
Machinery and equipment
|
|
|
25,465
|
|
|
|
23,122
|
|
Vehicles
|
|
|
934
|
|
|
|
848
|
|
Office equipment
|
|
|
728
|
|
|
|
709
|
|
Construction in process
|
|
|
1,653
|
|
|
|
1,873
|
|
|
|
|
47,060
|
|
|
|
44,727
|
|
Less accumulated depreciation
|
|
|
(24,050
|
)
|
|
|
(22,895
|
)
|
Total property, plant and equipment, net
|
|
$
|
23,010
|
|
|
$
|
21,832
|
|
Note 5 – Intangible Assets
Goodwill & indefinite-lived intangible assets consisted of the
following:
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Goodwill
|
|
$
|
10,368
|
|
|
$
|
10,368
|
|
Brand names
|
|
|
3,700
|
|
|
|
3,700
|
|
Goodwill and indefinite-lived intangible assets
|
|
$
|
14,068
|
|
|
$
|
14,068
|
|
Other intangible assets, net consisted of the following:
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Recipes
|
|
$
|
44
|
|
|
$
|
44
|
|
Customer lists and other customer related intangibles
|
|
|
4,529
|
|
|
|
4,529
|
|
Customer relationship
|
|
|
985
|
|
|
|
985
|
|
Trade names
|
|
|
2,248
|
|
|
|
2,248
|
|
Formula
|
|
|
438
|
|
|
|
438
|
|
|
|
|
8,244
|
|
|
|
8,244
|
|
Accumulated amortization
|
|
|
(6,933
|
)
|
|
|
(6,597
|
)
|
Other intangible assets, net
|
|
$
|
1,311
|
|
|
$
|
1,647
|
|
Note 6 – Accrued Expenses
Accrued expenses consisted of the following:
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Payroll and incentive compensation
|
|
$
|
3,207
|
|
|
$
|
1,560
|
|
Real estate taxes
|
|
|
331
|
|
|
|
394
|
|
Other
|
|
|
275
|
|
|
|
215
|
|
|
|
$
|
3,813
|
|
|
$
|
2,169
|
|
Note 7 – Notes Payable
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Variable rate term loan due May 31, 2018. Principal and interest (3.54% at June 30, 2017) payable monthly with a balloon payment due at maturity.
|
|
$
|
3,085
|
|
|
$
|
3,339
|
|
|
|
|
|
|
|
|
|
|
Variable rate term loan due May 31, 2019. Principal and interest (3.55% at June 30, 2017) payable monthly with a balloon payment due at maturity.
|
|
|
3,614
|
|
|
|
3,780
|
|
Total notes payable
|
|
|
6,699
|
|
|
|
7,119
|
|
Less current portion
|
|
|
(3,419
|
)
|
|
|
(840
|
)
|
Total long-term portion
|
|
$
|
3,280
|
|
|
$
|
6,279
|
|
The variable rate term loans are subject to
interest at the prime rate or at the LIBOR rate plus 2.5% and are collateralized by substantially all of the assets of the Company.
In addition, under the terms of the related agreements, the Company is subject to minimum fixed charged ratio and tangible net
worth thresholds, which among other things may limit the Company's ability to pay dividends or repurchase shares of its common
stock. Further, under the agreements the Company is required to deliver its annual and quarterly financial statements and related
SEC filings within specified timeframes. The Company was in compliance with these financial covenants at June 30, 2017.
In addition, the Company has a $5 million revolving
credit facility. Borrowings under the facility are subject to interest at the prime rate or LIBOR plus 2.5%. As of June 30, 2017
there were no borrowings under the facility. The facility expires in July 2018.
Note 8 – Commitments and contingencies
Lease obligations
The Company leases three retail stores for
its Lifeway Kefir Shop subsidiary, certain machinery and equipment, and office space under operating leases. Total lease expense
was $322 and $160 for the six months ended June 30, 2017 and 2016, respectively. Total lease expense was $165 and $70 for the three
months ended June 30, 2017 and 2016, respectively.
Litigation
The Company 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 the Company’s business activities.
The Company records accruals for outstanding
legal matters when it believes it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated.
The Company evaluates, on a periodic basis, developments in legal matters that could affect the amount of any accrual and developments
that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable,
the Company does not establish an accrued liability. Currently, none of the Company’s accruals for outstanding legal matters
are material individually or in the aggregate to the Company’s 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 the Company ultimately is required to make payments in connection with an adverse
outcome, it is possible that it could have a material adverse effect on the Company’s business, financial condition, results
of operations or cash flows.
The Company’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, the Company cannot predict with any
reasonable certainty the timing or outcome of such contingencies, and the Company is unable to estimate a possible loss or range
of loss.
In a letter dated May 19, 2016, the Company
received a request to voluntarily produce documents in connection with a confidential, informal inquiry by the Division of Enforcement
of the SEC concerning the Company’s internal controls, disclosure controls procedures, and internal control over financial
reporting for fiscal years 2013 through the date of the letter. The SEC has informed the Company that the inquiry should not be
construed as an indication that any violation of any federal securities law has occurred or as a reflection upon the merits of
any person, company, or securities involved. Since receiving the letter, the Company has been cooperating with the SEC and will
continue to do so.
Note 9 – Income taxes
For each interim period, the Company estimates
the effective tax rate (“ETR”) expected to be applicable for the full year and applies that rate to income before
provision for income taxes for the period. Additionally, the Company records discrete income tax items such as enacted tax rate
changes and completed tax audits in the period in which they occur.
The effective tax rate for the three months
ended June 30, 2017 was 43.6% compared to 27.2% for the three months ended June 30, 2016. The effective tax rate for the six months
ended June 30, 2017 was 43.1% compared to 31.3% for the six months ended June 30, 2016.
Note 10 – Fair Value Measurements
The Company’s financial assets and liabilities
include cash and cash equivalents, accounts receivable, accounts payable and notes payable, and are reported at carrying value
which approximates fair value.
Note 11 – Stock-based and Other Compensation
Stock Options
In December 2015, Lifeway shareholders 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. At June 30, 2017, 3.448 million shares remain available under the Omnibus Incentive Plan. The Company has not established
a pace for the frequency of awards under the Omnibus Incentive Plan, and 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.
The following table summarizes stock option activity during the
six months ended June 30, 2017:
|
|
Options
|
|
|
Weighted
average
exercise price
|
|
|
Weighted
average
remaining contractual life
|
|
|
Aggregate
intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
45
|
|
|
$
|
10.45
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
45
|
|
|
$
|
10.45
|
|
|
|
8.70
|
|
|
$
|
(51)
|
|
Exercisable at June 30, 2017
|
|
|
21
|
|
|
$
|
10.75
|
|
|
|
8.60
|
|
|
$
|
(30)
|
|
For the six months ended June 30, 2017 and
2016 total pre-tax stock-based compensation expense recognized in the consolidated statements of income and comprehensive income
was $29 and $42, respectively. For the six months ended June 30, 2017 and 2016 tax-related benefits of $11 and $16 were also recognized.
For the three months ended June 30, 2017 and 2016 total pre-tax stock-based compensation expense recognized in the consolidated
statements of income and comprehensive income was $14 and $21, respectively. For the three months ended June 30, 2017 and 2016
tax-related benefits of $5 and $8 were also recognized. As of June 30, 2017, the total remaining unearned compensation related
to non-vested stock options was $32, which is expected to be amortized over the weighted-average remaining service period of 1.27
years.
We measure the fair value of stock options
using the Black-Scholes option pricing model. The expected term of options granted was based on the weighted average time of vesting
and the end of the contractual term. We utilized this simplified method as we do not have sufficient historical exercise data to
provide a reasonable basis upon which to estimate the expected term.
Restricted Stock Units
Pursuant to the 2015 Omnibus Incentive Plan,
Lifeway granted 2 Restricted Stock Units (“RSUs”) to certain key employees in December 2016. An RSU represents the
right to receive one share of common stock in the future. RSUs have no exercise price.
The following table summarizes RSU activity during the six months
ended June 30, 2017:
|
|
RSU’s
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
2
|
|
Granted
|
|
|
–
|
|
Shares issued upon vesting
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
Outstanding at June 30, 2017
|
|
|
2
|
|
Weighted average grant date fair value per share
|
|
$
|
10.54
|
|
We expense RSU’s over the service period.
For the six months ended June 30, 2017 and 2016 total pre-tax stock-based compensation expense recognized in the consolidated statements
of income and comprehensive income was $9 and $0, respectively. For the six months ended June 30, 2017 and 2016 tax-related benefits
of $4 and $0 were also recognized. For the three months ended June 30, 2017 and 2016 total pre-tax stock-based compensation expense
recognized in the consolidated statements of income and comprehensive income was $4 and $0, respectively. For the three months
ended June 30, 2017 and 2016 tax-related benefits of $2 and $0 were also recognized. As of June 30, 2017, the total remaining unearned
compensation related to non-vested RSU’s was $11, which is expected to be amortized over the weighted-average remaining service
period of 0.96 years.
Incentive Compensation
In March 2016 Lifeway established an incentive-based
compensation program (the “2016 Plan”) for certain senior executives and key employees (the “participants”).
The incentive compensation was based on the achievement of certain sales and EBITDA performance levels versus respective targets
in 2016. Under the 2016 Plan, the senior executives had the opportunity to earn cash and equity-based incentive compensation in
amounts ranging from $0 to $4,000 for fiscal 2016 depending on the performance levels compared to the respective targets. For
the six months and three months ended June 30, 2016, bonuses of $1,040 and $640 were expensed under the 2016 Plan, respectively.
In January 2017, Lifeway established an incentive-based
compensation program (the “2017 Plan”) for certain senior executives and key employees (the “participants”).
The number of participants under the 2017 Plan was expanded from the 2016 Plan. Under the 2017 Plan, incentive compensation is
based on (a) the achievement of certain sales and EBITDA performance levels versus respective targets in 2017, and (b) for certain
senior executives, the achievement of individual performance objectives. Under the 2017 Plan, collectively the participants may
earn cash and equity based incentive compensation in amounts ranging from $0 to $11,025 depending on the Company’s performance
levels compared to the respective targets and the senior executive’s performance compared to their individual objectives.
The equity portion of the incentive compensation is payable in restricted stock that vests one-third in each of the three years
from the 2017 grant dates. For the six months ended June 30, 2017, $1,985 was accrued under the 2017 Plan, of which $1,248 was
recorded as cash bonus expense and $737 was recorded as stock-based compensation expense in the consolidated statements of income
and comprehensive income. For the three months ended June 30, 2017, $1,167 was accrued under the 2017 Plan, of which $859 was recorded
as cash bonus expense and $308 was recorded as stock-based compensation expense in the consolidated statements of income and comprehensive
income.
Retirement Benefits
The Company has a defined contribution plan
which is available to substantially all full-time employees. Under the terms of the plan the Company matches employee contributions
under a prescribed formula. For the six months ended June 30, 2017 and 2016 total contribution expense recognized in the consolidated
statements of income and comprehensive income was $237 and $173, respectively. For the three months ended June 30, 2017 and 2016
total contribution expense recognized in the consolidated statements of income and comprehensive income was $134 and $91, respectively.
Note 12 – Segments, Products and Customers
The Company manufactures probiotic, cultured,
functional dairy health food products. The Company's primary product is kefir, a dairy beverage similar to but distinct from yogurt,
in several flavors and in several package configurations. In addition to the drinkable products, Lifeway manufactures "Lifeway
Farmer Cheese," a line of various farmer cheeses.
The Company has determined that it has one
reportable segment based on how the Company's 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 the consolidated
revenues of the Company relate to the sale of fermented dairy products which are produced using the same processes and materials
and are sold to consumers through a network of distributors and retailers in the United States.
Net sales of products by category were as follows:
|
|
Six months ended
June 30,
|
|
|
Three months ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Drinkable Kefir (a)
|
|
$
|
55,248
|
|
|
$
|
54,602
|
|
|
$
|
27,488
|
|
|
$
|
26,535
|
|
Lifeway cheese products
|
|
|
5,189
|
|
|
|
5,099
|
|
|
|
2,591
|
|
|
|
2,462
|
|
Pro Bugs Kefir products
|
|
|
2,767
|
|
|
|
3,357
|
|
|
|
1,315
|
|
|
|
1,716
|
|
Frozen Kefir
|
|
|
646
|
|
|
|
643
|
|
|
|
339
|
|
|
|
418
|
|
Net Sales
|
|
$
|
63,850
|
|
|
$
|
63,701
|
|
|
$
|
31,733
|
|
|
$
|
31,131
|
|
(a)
|
Excludes ProBugs Kefir products, and includes cream, cupped Kefir and cupped cheese products, supplements and other.
|
Significant Customers
–
Sales are predominately to companies in the retail food industry, located within the United States. Two major customers accounted
for approximately 23% of net sales for the six months ended June 30, 2017 and 2016, and 22% and 23% of net sales for the three
months ended June 30, 2017 and 2016, respectively.
Note 13 – Related party transactions
The Company obtains consulting services from
the Chairperson of its board of directors. Fees earned by the Chairperson are included in general and administrative expenses in
the accompanying consolidated statements of income and comprehensive income and were $500 and $539 during the six months ended
June 30, 2017 and 2016, respectively, and $250 and $213 during the three months ended June 30, 2017 and 2016, respectively.
The Company is also a party to a royalty agreement
with the Chairperson of its board of directors under which the Company pays the Chairperson a royalty based on the sale of certain
Lifeway product, not to exceed $50 in any fiscal month. Royalties earned by the Chairperson are included in selling expenses in
the accompanying consolidated statements of income and comprehensive income and were $300 during the six months ended June 30,
2017 and 2016, and $150 during the three months ended June 30, 2017 and 2016.
Note 14 – Subsequent Event
On August 2, 2017, the Company completed a
tender offer to purchase for cash 86 shares of its common stock at a purchase price of $9.50 per share, for a total cost of approximately
$900, which includes $86 of costs directly attributable to the tender offer. These shares represented approximately 0.5% of the
Company’s total outstanding common stock as of July 26, 2017. The share purchases and related costs were funded through the
Company’s cash and cash equivalents on hand.