Notes to Consolidated Financial Statements
March 31, 2018 and December 31, 2017
(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 our Annual Report on Form 10-K as of and for the year ended December 31, 2017. 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
We sell food and beverage products across
select product categories to customers predominantly within the United States (see Note 11, Segments, Products and Customers).
We also sell bulk cream, a byproduct of our fluid milk manufacturing process. We recognize revenue when control over the products
transfers to our customers, which generally occurs upon delivery or shipment of the products. 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.
Revenues are recorded net of discounts
and allowances to our customers and consumers. Known or expected pricing or revenue adjustments, such as trade discounts, allowances
for non-saleable products, and coupon redemption, are estimated at the time of sale. We base these estimates of expected amounts
principally on historical utilization and redemption rates. Estimates that affect revenue, such as trade incentives and coupon
redemptions, are monitored and adjusted each period until the incentives realized or the coupons expire.
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.
Advertising and promotional costs
Lifeway expenses advertising costs as incurred.
For the three months ended March 31, 2018 and 2017 total advertising expenses were $1,389 and $1,768 respectively.
Recently Adopted Accounting Pronouncements
In May 2017, the Financial Accounting Standards
Board ("FASB”) issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.
The new guidance provides clarity and reduces both diversity in practice and cost of complexity when accounting for a change to
the terms of or conditions of a share-based payment award. The amendments in this update provide guidance about which changes to
the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This guidance
was effective January 1, 2018. The adoption of this amendment had no impact on the consolidated financial statements.
In August 2016, the FASB issued ASU No.
2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to address
the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash
flows, such as debt prepayment or debt extinguishment costs, contingent consideration payments made after an acquisition, proceeds
from the settlement of insurance claims, and other topics. This guidance was effective January 1, 2018. The adoption of this amendment
had no impact on the consolidated financial statements.
In January 2016, the FASB issued ASU No.
2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance modifies how entities measure
equity investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will have to
measure equity investments that do not result in consolidation and are not accounted under the equity method at fair value and
recognize any changes in fair value in net income unless certain conditions exist. This guidance was effective January 1, 2018.
The adoption of this amendment had no impact on the consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements
in Topic 605, Revenue Recognition, including most industry-specific requirements. ASU 2014-09 establishes a five-step revenue recognition
process in which an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects
the consideration to which an entity expects to be entitled in exchange for those goods or services. The standard allows for either
“full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified
retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements.
ASU 2014-09 also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows
from contracts with customers. On August 12, 2015 the FASB approved a one year delay of the effective date to reporting periods
beginning after December 15, 2017, while permitting companies to voluntarily adopt the new standard as of the original effective
date. In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts
with Customers, which clarifies narrow aspects of ASC 606 or corrects unintended application of the guidance. The effective date
and transition requirements for ASU 2016-20 are the same as the effective date and transition requirements for ASU 2014-09. Under
the delayed effective date, this guidance was effective January 1, 2018. We adopted the new standard on January 1, 2018 on a modified
retrospective basis. The adoption of this amendment had no impact on the consolidated financial statements. Refer to the Revenue
Recognition section above and Note 11, Segment, Products, and Customers for additional information.
Recently Issued Accounting Pronouncements
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 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.
Note 3 – Inventories, net
Inventories consisted of the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Ingredients
|
|
$
|
1,604
|
|
|
$
|
1,717
|
|
Packaging
|
|
|
2,351
|
|
|
|
2,453
|
|
Finished goods
|
|
|
3,560
|
|
|
|
3,527
|
|
Total inventories
|
|
$
|
7,515
|
|
|
$
|
7,697
|
|
Note 4 – Property, Plant and Equipment, net
Property, plant and equipment consisted of the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Land
|
|
$
|
1,747
|
|
|
$
|
1,747
|
|
Buildings and improvements
|
|
|
17,323
|
|
|
|
17,260
|
|
Machinery and equipment
|
|
|
28,158
|
|
|
|
27,539
|
|
Vehicles
|
|
|
901
|
|
|
|
901
|
|
Office equipment
|
|
|
734
|
|
|
|
734
|
|
Construction in process
|
|
|
1,768
|
|
|
|
1,683
|
|
|
|
|
50,631
|
|
|
|
49,864
|
|
Less accumulated depreciation
|
|
|
(25,804
|
)
|
|
|
(25,219
|
)
|
Total property, plant and equipment, net
|
|
$
|
24,827
|
|
|
$
|
24,645
|
|
Note 5 – Intangible Assets
Goodwill & indefinite-lived intangible assets consisted
of the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
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:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
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
|
|
|
(7,432
|
)
|
|
|
(7,269
|
)
|
Other intangible assets, net
|
|
$
|
812
|
|
|
$
|
975
|
|
Note 6 – Accrued Expenses
Accrued expenses consisted of the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Payroll and incentive compensation
|
|
$
|
2,080
|
|
|
$
|
2,208
|
|
Real estate taxes
|
|
|
271
|
|
|
|
371
|
|
Other
|
|
|
498
|
|
|
|
405
|
|
|
|
$
|
2,849
|
|
|
$
|
2,984
|
|
Note 7 – Notes Payable
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Variable rate term loan due May 31, 2018. Principal and interest (4.15% at March 31, 2018) payable monthly with a balloon payment due at maturity.
|
|
$
|
2,705
|
|
|
$
|
2,832
|
|
Variable rate term loan due May 31, 2019. Principal and interest (4.16% at March 31, 2018) payable monthly with a balloon payment due at maturity.
|
|
|
3,364
|
|
|
|
3,447
|
|
Total notes payable
|
|
|
6,069
|
|
|
|
6,279
|
|
Less current portion
|
|
|
–
|
|
|
|
(3,166
|
)
|
Total long-term portion
|
|
$
|
6,069
|
|
|
$
|
3,113
|
|
The variable rate term loans are subject
to interest at the prime rate or at the LIBOR plus 2.5% and are collateralized by substantially all of Lifeway’s assets.
In addition, under the terms of the related agreements, we are subject to minimum fixed charged ratio and tangible net worth thresholds,
which among other things may limit our ability to pay dividends or repurchase shares of its common stock. Further, under the agreements
Lifeway is required to deliver its annual and quarterly financial statements and related SEC filings within specified timeframes.
Although we were not in compliance with the minimum fixed charge coverage ratio covenant at March 31, 2018, we have obtained a
waiver of the minimum fixed charge coverage ratio through December 31, 2018. On May 7, 2018, we refinanced the two outstanding
term loans and our $5 million revolving credit facility into a new, three-year, $10 million revolving line of credit. The notes
payable are presented long-term as of March 31, 2018, as the new maturity date is May 7, 2021.
See Note 14 for discussion of this
subsequent event.
Note 8 – Commitments and contingencies
Lease obligations
We lease three retail stores for our Lifeway
Kefir Shop subsidiary, certain machinery and equipment, and office space under operating leases. Total lease expense was $180 and
$157 for the three months ended March 31, 2018 and 2017, respectively.
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.
In a letter dated May 19, 2016, Lifeway
received a request to voluntarily produce documents in connection with a confidential, informal inquiry by the Division of Enforcement
of the SEC concerning Lifeway’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 Lifeway 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, Lifeway has been cooperating with the SEC and will continue to do so.
Note 9 – Income taxes
For each interim period, Lifeway 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, we record 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 March 31, 2018 was 35.1% compared to 39.2% for the three months ended March 31, 2017.
Note 10 – 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 March 31, 2018, 3.469 million shares remain available under the Omnibus Incentive Plan. We have 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 three months ended March 31, 2018:
|
|
Options
|
|
|
Weighted
average
exercise price
|
|
|
Weighted
average
remaining contractual life
|
|
|
Aggregate
intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
45
|
|
|
$
|
10.45
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2018
|
|
|
45
|
|
|
$
|
10.45
|
|
|
|
8.00
|
|
|
$
|
–
|
|
Exercisable at March 31, 2018
|
|
|
33
|
|
|
$
|
10.50
|
|
|
|
8.00
|
|
|
$
|
–
|
|
For the three months ended March 31, 2018
and 2017 total pre-tax stock-based compensation expense recognized in the consolidated statements of operations was $4 and $15,
respectively. For the three months ended March 31, 2018 and 2017 tax-related benefits of $2 and $6 were also recognized. As of
March 31, 2018, the total remaining unearned compensation related to non-vested stock options was $15, which is expected to be
amortized over the weighted-average remaining service period of 1.13 years.
Incentive Compensation
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 was
based on (a) the achievement of certain sales and adjusted 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
had the opportunity to earn cash and equity-based incentive compensation in amounts ranging from $0 to $11,025 depending on Lifeway’s
performance levels compared to the respective targets and the senior executive’s performance compared to their individual
objectives. The equity portion of the incentive compensation is payable in restricted stock that vests one-third in each of the
three years from the 2017 grant dates. For the three months ended March 31, 2018, $286 was accrued under the 2017 Plan as stock-based
compensation expense in the consolidated statements of operations. For the three months ended March 31, 2017, $818 was accrued
under the 2017 Plan, of which $389 was recorded as cash bonus expense and $429 was recorded as stock-based compensation expense
in the consolidated statements of operations. As of March 31, 2018, the total remaining unearned compensation related to the 2017
Plan was $787, of which $424 is expected to be recognized through the balance of fiscal year 2018 subject to vesting; and $309
and $54 is expected to be recognized in 2019 and 2020, respectively, subject to vesting.
In January 2018, Lifeway established an incentive-based compensation
program (the “2018 Plan”) for certain senior executives and key employees (the “participants”). The number
of participants under the 2018 Plan was expanded from the 2017 Plan. Under the 2018 Plan, incentive compensation is based on (a)
the achievement of certain sales and adjusted EBITDA performance levels versus respective targets in 2018, and (b) for certain
senior executives, the achievement of individual performance objectives. Under the 2018 Plan, collectively the participants have
the opportunity to earn cash and equity-based incentive compensation in amounts ranging from $0 to $11,200 depending on Lifeway’s
performance levels compared to the respective targets and the senior executive’s performance compared to their individual
objectives. The equity portion of the incentive compensation is payable in restricted stock that vests one-third in each of the
three years from the 2018 grant dates. For the three months ended March 31, 2018, $171 was accrued under the 2018 Plan, of which
$76 was recorded as cash bonus expense and $95 was recorded 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 three months ended March 31, 2018 and 2017 total contribution expense recognized in the consolidated
statements of operations was $132 and $103, respectively.
Note 11 – Segments, Products and Customers
Lifeway’s primary product is drinkable
kefir, a cultured dairy product. Lifeway Kefir is a tart and tangy cultured milk smoothie that is 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. Lifeway offers over 50 varieties
of our kefir products including more than 20 flavors. In addition to our core drinkable kefir products, we offer 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 with mini-spoons. We also offer Lifeway Elixir, a line of non-dairy, sparkling organic probiotic beverages, as
well as probiotic supplements for adults and children. In late 2017, we also announced that we would begin offering Skyr, a strained
cupped Icelandic yogurt, and Plantiful, a plant-based probiotic beverage made from organic and non-GMO pea protein with 10 vegan
kefir cultures.
Our product categories are:
|
·
|
Drinkable Kefir, sold in a variety of organic and non-organic sizes, flavors, and types, including low fat, non-fat, whole milk, protein, BioKefir (a 3.5 oz. kefir with additional probiotic cultures), and Kefir with Oats.
|
|
|
|
|
·
|
European-style soft cheeses, including farmer cheese in resealable cups.
|
|
|
|
|
·
|
Cream and other, which consists primarily of cream, a byproduct of our fluid milk manufacturing process.
|
|
|
|
|
·
|
ProBugs, a line of kefir products in drinkable, frozen, and freeze dried formats, designed for children.
|
|
|
|
|
·
|
Other Dairy, which include Cupped Kefir and Icelandic Skyr, a line of strained kefir and yogurt products in resealable cups.
|
|
|
|
|
·
|
Frozen Kefir, available in both bars and pint-size containers.
|
Lifeway has determined that it has one
reportable segment based on how our chief operating decision maker manages the business and in a manner consistent with the internal
reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating
resources and assessing 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.
Net sales of products by category
were as follows for the three months ended March 31:
|
|
2018
|
|
|
2017
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Drinkable Kefir other than ProBugs
|
|
$
|
21,663
|
|
|
|
76%
|
|
|
$
|
25,051
|
|
|
|
78%
|
|
Cheese
|
|
|
2,934
|
|
|
|
10%
|
|
|
|
2,834
|
|
|
|
9%
|
|
Cream and other (a)
|
|
|
1,492
|
|
|
|
5%
|
|
|
|
1,724
|
|
|
|
5%
|
|
ProBugs Kefir
|
|
|
952
|
|
|
|
3%
|
|
|
|
1,479
|
|
|
|
5%
|
|
Other dairy
|
|
|
1,337
|
|
|
|
5%
|
|
|
|
593
|
|
|
|
2%
|
|
Frozen Kefir (b)
|
|
|
364
|
|
|
|
1%
|
|
|
|
436
|
|
|
|
1%
|
|
Net Sales
|
|
$
|
28,742
|
|
|
|
100%
|
|
|
$
|
32,117
|
|
|
|
100%
|
|
(a)
|
Includes cream byproducts and other non-dairy products for resale
|
(b)
|
Includes Lifeway Kefir Shop sales
|
Significant Customers
–
Sales are predominately to companies in the retail food industry, located within the United States. Two major customers accounted
for approximately 22% and 23% of net sales for the three months ended March 31, 2018 and 2017, respectively.
Note 12 – Related party transactions
Lifeway obtains consulting services from
the Chairperson of its board of directors. Fees earned by the Chairperson are included in general and administrative expenses in
the accompanying consolidated statements of operations and were $250 during each of the three months ended March 31, 2018 and 2017.
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 by the Chairperson are included in selling expenses in the accompanying
consolidated statements of operations and were $150 during each of the three months ended March 31, 2018 and 2017.
Note 13 – Subsequent Event
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 are to be 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 in Note 7 above.
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 expires three years after the Closing Date. The Loans and all other amounts due and owing under the Revolving Credit Facility
and related documents are secured by substantially all of our assets.
Amounts available for borrowing under the
Loans 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.