Notes to Consolidated Financial Statements
(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, these statements include all adjustments necessary for a fair presentation of the results
of all interim periods reported herein. The consolidated financial statements and related notes should be read in conjunction with
the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2019. Results of operations for interim periods are not necessarily indicative of the results to be expected for other interim
periods or the full year.
A detailed description of our significant
accounting policies can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
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 12, Segments, Products and Customers).
We also sell bulk cream, a byproduct of our fluid milk manufacturing process. In accordance with ASC 606, Revenue from Contracts
with Customers, we recognize revenue when control over the products transfers to our customers, which generally occurs upon delivery
to our customers or their common carriers. The Company adopted this standard at the beginning of fiscal year 2018, with no significant
impact to its financial position or results of operations, using the modified retrospective method. The amount of revenue recognized
reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, using
the five-step method required by ASC 606.
For the Company, the contract is the approved
sales order, which may also be supplemented by other agreements that formalize various terms and conditions with customers. The
Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors
including the customer’s historical payment experience or, in the case of a new customer, published credit and financial
information pertaining to the customer.
Performance obligations promised in a contract
are identified based on the goods or services that will be transferred to the customer, which is the delivery of food products
which provide immediate benefit to the customer.
We account for product shipping and handling
as fulfillment activities with revenues for these activities recorded within net revenue and costs recorded within cost of goods
sold. Any taxes collected on behalf of government authorities are excluded from net revenues.
Variable consideration, which typically
includes volume-based rebates, known or expected pricing or revenue adjustments, such as trade discounts, allowances for non-saleable
products, product returns, trade incentives and coupon redemption, is estimated utilizing the most likely amount method.
Key sales terms, such as pricing and quantities
ordered, are established on a frequent basis such that most customer arrangements and related incentives have a one year or shorter
duration. As such, we do not capitalize contract inception costs and we capitalize product fulfillment costs in accordance with
U.S. GAAP and our inventory policies. We do not have any significant deferred revenue or unbilled receivables at the end of a period.
We generally do not receive noncash consideration for the sale of goods, nor do we grant payment financing terms greater than one
year.
Advertising and promotional costs
Lifeway expenses advertising costs as incurred.
For the nine months ended September 30, 2020 and 2019 total advertising expenses were $1,700 and $2,650, respectively. For the
three months ended September 30, 2020 and 2019 total advertising expenses were $380 and $786, respectively.
Recent accounting pronouncements
Issued but not yet effective
In March 2020, the FASB issued ASU No.
2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The new
guidance provides optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts,
hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because
of reference rate reform. The guidance is effective prospectively as of March 12, 2020 through December 31, 2022 and interim periods
within those fiscal years. Management is currently evaluating the impact that the new guidance will have on the consolidated financial
statements.
In December 2019, the FASB issued ASU No.
2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new guidance is intended to enhance and simplify
various aspects of the accounting for income taxes. The new guidance eliminates certain exceptions
to the general approach to the income tax accounting model, and adds new guidance to reduce the complexity in accounting for income
taxes. The guidance will be effective for fiscal years beginning after December 15, 2020 and interim periods within those
fiscal years. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities
for periods for which financial statements have not yet been issued. Management is currently evaluating the impact that the new
guidance will have on the consolidated financial statements.
In June 2016, the FASB issued ASU
No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, in
November 2018 issued an amendment, ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses,
and in November 2019 issued two amendments, ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and
Hedging (Topic 815), and Leases (Topic 842): Effective Dates, and ASU 2019-11, Codification Improvements to Topic 326, Financial
Instruments—Credit Losses. The series of new guidance amends the impairment model by requiring entities to use a forward-looking
approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments,
including trade receivables. This may result in the earlier recognition of allowances for losses. The guidance should be applied
on either a prospective transition or modified-retrospective approach depending on the subtopic. The guidance will be effective
for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted.
Management is currently evaluating the impact that the new guidance will have on the consolidated financial statements.
Note 3 – Inventories, net
Inventories consisted of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Ingredients
|
|
$
|
1,848
|
|
|
$
|
1,942
|
|
Packaging
|
|
|
2,223
|
|
|
|
2,230
|
|
Finished goods
|
|
|
2,401
|
|
|
|
2,220
|
|
Total inventories
|
|
$
|
6,472
|
|
|
$
|
6,392
|
|
Note 4 – Property, Plant and Equipment, net
Property, plant and equipment consisted of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Land
|
|
$
|
1,565
|
|
|
$
|
1,565
|
|
Buildings and improvements
|
|
|
17,744
|
|
|
|
17,332
|
|
Machinery and equipment
|
|
|
30,930
|
|
|
|
30,670
|
|
Vehicles
|
|
|
778
|
|
|
|
778
|
|
Office equipment
|
|
|
849
|
|
|
|
851
|
|
Construction in process
|
|
|
455
|
|
|
|
362
|
|
|
|
|
52,321
|
|
|
|
51,558
|
|
Less accumulated depreciation
|
|
|
(31,239
|
)
|
|
|
(29,284
|
)
|
Total property, plant and equipment, net
|
|
$
|
21,082
|
|
|
$
|
22,274
|
|
Note 5 – Goodwill and Intangible Assets
Goodwill and indefinite-lived intangible assets consisted of
the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Gross goodwill
|
|
$
|
10,368
|
|
|
$
|
10,368
|
|
Accumulated impairment losses
|
|
|
(1,244
|
)
|
|
|
(1,244
|
)
|
Goodwill
|
|
|
9,124
|
|
|
|
9,124
|
|
Brand names
|
|
|
3,700
|
|
|
|
3,700
|
|
Goodwill and indefinite-lived intangible assets
|
|
$
|
12,824
|
|
|
$
|
12,824
|
|
Finite-lived Intangible Assets
Other intangible assets, net consisted of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
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
|
|
|
(8,209
|
)
|
|
|
(8,092
|
)
|
Other intangible assets, net
|
|
$
|
35
|
|
|
$
|
152
|
|
Note 6 – Accrued Expenses
Accrued expenses consisted of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Payroll and incentive compensation
|
|
$
|
2,092
|
|
|
$
|
3,009
|
|
Real estate taxes
|
|
|
320
|
|
|
|
398
|
|
Current portion of operating lease liabilities
|
|
|
181
|
|
|
|
285
|
|
Other
|
|
|
297
|
|
|
|
395
|
|
Total accrued expenses
|
|
$
|
2,890
|
|
|
$
|
4,087
|
|
Note 7 – Debt
Line of Credit
On May 7, 2018, Lifeway entered into an
Amended and Restated Loan and Security Agreement (the “Revolving Credit Facility”) with its existing lender. On April
10, 2019, effective March 31, 2019, Lifeway entered into the First Modification to the Amended and Restated Loan and Security Agreement
(the “Modified Revolving Credit Facility”) with its existing lender. Under the amendment, the Modified Revolving Credit
Facility provides for a revolving line of credit up to a maximum of $9 million (the “Revolving Loan”) with an incremental
facility not to exceed $5 million (the “Incremental Facility” and together with the Revolving Loan, the “Loans”).
On December 10, 2019, Lifeway entered into
the Second Modification to the Amended and Restated Loan and Security Agreement, as amended, (the “Second Modification”)
with its existing lender. The Second Modification amends the Amended and Restated Loan and Security Agreement, as amended, by redefining
the “Borrowing Base” and further clarifying the definitions of “Eligible Accounts” and “Eligible
Inventory.” The “Borrowing Base” under this amendment means, generally, an amount equal to the sum of (a) 85%
of the unpaid amount of all eligible accounts receivable, plus (b) 50% of the value of all eligible inventory. The Second Modification
also addresses the calculation of interest after the potential discontinuance of LIBOR and its replacement with a replacement benchmark
interest rate.
On September 30, 2020, Lifeway entered
into the Third Modification to the Amended and Restated Loan and Security Agreement, as amended, (the “Third Modification”)
with its existing lender. The Third Modification amends the Amended and Restated Loan and Security Agreement, as amended, by removing
the monthly borrowing base reporting requirement effective September 30, 2020, including a covenant to maintain a quarterly minimum
working capital financial covenant, as defined, of no less than $11.25 million each of the fiscal quarters commencing the fiscal
quarter ending December 31, 2020 through the expiration date, and eliminating the tier interest pricing structure. The Amended
and Restated Loan and Security Agreement continues to provide Lifeway with a revolving line of credit up to a maximum of $5 million
(the “Revolving Loan”) and provides the Borrowers with an incremental facility not to exceed $5 million (the “Incremental
Facility” and together with the Revolving Loan, the “Loans”). The Termination Date of the Revolving Loan was
extended to June 30, 2025, unless earlier terminated.
Except as described above, as amended,
the Modified Revolving Credit Facility remains substantively unchanged and in full force and effect, including customary representations,
warranties, and covenants on the part of Lifeway, including financial covenants requiring us to maintain a fixed charge coverage
ratio of no less than 1.25 to 1.00 each of the fiscal quarters ending through the expiration date. The Modified Revolving Credit
Facility continues to provide for events of default, including failure to repay principal and interest when due and failure to
perform or violation of the provisions or covenants of the agreement, as a result of which amounts due under the Modified Revolving
Credit Facility may be accelerated. The loans and all other amounts due and owed under the Revolving Credit Facility and related
documents are secured by substantially all of our assets.
As of September 30, 2020, we had $2,763
net of $14 of unamortized deferred financing costs, outstanding under the Revolving Credit Facility. We had $2,223 available for
future borrowings as of September 30, 2020.
As amended, all outstanding amounts under
the Loans bear interest, at Lifeway’s election, at either the lender Base Rate (the Prime Rate minus 1.00%) or the LIBOR
plus 1.95%, payable monthly in arrears. Lifeway is also required to pay a quarterly unused line fee of 0.20% and, in conjunction
with the issuance of any letters of credit, a letter of credit fee of 0.20%. Lifeway’s interest rate on debt outstanding
under our Revolving Credit Facility as of September 30, 2020 was 2.41%.
We were in compliance with the fixed charge
coverage ratio covenant at September 30, 2020.
Note 8 – Leases
Lifeway has operating leases for two retail
stores for its Lifeway Kefir Shop subsidiary and office space which includes fixed base rent payments as well as variable rent
payments to reimburse the landlord for operating expenses and taxes. The Company terminated its office space leases in June 2020.
The Company also leases certain machinery and equipment with fixed base rent payments and variable costs based on usage. Remaining
lease terms for these leases range from less than 1 year to 5 years. Some of our leases include options to extend the leases for
up to 5 years and have been included in our calculation of the right-of-use asset and lease liabilities. Lifeway includes only
fixed payments for lease components in the measurement of the right-of-use asset and lease liability. Variable lease payments are
those that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time.
There are no residual value guarantees. We do not currently have leases which meet the finance lease classification as defined
under ASC 842.
We do not record leases with an initial
term of 12 months or less on the balance sheet. Expense for these short-term leases is recorded on a straight-line basis over the
lease term. Total lease expense was $392 and $552 (including short term leases) for the nine months ended September 30, 2020 and
2019, respectively. Total lease expense was $81 and $187 (including short term leases) for the three months ended September 30,
2020 and 2019, respectively.
Lifeway treats contracts as a lease when
the contract conveys the right to use a physically distinct asset for a period of time in exchange for consideration, we direct
the use of the asset and obtain substantially all the economic benefits of the asset.
Right-of-use assets and lease liabilities
are measured and recognized based on the present value of the future minimum lease payments over the lease term at the commencement
date. We have elected the practical expedient to combine lease and non-lease components into a single component for all of our
leases. For many of our leases such as real estate leases, we are unable to determine an implicit rate; therefore, we use our incremental
borrowing rate based on the information available at the commencement date in determining the present value of future payments
for those leases. We include options to extend or terminate the lease in the measurement of the right-of-use asset and lease liability
when it is reasonably certain that we will exercise such options. Lease expense for minimum lease payments is recognized on a straight-line
basis over the lease term.
Future maturities of lease liabilities
were as follows
Year
|
|
|
Operating Leases
|
|
Three months ended December 31, 2020
|
|
|
$
|
53
|
|
2021
|
|
|
|
189
|
|
2022
|
|
|
|
145
|
|
2023
|
|
|
|
16
|
|
Thereafter
|
|
|
|
2
|
|
Total lease payments
|
|
|
|
405
|
|
Less: Interest
|
|
|
|
(26
|
)
|
Present value of lease liabilities
|
|
|
$
|
379
|
|
The weighted-average remaining lease term
for our operating leases was 2.02 years as of September 30, 2020. The weighted average discount rate of our operating leases was
5.82% as of September 30, 2020. Cash paid for amounts included in the measurement of lease liabilities was $328 and $437 the nine
months ended September 30, 2020 and 2019, respectively. Cash paid for amounts included in the measurement of lease liabilities
was $56 and $145 for the three months ended September 30, 2020 and 2019, respectively.
Note 9 – Commitments and contingencies
Litigation
Lifeway is engaged in various legal actions,
claims, audits, 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.
Note 10 – Income taxes
For
each interim period, Lifeway estimates the effective tax rate expected to be applicable for the full year and applies that rate
to income before provision for income taxes for the period. The effective tax rate for the nine months ended September 30, 2020
was 29.3% compared to 8.8% for the nine months ended September 30, 2019. The effective tax rate for the three months ended September
30, 2020 was 29.5% compared to 19.3% for the three months ended September 30, 2019. The increase in effective tax rate for the
nine months ended is primarily the result of non-deductible compensation expense related to equity incentive awards and state
tax receivables reducing the benefit associated with a pre-tax book loss in 2019, partially offset by a benefit recognized in
2020 due to the enactment of the “Coronavirus Aid, Relief, and Economic Security Act” (the CARES Act). The increase
in effective tax rate for the three months ended is also primarily due to the non-deductible compensation expenses related to
equity incentive awards and state tax receivables associated with a pre-tax book loss in 2019, but further offset by the adjustment
to the valuation allowance recorded for the quarter ended September 30, 2019, which increased the tax benefit associated with
our pre-tax book loss for the quarter. Our effective tax rate may change from period to period based on recurring and non-recurring
factors including the relative mix of pre-tax earnings (or losses), the underlying income tax rates applicable to various state
and local taxing jurisdictions, enacted tax legislation, settlement of tax audits, the impact of non-deductible items, changes
in valuation allowances, and the expiration of the statute of limitations in relation to unrecognized tax benefits. We record
discrete income tax items such as enacted tax rate changes and completed tax audits in the period in which they occur.
On March 27, 2020, the “Coronavirus
Aid, Relief, and Economic Security Act” (the CARES Act) was enacted. The CARES act features several tax provisions and other
measures that assist businesses impacted by the economic effects of the COVID-19 pandemic. The significant tax provisions include
an increase in the limitation of the tax deduction for interest expense from 30% to 50% of adjusted earnings in 2019 and 2020,
a five-year carryback allowance for net operating losses generated in tax years 2018-2020, increased charitable contribution limitations
to 25% of taxable income in 2020, and a retroactive technical correction to the 2017 Tax Cuts and Jobs Act that makes qualified
improvement property placed in service after December 31, 2017 eligible for bonus depreciation. The Company has recorded a $245
income tax benefit related to the net operating loss carryback provisions of the CARES Act for the nine months ended September
30, 2020.
Unrecognized tax benefits were $93 and
$63 at September 30, 2020 and 2019, respectively. The Company believes that an adequate provision has been made for any adjustments
that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If a tax audit is
resolved in a manner inconsistent with its expectations, the Company could be required to adjust its provision for income taxes
in the period such resolution occurs. We do not expect material changes to our unrecognized tax benefits during the next twelve
months.
Note 11 – Stock-based and Other Compensation
In December 2015, Lifeway stockholders
approved the 2015 Omnibus Incentive Plan, which authorized the issuance of an aggregate of 3.5 million shares to satisfy awards
of stock options, stock appreciation rights, unrestricted stock, restricted stock, restricted stock units, performance shares and
performance units to qualifying employees. Under the Plan, the Board or its Audit and Corporate Governance Committee approves stock
awards to executive officers and certain senior executives, generally in the form of restricted stock or performance shares. The
number of performance shares that participants may earn depends on the extent to which the corresponding performance goals have
been achieved. Stock awards generally vest over a three-year performance or service period. At September 30, 2020, 3.317 million
shares remain available under the Omnibus Incentive Plan. While we plan to continue to issue awards pursuant to the Plan at least
annually, we may choose to suspend the issuance of new awards in the future and may grant additional awards at any time including
issuing special grants of restricted stock, restricted stock units, and stock options to attract and retain new and existing
executives.
Stock Options
The following table summarizes stock option activity during
the nine months ended September 30, 2020:
|
|
|
Options
|
|
|
Weighted
average
exercise price
|
|
|
Weighted
average
remaining contractual life
|
|
|
Aggregate
intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
|
41
|
|
|
$
|
10.42
|
|
|
|
6.22
|
|
|
$
|
–
|
|
Granted
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding at September 30, 2020
|
|
|
|
41
|
|
|
$
|
10.42
|
|
|
|
5.47
|
|
|
$
|
–
|
|
Exercisable at September 30, 2020
|
|
|
|
41
|
|
|
$
|
10.42
|
|
|
|
5.47
|
|
|
$
|
–
|
|
As of December 31, 2019, all outstanding
options were vested and there was no remaining unearned compensation expense. For the nine months and three months ended September
30, 2019, total pre-tax stock-based compensation expense recognized in the consolidated statements of operations was $0. For the
nine months and three months ended September 30, 2019, no tax-related benefits were recognized.
Restricted Stock Awards
A Restricted Stock Award (“RSA”)
represents the right to receive one share of common stock in the future. RSAs have no exercise price. The grant date fair value
of the awards is equal to our closing stock price on the grant date. The following table summarizes RSA activity during the nine
months ended September 30, 2020.
|
|
RSA’s
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
47
|
|
Granted
|
|
|
57
|
|
Shares issued upon vesting
|
|
|
(13
|
)
|
Forfeited
|
|
|
(13
|
)
|
Outstanding at September 30, 2020
|
|
|
78
|
|
Weighted average grant date fair value per share outstanding
|
|
$
|
3.06
|
|
We expense RSA’s over the service
period. For the nine months ended September 30, 2020 and 2019 total pre-tax stock-based compensation expense recognized in the
consolidated statements of operations was $51 and $82, respectively. For the nine months ended September 30, 2020 and 2019 tax-related
benefits of $14 and $22, respectively, were also recognized. For the three months ended September 30, 2020 and 2019 total pre-tax
stock-based compensation expense recognized in the consolidated statements of operations was $28 and $30, respectively. For the
three months ended September 30, 2020 and 2019 tax-related benefits of $8 were also recognized. As of September 30, 2020, the total
remaining unearned compensation related to non-vested RSA’s was $166, which is expected to be amortized over the weighted-average
remaining service period of 1.35 years.
Long-Term Incentive Plan Compensation
Lifeway established long-term incentive-based
compensation programs for fiscal year 2017 (the “2017 Plan”) and for fiscal year 2019 (the “2019 Plan”)
for certain senior executives and key employees (the “participants”). Under the 2017 Plan, long-term incentive compensation
is based on Lifeway’s achievement of certain sales and adjusted EBITDA performance levels versus respective targets established
by the Board for the fiscal year. Under the 2019 Plan, long-term equity incentive compensation is based on Lifeway’s achievement
of four strategic milestones over a three-year period from Fiscal 2019 through Fiscal 2021.
2017 Plan
Under the 2017 Plan, collectively the participants
had the opportunity to earn cash and equity-based incentive compensation in amounts ranging from $0 to $11,025 depending on Lifeway’s
performance levels compared to the respective targets and the participants performance compared to their individual objectives.
The equity portion of the incentive compensation is payable in restricted stock that vests one-third in each of the three years
from the 2017 grant dates. For the nine months ended September 30, 2020 and 2019, $49 and $234 was expensed under the 2017 Plan
as stock-based compensation expense in the consolidated statements of operations, respectively. For the three months ended September
30, 2020 and 2019, $0 and $54 was expensed under the 2017 Plan as stock-based compensation expense in the consolidated statements
of operations, respectively. As of March 31, 2020, there was no remaining expense under the 2017 plan.
2019 Plan
Under the 2019 Plan, collectively the participants
can earn equity-based incentive compensation in amounts ranging from $0 to $1,776 depending on Lifeway’s performance levels
compared to the respective targets. The equity-based incentive compensation is payable in restricted stock that vests 50% of unvested
shares in year one, 50% of unvested shares in year two, and 100% of remaining unvested shares in year three from the 2019 grant
date. For the nine months ended September 30, 2020 and 2019, $90 and $103 was expensed under the 2019 Plan as stock-based compensation
expense in the consolidated statements of operations, respectively. For the three months ended September 30, 2020 and 2019, $1
and $35 was expensed under the 2019 Retention Award as stock-based compensation expense in the consolidated statements of operations,
respectively.
2019 Retention Award
During Q1 2019, we awarded a special retention
grant (the “2019 Retention Award”) of restricted stock to certain senior executives and key employees (the “participants”).
The equity-based incentive compensation is payable in restricted stock that vests one-third in March 2019, one-third in March 2020
and one-third in March 2021. For the nine months ended September 30, 2020 and 2019, $73 and $265 was expensed under the 2020 Retention
Award as stock-based compensation expense in the consolidated statements of operations, respectively. For the three months ended
September 30, 2020 and 2019, $15 and $54 was expensed under the 2019 Retention Award as stock-based compensation expense in the
consolidated statements of operations, respectively.
As of September 30, 2020, the total remaining
unearned compensation related to the 2019 Retention Award was $29, of which $15 and $14 is expected to be recognized in 2020 and
2021, respectively, subject to vesting.
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 nine months ended September 30, 2020 and 2019 total contribution expense recognized in the consolidated
statements of operations was $307 and $269, respectively. For the three months ended September 30, 2020 and 2019 total contribution
expense recognized in the consolidated statements of operations was $93 and $88, respectively.
Note 12 – Segments, Products and Customers
Lifeway’s primary product is drinkable
kefir, a cultured dairy product. Lifeway Kefir is tart and tangy, high in protein, calcium and vitamin D. Thanks to our exclusive
blend of kefir cultures, each cup of kefir contains 12 live and active cultures and 15 to 20 billion beneficial CFU (Colony Forming
Units) at the time of manufacture.
We manufacture (directly or through co-packers)
our products under our own brand, as well as under private labels on behalf of certain customers. In addition to our core drinkable
kefir products, we offer several lines of products developed through our innovation and development efforts. These include Kefir
Cups, a strained, cupped version of our kefir; and Organic Farmer Cheese Cups, a cupped version of our soft cheeses, both served
in resealable 5 oz. containers. We also offer Skyr, a strained cupped Icelandic yogurt; Plantiful, a plant-based probiotic beverage
made from organic and non-GMO pea protein with 10 vegan kefir cultures; a line of probiotic supplements for adults and children;
and a soft serve kefir mix.
Our product categories are:
|
·
|
Drinkable Kefir, sold in a variety of organic and non-organic sizes, flavors, and types, including low fat, non-fat, whole milk, protein, and BioKefir (a 3.5 oz. kefir with additional probiotic cultures).
|
|
·
|
European-style soft cheeses, including farmer cheese in resealable cups.
|
|
·
|
Cream and other, which consists primarily of cream, a byproduct of making our kefir.
|
|
·
|
ProBugs, a line of kefir products designed for children.
|
|
·
|
Other Dairy, which includes Cupped Kefir and Icelandic Skyr, a line of strained kefir and yogurt products in resealable cups.
|
|
·
|
Frozen Kefir, available in soft serve and pint-size containers.
|
Lifeway has determined that it has one
reportable segment based on how our chief operating decision maker manages the business and in a manner consistent with the internal
reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating
resources and assessing our performance, has been identified collectively as the Chief Executive Officer, the Chief Operating Officer,
the Chief Financial 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 nine months ended September 30:
|
|
|
2020
|
|
|
|
2019
|
|
|
|
|
$
|
|
|
|
%
|
|
|
|
$
|
|
|
|
%
|
|
Drinkable Kefir other than ProBugs
|
|
$
|
61,155
|
|
|
|
80%
|
|
|
$
|
54,126
|
|
|
|
77%
|
|
Cheese
|
|
|
9,619
|
|
|
|
13%
|
|
|
|
8,348
|
|
|
|
12%
|
|
Cream and other
|
|
|
2,120
|
|
|
|
3%
|
|
|
|
3,359
|
|
|
|
5%
|
|
ProBugs Kefir
|
|
|
1,946
|
|
|
|
2%
|
|
|
|
2,050
|
|
|
|
3%
|
|
Other dairy
|
|
|
1,171
|
|
|
|
1%
|
|
|
|
1,334
|
|
|
|
2%
|
|
Frozen Kefir (a)
|
|
|
430
|
|
|
|
1%
|
|
|
|
1,280
|
|
|
|
1%
|
|
Net Sales
|
|
$
|
76,441
|
|
|
|
100%
|
|
|
$
|
70,497
|
|
|
|
100%
|
|
(a)
|
Includes Lifeway Kefir Shop sales
|
Net sales of products by category were
as follows for the three months ended September 30:
|
|
|
2020
|
|
|
|
2019
|
|
|
|
|
$
|
|
|
|
%
|
|
|
|
$
|
|
|
|
%
|
|
Drinkable Kefir other than ProBugs
|
|
$
|
21,152
|
|
|
|
81%
|
|
|
$
|
17,513
|
|
|
|
77%
|
|
Cheese
|
|
|
3,105
|
|
|
|
12%
|
|
|
|
2,791
|
|
|
|
12%
|
|
Cream and other
|
|
|
688
|
|
|
|
3%
|
|
|
|
913
|
|
|
|
4%
|
|
ProBugs Kefir
|
|
|
629
|
|
|
|
2%
|
|
|
|
590
|
|
|
|
3%
|
|
Other dairy
|
|
|
363
|
|
|
|
1%
|
|
|
|
432
|
|
|
|
2%
|
|
Frozen Kefir (a)
|
|
|
102
|
|
|
|
1%
|
|
|
|
490
|
|
|
|
2%
|
|
Net Sales
|
|
$
|
26,039
|
|
|
|
100%
|
|
|
$
|
22,729
|
|
|
|
100%
|
|
(a)
|
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 21% and 22% of net sales for the nine months ended September 30, 2020 and 2019, respectively. Two major customers
accounted for approximately 22% and 21% of net sales for the three months ended September 30, 2020 and 2019, respectively.
Note 13 – Related Party Transactions
Lifeway obtains consulting services from
the Chairperson of its board of directors. Fees earned by the Chairperson are included in general and administrative expenses in
the accompanying consolidated statements of operations and were $750 during each of the nine months ended September 30, 2020 and
2019. Fees earned are included in general and administrative expenses in the accompanying consolidated statements of operations
and were $250 during each of the three months ended September 30, 2020 and 2019.
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 $450 and $441 during the nine months ended September 30, 2020 and 2019, respectively.
Royalties earned are included in selling expenses in the accompanying consolidated statements of operations and were $150 and $143
during the three months ended September 30, 2020 and 2019.