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, 2020. 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, 2020.
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 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 three months ended March 31, 2021 and 2020 total advertising expenses were $1,393 and $536 respectively.
Recent accounting pronouncements
Adopted
In December 2019, the FASB issued Accounting Standards
Update (“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 Company
adopted this guidance on January 1, 2021. The adoption of this standard did not have a material impact on our consolidated financial statements
and disclosures.
Issued but not yet effective
In March 2020, the FASB issued Accounting Standards
Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial
Reporting. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to
contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because
of reference rate reform. The guidance will be effective prospectively as of March 12, 2020 through December 31, 2022 and interim periods
within those fiscal years. Management is currently evaluating the impact that the new guidance will have on the consolidated financial
statements.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, in November 2018 issued
an amendment, ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, and in November 2019 issued
two amendments, ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic
842): Effective Dates, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The series
of new guidance amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than
incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the
earlier recognition of allowances for losses. The guidance should be applied on either a prospective transition or modified-retrospective
approach depending on the subtopic. The guidance is effective for annual periods beginning after December 15, 2022, including interim
periods within those fiscal years, with early adoption permitted. Management is currently evaluating the impact that the new guidance
will have on the consolidated financial statements.
Note 3 – Inventories, net
Inventories consisted of the following:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Ingredients
|
|
$
|
1,684
|
|
|
$
|
1,725
|
|
Packaging
|
|
|
2,114
|
|
|
|
2,234
|
|
Finished goods
|
|
|
2,938
|
|
|
|
2,971
|
|
Total inventories
|
|
$
|
6,736
|
|
|
$
|
6,930
|
|
Note 4 – Property, Plant and Equipment, net
Property, plant and equipment consisted of the following:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Land
|
|
$
|
1,565
|
|
|
$
|
1,565
|
|
Buildings and improvements
|
|
|
17,182
|
|
|
|
17,834
|
|
Machinery and equipment
|
|
|
31,716
|
|
|
|
31,707
|
|
Vehicles
|
|
|
778
|
|
|
|
778
|
|
Office equipment
|
|
|
862
|
|
|
|
857
|
|
Construction in process
|
|
|
587
|
|
|
|
228
|
|
|
|
|
52,690
|
|
|
|
52,969
|
|
Less accumulated depreciation
|
|
|
(31,946
|
)
|
|
|
(31,921
|
)
|
Total property, plant and equipment, net
|
|
$
|
20,744
|
|
|
$
|
21,048
|
|
Note 5 – Goodwill and Intangible Assets
Goodwill and indefinite-lived intangible assets consisted of the following:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
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:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
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
|
|
|
(8,244
|
)
|
|
|
(8,244
|
)
|
Other intangible assets, net
|
|
$
|
–
|
|
|
$
|
–
|
|
Note 6 – Accrued Expenses
Accrued expenses consisted of the following:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Payroll and incentive compensation
|
|
$
|
1,825
|
|
|
$
|
1,366
|
|
Real estate taxes
|
|
|
271
|
|
|
|
341
|
|
Current portion of operating lease liabilities
|
|
|
174
|
|
|
|
179
|
|
Other
|
|
|
317
|
|
|
|
310
|
|
Total accrued expenses
|
|
$
|
2,587
|
|
|
$
|
2,196
|
|
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 March 31, 2021, we had $2,774 net of $3
of unamortized deferred financing costs, outstanding under the Revolving Credit Facility. We had $2,223 available for future borrowings
as of March 31, 2021.
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 March 31, 2021 was 2.15%.
We were in compliance with the fixed charge coverage
ratio and minimum working capital covenants at March 31, 2021.
Note 8 – Leases
Lifeway has operating leases for two retail stores
for its Lifeway Kefir Shop subsidiary 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 lease certain machinery
and equipment with fixed base rent payments and variable costs based on usage. Remaining lease terms for these leases range from less
than 1 year to 4 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 $78 and $179 (including short term leases) for the three months ended March 31, 2021 and 2020, respectively.
Lifeway treats contracts as a lease when the contract
conveys the right to use a physically distinct asset for a period of time in exchange for consideration, we direct the use of the asset
and obtain substantially all the economic benefits of the asset.
Right-of-use assets and lease liabilities are
measured and recognized based on the present value of the future minimum lease payments over the lease term at the commencement date.
We have elected the practical expedient to combine lease and non-lease components into a single component for all of its leases. For many
of our leases such as real estate leases, we are unable to determine an implicit rate; therefore, we use our incremental borrowing rate
based on the information available at the commencement date in determining the present value of future payments for those leases. We include
options to extend or terminate the lease in the measurement of the right-of-use asset and lease liability when it is reasonably certain
that we will exercise such options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
Future maturities of lease liabilities were as
follows
Year
|
|
Operating Leases
|
|
Nine months ended December 31, 2021
|
|
$
|
147
|
|
2022
|
|
|
158
|
|
2023
|
|
|
23
|
|
2024
|
|
|
7
|
|
2025
|
|
|
5
|
|
Thereafter
|
|
|
2
|
|
Total lease payments
|
|
|
342
|
|
Less: Interest
|
|
|
(26
|
)
|
Present value of lease liabilities
|
|
$
|
316
|
|
The weighted-average remaining lease term for
our operating leases was 2.05 years as of March 31, 2021. The weighted average discount rate of our operating leases was 7.85% as of March
31, 2021. Cash paid for amounts included in the measurement of lease liabilities was $55 and $142 for the three months ended March 31,
2021 and 2020, 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 three months ended March 31, 2021 was 31.2% compared to 27.5% for the three months
ended March 31, 2020. 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, 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 three months ended March 31, 2020.
Unrecognized tax benefits were $96 and $90
at March 31, 2021 and 2020, respectively. We do not expect material changes to our unrecognized tax benefits during the next twelve
months. 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 March 31, 2021, 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 three
months ended March 31, 2021:
|
|
Options
|
|
|
Weighted
average
exercise price
|
|
|
Weighted
average
remaining contractual life
|
|
|
Aggregate
intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
41
|
|
|
$
|
10.42
|
|
|
|
5.22
|
|
|
$
|
–
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding at March 31, 2021
|
|
|
41
|
|
|
$
|
10.42
|
|
|
|
4.97
|
|
|
$
|
–
|
|
Exercisable at March 31, 2021
|
|
|
41
|
|
|
$
|
10.42
|
|
|
|
–
|
|
|
$
|
–
|
|
As of December 31, 2019, all outstanding options
were vested and there was no remaining unearned compensation expense.
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 three months ended March 31,
2021.
|
|
RSA’s
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
78
|
|
Granted
|
|
|
4
|
|
Shares issued upon vesting
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
Outstanding at March 31, 2021
|
|
|
82
|
|
Weighted average grant date fair value per share outstanding
|
|
$
|
3.04
|
|
We expense RSA’s over the service period.
For the three months ended March 31, 2021 and 2020 total pre-tax stock-based compensation expense recognized in the consolidated statements
of operations was $36 and $5, respectively. For the three months ended March 31, 2021 and 2020 tax-related benefits of $11 and $1, respectively,
were also recognized. As of March 31, 2021, the total remaining unearned compensation related to non-vested RSA’s was $108, which
is expected to be amortized over the weighted-average remaining service period of 1.22 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 both 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 each fiscal year. Under the 2019 Plan, long-term equity incentive compensation is based on Lifeway’s achievement of four strategic
milestones over a three-year period from Fiscal 2019 through Fiscal 2021.
2017 Plan
Under the 2017 Plan, collectively the participants
had the opportunity to earn cash and equity-based incentive compensation in amounts ranging from $0 to $11,025 depending on Lifeway’s
performance levels compared to the respective targets and the participants performance compared to their individual objectives. The equity
portion of the incentive compensation is payable in restricted stock that vests one-third in each of the three years from the 2017 grant
dates. For the three months ended March 31, 2021 and 2020, $0 and $49 was expensed as stock-based compensation expense in the consolidated
statements of operations, respectively. As of March 31, 2021, there was no remaining expense.
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 three
months ended March 31, 2021 and 2020, $19 and $13 was expensed 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 three months ended March 31, 2021 and 2020, $8 and $43 was expensed as stock-based compensation expense
in the consolidated statements of operations, respectively. As of March 31, 2021, there was no remaining expense.
2020 CEO Incentive Award
During the fourth quarter 2020, we awarded a long-term
equity-based incentive of $750 to our Chief Executive Officer (the “2020 CEO Award”) depending on Lifeways 2020 performance
levels compared to the respective targets. The equity-based incentive compensation is payable in restricted stock that vests one-third
in April 2022, one-third in April 2023, and one-third in April 2024. The issuance of vested equity awards is subject to approval under
the Stock Purchase Agreement dated October 1, 1999. For the three months ended March 31, 2021 and 2020, $90 and $0 was expensed as stock-based
compensation expense in the consolidated statements of operations, respectively. As of March 31, 2021, the total remaining unearned compensation
was $610, of which $274 will be recognized in 2021, $221 in 2022, $98 in 2023, and $17 in 2024, 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 three months ended March 31, 2021 and 2020 total contribution expense recognized in the consolidated statements of operations
was $113 and $118, 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 25 to 30 billion beneficial CFU (Colony Forming Units) at the time
of manufacture.
We manufacture (directly or through co-packers)
and market products under the Lifeway and Fresh Made brand names, as well as under private labels on behalf of certain customers.
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, white cheese, and Sweet Kiss.
|
|
·
|
Cream and other, which consists primarily of cream, a byproduct of making our kefir.
|
|
·
|
ProBugs, a line of kefir products designed for children.
|
|
·
|
Other Dairy, which includes Cupped Kefir and Icelandic Skyr, a line of strained kefir and yogurt products in resealable cups.
|
|
·
|
Frozen Kefir, available in soft serve and pint-size containers.
|
Lifeway has determined that it has one reportable
segment based on how our chief operating decision maker manages the business and in a manner consistent with the internal reporting provided
to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing our
performance, has been identified collectively as the Chief Financial Officer, the Chief Operating Officer, the Chief Executive Officer,
and Chairperson of the board of directors. Substantially all of our consolidated revenues relate to the sale of cultured dairy products
that we produce using the same processes and materials and are sold to consumers through a common network of distributors and retailers
in the United States.
Net sales of products by category were as follows
for the three months ended March 31:
|
|
2021
|
|
|
2020
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Drinkable Kefir other than ProBugs
|
|
$
|
24,203
|
|
|
|
82%
|
|
|
$
|
19,857
|
|
|
|
78%
|
|
Cheese
|
|
|
3,199
|
|
|
|
11%
|
|
|
|
3,260
|
|
|
|
13%
|
|
Cream and other
|
|
|
863
|
|
|
|
3%
|
|
|
|
781
|
|
|
|
3%
|
|
ProBugs Kefir
|
|
|
680
|
|
|
|
2%
|
|
|
|
860
|
|
|
|
3%
|
|
Other dairy
|
|
|
384
|
|
|
|
1%
|
|
|
|
371
|
|
|
|
2%
|
|
Frozen Kefir (a)
|
|
|
47
|
|
|
|
1%
|
|
|
|
259
|
|
|
|
1%
|
|
Net Sales
|
|
$
|
29,376
|
|
|
|
100%
|
|
|
$
|
25,388
|
|
|
|
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
22% and 21% of net sales for the three months ended March 31, 2021 and 2020, respectively.
Note 13 – Related Party Transactions
Lifeway obtains consulting services from the Chairperson
of its board of directors. On December 28, 2020, Lifeway entered into an amended and restated consulting agreement (the “Agreement”),
effective as of December 31, 2020, with the Chairperson. Under the terms and conditions of the Agreement, the Chairperson will continue
to provide consulting services with respect to, among other things, our business strategy, international expansion and product management
and expansion. For the services, the Company will pay an annual service fee of $500. The Chairperson will also be eligible for an annual
performance fee target of $500 based on the achievement of specified performance criteria. The Chairpersons annual service fee and target
bonus amounts are subject to periodic change by the Compensation Committee of the Company’s Board of Directors on 30 days’
prior written notice to the Chairperson. The Agreement shall continue until either party provides at least a 10-day written notice of
termination.
Service fees earned are included in general and
administrative expenses in the accompanying consolidated statements of operations and were $125 and $250 during each of the three months
ended March 31, 2021 and 2020, respectively. During the three months ended March 31, 2021, the Company recorded $94 related to estimated
earnings under the fiscal year 2021 annual performance fee target. This amount is included in general and administrative expenses in the
accompanying consolidated statements of operations.
Lifeway is also a party to a royalty agreement
with the Chairperson of its board of directors under which we pay the Chairperson a royalty based on the sale of certain Lifeway products,
not to exceed $50 in any fiscal month. Royalties earned are included in selling expenses in the accompanying consolidated statements of
operations and were $150 during each of the three months ended March 31, 2021 and 2020.
Note 14 – COVID-19
The ultimate impact that the COVID-19 pandemic or any future pandemic
or disease outbreak will have on our business and our consolidated results of operations is uncertain.
To date we
have seen increased customer and consumer demand for our products as consumers initially began pantry loading and have increased their
at-home consumption as a result of social distancing and stay-at-home and work-from-home mandates and recommendations. However, this increased
customer and consumer demand may decrease in the coming months if and when the need for social distancing and stay-at-home and work-from-home
mandates and recommendations decrease, and we are unable to predict the nature and timing of when that impact may occur, if at all.
Although to
date we have not experienced supply chain constraints, and we have continued to be able to fully satisfy customer and consumer demand
for our products, the continued unprecedented demand for food and other consumer packaged goods products as a result of the COVID-19 pandemic
or any future pandemic may limit the availability of, or increase the cost of, ingredients, packaging and other raw materials necessary
to produce our products, and our operations may be negatively impacted. Additionally, pandemics or disease outbreaks could result in a
widespread health crisis that could adversely affect economies and financial markets, consumer spending and confidence levels resulting
in an economic downturn that could affect customer and consumer demand for our products.
Our efforts
to manage and mitigate these factors may be unsuccessful, and the effectiveness of these efforts depends on factors beyond our control,
including the duration and severity of any pandemic or disease outbreak, as well as third party actions taken to contain its spread and
mitigate public health effects.
The ultimate
impact of the COVID-19 pandemic on our business will depend on many factors, including, among others, the duration of social distancing
and stay-at-home and work-from-home mandates and recommendations and whether additional waves of COVID-19 or different variants of COVID-19
will affect the United States and other markets, our ability and the ability of our suppliers to continue to operate our and their manufacturing
facilities and maintain the supply chain without material disruption and procure ingredients, packaging and other raw materials when needed
despite unprecedented demand in the food industry, and the extent to which macroeconomic conditions resulting from the pandemic and the
pace of the subsequent recovery may impact consumer eating and shopping habits. We cannot predict the duration or scope of the disruption.
Therefore, the financial impact cannot be reasonably estimated at this time.