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.
Cash and cash equivalents
Lifeway considers cash and all highly liquid
investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated
at cost, which approximates or equals fair value due to their short-term nature.
Lifeway from time to time may have bank deposits
in excess of insurance limits of the Federal Deposit Insurance Corporation. Lifeway has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk related to its cash and cash equivalents.
The Company has $580 of restricted cash which
is included in cash and cash equivalents as of September 30, 2021. The restricted cash balance represents escrow funds deposited by Lifeway
in connection with the September 18, 2021 acquisition of certain assets of Glen Oaks Farms, Inc. The funds are security for the liability
and indemnity obligations of seller as defined under the asset purchase agreement. The funds will remain in escrow for twelve months
from the acquisition closing date, at which time the funds, less any amounts for outstanding seller obligations, will be remitted to
the sellers.
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 nine months ended September 30, 2021 and 2020 total advertising expenses were $2,892 and $1,700 respectively. For the three months
ended September 30, 2021 and 2020 total advertising expenses were $726 and $380, 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 October 2021, the FASB issued ASU No. 2021-08,
Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new guidance
provides a single comprehensive accounting model on revenue recognition for contracts with customers and requires that the acquirer in
a business combination recognize and measure contract assets and liabilities acquired in a business combination in accordance with Topic
606 (Revenue from Contracts with Customers). The amendments in this ASU are effective for fiscal years beginning after December 15, 2022.
Early adoption is permitted, including adoption in an interim period. With early adoption, the amendments are applied retrospectively
to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim
period of adoption and prospectively to all business combinations that occur on or after the date of initial application. Management is
currently evaluating the impact that the new guidance will have on the consolidated financial statements.
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
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:
Schedule Of Inventories
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Ingredients
|
|
$
|
2,120
|
|
|
$
|
1,725
|
|
Packaging
|
|
|
2,632
|
|
|
|
2,234
|
|
Finished goods
|
|
|
2,820
|
|
|
|
2,971
|
|
Total inventories
|
|
$
|
7,572
|
|
|
$
|
6,930
|
|
Note 4 – Property, Plant and Equipment, net
Property, plant and equipment consisted of the following:
Schedule of property, plant and equipment
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Land
|
|
$
|
1,565
|
|
|
$
|
1,565
|
|
Buildings and improvements
|
|
|
18,082
|
|
|
|
17,834
|
|
Machinery and equipment
|
|
|
31,959
|
|
|
|
31,707
|
|
Vehicles
|
|
|
778
|
|
|
|
778
|
|
Office equipment
|
|
|
895
|
|
|
|
857
|
|
Construction in process
|
|
|
399
|
|
|
|
228
|
|
|
|
|
53,678
|
|
|
|
52,969
|
|
Less accumulated depreciation
|
|
|
(33,132
|
)
|
|
|
(31,921
|
)
|
Total property, plant and equipment, net
|
|
$
|
20,546
|
|
|
$
|
21,048
|
|
Note 5 – Goodwill and Intangible Assets
Goodwill and indefinite-lived intangible assets consisted of the following:
Goodwill & indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
Brand Names
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020, before accumulated impairment loses
|
|
$
|
10,368
|
|
|
$
|
3,700
|
|
|
$
|
14,068
|
|
Accumulated impairment loses
|
|
|
(1,244
|
)
|
|
|
–
|
|
|
|
(1,244
|
)
|
Balance at December 31, 2020
|
|
|
9,124
|
|
|
|
3,700
|
|
|
|
12,824
|
|
Acquisition (1)
|
|
|
1,400
|
|
|
|
–
|
|
|
|
1,400
|
|
Balance at September 30, 2021
|
|
$
|
10,524
|
|
|
$
|
3,700
|
|
|
$
|
14,224
|
|
|
(1)
|
Refer to Note 15 for additional information regarding acquisition-related adjustments to goodwill
|
Finite-lived Intangible Assets
Other intangible assets, net consisted of the following:
Schedule of other intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Recipes
|
|
$
|
44
|
|
|
$
|
(44
|
)
|
|
$
|
–
|
|
|
$
|
44
|
|
|
$
|
(44
|
)
|
|
$
|
–
|
|
Customer lists and other customer related intangibles
|
|
|
4,529
|
|
|
|
(4,529
|
)
|
|
|
–
|
|
|
|
4,529
|
|
|
|
(4,529
|
)
|
|
|
–
|
|
Customer relationship
|
|
|
3,385
|
|
|
|
(1,003
|
)
|
|
|
2,382
|
|
|
|
985
|
|
|
|
(985
|
)
|
|
|
–
|
|
Brand names
|
|
|
4,248
|
|
|
|
(2,263
|
)
|
|
|
1,985
|
|
|
|
2,248
|
|
|
|
(2,248
|
)
|
|
|
–
|
|
Formula
|
|
|
438
|
|
|
|
(438
|
)
|
|
|
–
|
|
|
|
438
|
|
|
|
(438
|
)
|
|
|
–
|
|
Total finite lived intangible assets
|
|
$
|
12,644
|
|
|
$
|
(8,277
|
)
|
|
$
|
4,367
|
|
|
$
|
8,244
|
|
|
$
|
(8,244
|
)
|
|
$
|
–
|
|
Note 6 – Accrued Expenses
Accrued expenses consisted of the following:
Schedule Of Accrued Expenses
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Payroll and incentive compensation
|
|
$
|
3,095
|
|
|
$
|
1,366
|
|
Real estate taxes
|
|
|
334
|
|
|
|
341
|
|
Current portion of operating lease liabilities
|
|
|
142
|
|
|
|
179
|
|
Other
|
|
|
301
|
|
|
|
310
|
|
Total accrued expenses
|
|
$
|
3,872
|
|
|
$
|
2,196
|
|
Note 7 – Debt
Note payable consisted of the following:
Schedule of note payable
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
|
|
|
|
|
|
Variable rate term loan due August 18, 2026. Principal and interest (2.15% at September 30, 2021) payable monthly.
|
|
$
|
4,750
|
|
|
$
|
–
|
|
Unamortized deferred financing costs
|
|
|
(24
|
)
|
|
|
–
|
|
Total note payable
|
|
|
4,726
|
|
|
|
–
|
|
Less current portion
|
|
|
(1,000
|
)
|
|
|
–
|
|
Total long-term portion
|
|
$
|
3,726
|
|
|
$
|
–
|
|
Credit Agreement
On August 18, 2021, Lifeway entered into the Fourth Modification (the
“Fourth Modification”) to the Amended and Restated Loan and Security Agreement (as amended and modified from time to time,
the “Credit Agreement” and, as amended and modified by the Fourth Modification, the “Modified Credit Agreement”)
with its existing lender and certain of its subsidiaries. The Fourth Modification amends the Credit Agreement to provide for, among other
things, a $5 million term loan by the existing lender to the borrowers to be repaid in quarterly installments of principal and interest
over a term of five years (the “Term Loan”). The termination date of the Term Loan is August 18, 2026, unless earlier
terminated. Except for the addition of the Term Loan, the Credit Agreement remains substantively unchanged and in full force and effect.
As amended, all outstanding amounts under the
revolving line of credit and term loan 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 revolving line of credit
fee of 0.20% and, in conjunction with the issuance of any letters of credit, a letter of credit fee of 0.20%.
Revolving Credit Facility
As of September 30, 2021, we had $2,777 outstanding
under the Revolving Credit Facility. We had $2,223 available for future borrowings under the Revolving Credit Facility as of September
30, 2021. Lifeway’s interest rate on debt outstanding under the Revolving Credit Facility as of September 30, 2021 was 2.15%.
Deferred Financing Costs
As of September 30, 2021, net unamortized deferred
financing costs of $24 related to the term loan were included as a direct deduction from outstanding long-term debt.
Except as described above, as amended, the Modified
Credit Agreement 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 Credit Agreement 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 Credit Agreement may be accelerated. The loans and all other amounts due and owed
under the Credit Agreement and related documents are secured by substantially all of our assets.
We were in compliance with the fixed charge coverage
ratio and minimum working capital covenants at September 30, 2021.
Note 8 – Leases
Lifeway had 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 the operating lease of one of the Lifeway Kefir Shop retail stores during July
2021. The Company terminated its office space leases in September 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 $245 and $392 (including short term leases) for the nine months ended September 30, 2021 and 2020, respectively.
Total lease expense was $76 and $81 (including short term leases) for the three months ended September 30, 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:
Future maturities of lease liabilities
|
|
|
|
Year
|
|
Operating Leases
|
|
Three months ended December 31, 2021
|
|
$
|
45
|
|
2022
|
|
|
149
|
|
2023
|
|
|
47
|
|
2024
|
|
|
30
|
|
2025
|
|
|
18
|
|
Thereafter
|
|
|
6
|
|
Total lease payments
|
|
|
295
|
|
Less: Interest
|
|
|
(40
|
)
|
Present value of lease liabilities
|
|
$
|
255
|
|
The weighted-average remaining lease term for
our operating leases was 2.5 years as of September 30, 2021. The weighted average discount rate of our operating leases was 12.10% as
of September 30, 2021. Cash paid for amounts included in the measurement of lease liabilities was $153 and $328 the nine months ended
September 30, 2021 and 2020, respectively. Cash paid for amounts included in the measurement of lease liabilities was $46 and $56 for
the three months ended September 30, 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 nine months ended September 30, 2021 was 35.2% compared to 29.3% for the nine months ended September
30, 2020. The effective tax rate for the three months ended September 30, 2021 was 52.3% compared to 29.5% for the three months ended
September 30, 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 nine months ended September 30, 2020.
Unrecognized tax benefits were $98 and $93 at
September 30, 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 September 30, 2021, 3.281 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, 2021:
Stock option activity table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2021
|
|
|
41
|
|
|
$
|
10.42
|
|
|
|
4.47
|
|
|
$
|
–
|
|
Exercisable at September 30, 2021
|
|
|
41
|
|
|
$
|
10.42
|
|
|
|
4.47
|
|
|
$
|
–
|
|
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
September 30, 2021.
RSA activity table
|
|
|
|
|
|
|
RSA’s
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
78
|
|
Granted
|
|
|
25
|
|
Shares issued upon vesting
|
|
|
(43
|
)
|
Forfeited
|
|
|
–
|
|
Outstanding at September 30, 2021
|
|
|
60
|
|
Weighted average grant date fair value per share outstanding
|
|
$
|
3.80
|
|
We expense RSA’s over the service period.
For the nine months ended September 30, 2021 and 2020 total pre-tax stock-based compensation expense recognized in the consolidated statements
of operations was $106 and $51, respectively. For the nine months ended September 30, 2021 and 2020 tax-related benefits of $31 and $14,
respectively, were also recognized. For the three months ended September 30, 2021 and 2020 total pre-tax stock-based compensation expense
recognized in the consolidated statements of operations was $37 and $28, respectively. For the three months ended September 30, 2021 and
2020 tax-related benefits of $11 and $8, respectively, were also recognized. As of September 30, 2021, the total remaining unearned compensation
related to non-vested RSA’s was $159, which is expected to be amortized over the weighted-average remaining service period of 1.38
years.
Long-Term Incentive Plan Compensation
Lifeway established long-term incentive-based
compensation programs for fiscal year 2017 (the “2017 Plan”), fiscal year 2019 (the “2019 Plan”), and for fiscal
year 2021 (the “2021 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 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. Under
the 2021 Plan, long-term incentive compensation is based on Lifeway’s achievement of adjusted EBITDA performance versus the respective
target established by the Board for 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, 2021 and 2020, $0 and $49 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, 2021 and 2020, $0 was expensed
as stock-based compensation expense in the consolidated statements of operations, respectively. As of September 30, 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 nine
months ended September 30, 2021 and 2020, $89 and $90 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, 2021 and 2020, $35 and $1 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 nine months ended September 30, 2021 and 2020, $0 and $73 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,
2021 and 2020, $0 and $15 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively.
As of September 30, 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 nine months ended September 30, 2021 and 2020, $255 and $0 was expensed as
stock-based compensation expense in the consolidated statements of operations, respectively. For the three months ended September 30,
2021 and 2020, $85 and $0 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively.
As of September 30, 2021, the total remaining unearned compensation was $445, of which $87 will be recognized in 2021, $229 in 2022, $105
in 2023, and $24 in 2024, respectively, subject to vesting. During Q2 2021, the number of shares awarded became fixed and determinable.
Therefore, the award liability was reclassified from long-term liabilities to paid in capital.
2021 Equity Award
Under the 2021 Plan, collectively the participants
can earn equity-based incentive compensation in amounts ranging from $0 to $1,069 depending on Lifeway’s achievement of the respective
financial target. The equity-based incentive compensation is payable in restricted stock that is expected to vest one-third in March
2022, one-third in March 2023, and one-third in March 2024. For the nine months ended September 30, 2021, $150
was expensed under the 2021 Plan as stock-based compensation expense in the consolidated statements of operations, respectively.
For the three months ended September 30, 2021, $150
was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. As of September 30,
2021, the total remaining unearned compensation was $919,
of which $236
will be recognized in 2021, $474
in 2022, $181
in 2023, and $28
in 2024, respectively, subject to vesting. As of September 30, 2021, the number of shares to be awarded is not fixed and determinable.
Therefore, the liability is classified in accrued expenses and other long-term liabilities as of September 30, 2021. When the number
of shares awarded becomes fixed and determinable, the award liability will be reclassified from liabilities to paid in capital.
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, 2021 and 2020 total contribution expense recognized in the consolidated statements of
operations was $315 and $307, respectively. For the three months ended September 30, 2021 and 2020 total contribution expense recognized
in the consolidated statements of operations was $97 and $93, 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, Fresh Made, and Glen Oaks Farms 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.
|
|
·
|
Drinkable Yogurt, sold in a variety of sizes and flavors.
|
|
·
|
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 nine months ended September 30:
Schedule of sales of products by category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Drinkable Kefir other than ProBugs
|
|
$
|
72,204
|
|
|
|
82%
|
|
|
$
|
61,155
|
|
|
|
80%
|
|
Cheese
|
|
|
9,158
|
|
|
|
11%
|
|
|
|
9,619
|
|
|
|
13%
|
|
Cream and other
|
|
|
2,568
|
|
|
|
3%
|
|
|
|
2,120
|
|
|
|
3%
|
|
ProBugs Kefir
|
|
|
2,197
|
|
|
|
2%
|
|
|
|
1,946
|
|
|
|
2%
|
|
Other dairy
|
|
|
1,010
|
|
|
|
1%
|
|
|
|
1,171
|
|
|
|
1%
|
|
Drinkable yogurt
|
|
|
739
|
|
|
|
1%
|
|
|
|
–
|
|
|
|
0%
|
|
Frozen Kefir (a)
|
|
|
215
|
|
|
|
0%
|
|
|
|
430
|
|
|
|
1%
|
|
Net Sales
|
|
$
|
88,091
|
|
|
|
100%
|
|
|
$
|
76,441
|
|
|
|
100%
|
|
(a)
|
Includes Lifeway Kefir
Shop sales
|
Net sales of products by category were as follows
for the three months ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Drinkable Kefir other than ProBugs
|
|
$
|
23,831
|
|
|
|
81%
|
|
|
$
|
21,152
|
|
|
|
81%
|
|
Cheese
|
|
|
2,937
|
|
|
|
10%
|
|
|
|
3,105
|
|
|
|
12%
|
|
Cream and other
|
|
|
877
|
|
|
|
3%
|
|
|
|
688
|
|
|
|
3%
|
|
ProBugs Kefir
|
|
|
766
|
|
|
|
3%
|
|
|
|
629
|
|
|
|
2%
|
|
Drinkable yogurt
|
|
|
739
|
|
|
|
2%
|
|
|
|
–
|
|
|
|
0%
|
|
Other dairy
|
|
|
312
|
|
|
|
1%
|
|
|
|
363
|
|
|
|
1%
|
|
Frozen Kefir (a)
|
|
|
91
|
|
|
|
0%
|
|
|
|
102
|
|
|
|
1%
|
|
Net Sales
|
|
$
|
29,553
|
|
|
|
100%
|
|
|
$
|
26,039
|
|
|
|
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
23% and 21% of net sales for the nine months ended September 30, 2021 and 2020, respectively. Two major customers accounted for approximately
23% and 22% of net sales for the three months ended September 30, 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 by the Chairperson are included
in general and administrative expenses in the accompanying consolidated statements of operations and were $375 and $750 during each of
the nine months ended September 30, 2021 and 2020, respectively. 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 September 30, 2021
and 2020, respectively. During the nine months ended September 30, 2021, the Company recorded $282 related to estimated earnings under
the fiscal year 2021 annual performance fee target. During the three months ended September 30, 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 by the Chairperson are included in selling expenses in the accompanying consolidated
statements of operations and were $450 during the nine months ended September 30, 2021 and 2020. Royalties earned are included in selling
expenses in the accompanying consolidated statements of operations and were $150 during each of the three months ended September 30, 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.
Note 15 – Business Acquisition
On August 18, 2021, the Company completed the acquisition of certain
assets of GlenOaks Farms Inc. for a purchase price of $5,800 in cash. Glen Oaks is engaged in the manufacture, development, and sale of
probiotic drinkable yogurt. The acquisition of GlenOaks Farms initiates Lifeway’s expansion outside of kefir and into drinkable
yogurt. The current distribution of GlenOaks Farms in western U.S. retailers is strategically significant for Lifeway as the Company seeks
to further grow its presence in this region. From a portfolio perspective, it complements the Company’s eastern U.S. presence with
the Freshmade brand and national strength with Lifeway. The acquisition was funded through the proceeds of a $5,000 note payable (see
Note 7) and the Company’s existing cash resources.
Management considers the purchase of
Glenoaks Farms Inc. to consist of inputs, processes and outputs and has accounted for the purchase as a business combination. The
acquisition was accounted for under the acquisition method of accounting and the results of operations were included in our
consolidated statement of operations from the date of acquisition. Included in the Company’s consolidated statements of
operations are the acquisition’s net sales of $739
and income before income taxes of approximately $
from the date of acquisition through September 30, 2021. The Company incurred approximately $83
in acquisition-related costs which are expensed as incurred and included in general and administrative expense on the consolidated
statement of operations. Pro-forma results of operation have not been presented as the effect would not be material to the
Company’s results of operations for any periods presented.
The following table
summarizes the preliminary purchase price allocation of the fair value of intangible assets acquired and liabilities assumed:
Schedule of purchase price allocation
|
|
|
|
|
|
|
$
|
|
|
|
|
|
Customer relationships
|
|
|
2,400
|
|
Brand name
|
|
|
2,000
|
|
Goodwill
|
|
|
1,400
|
|
Assets acquired
|
|
|
5,800
|
|
Liabilities assumed
|
|
|
–
|
|
Total purchase price
|
|
|
5,800
|
|
The purchase price allocation
in the table above is preliminary and subject to the finalization of the Company’s valuation analysis. The fair value for the customer
relationships at the acquisition date were determined using the excess earnings method under the income approach. The brand name fair
value was determined using the relief from royalty method. The customer relationship and brand name intangible assets have an estimated
life of 15 years and will be amortized over that period. The fair value measurements of intangible assets are based on significant unobservable
inputs, and thus represent Level 3 inputs. Significant assumptions used in assessing the fair values of intangible assets include discounted
future cash flows, customer attrition rates, and royalty rates. Goodwill arises principally as a result of category expansion opportunities
to better serve its regional and national customers. The goodwill resulting from the acquisition is tax deductible.