Notes to Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data)
Note 1 – 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 certain information and footnote 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 the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Results
of operations for any interim period are not necessarily indicative of future or annual results.
Principles of consolidation
The 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.
Restatement of Previously Issued Consolidated
Financial Statements
As previously disclosed in Note 1 to the Company’s
consolidated financial statements included in the 2021 Form 10-K, the Company identified past errors in the accounting for deferred income
tax liabilities and goodwill that resulted from a 2009 acquisition when preparing the 2021 consolidated financial statements. In the
2021 Form 10-K, the Company restated its historical consolidated financial statements to properly reflect the impact of the 2009 acquisition,
which resulted in adjustments to goodwill and deferred income tax liabilities in the affected periods. The consolidated financial statements
for the three months ended March 31, 2021 included in this Quarterly Report on Form 10-Q have been similarly restated to reflect the
correction of these errors and should be read in conjunction with Notes 1 and 17 to the Company’s consolidated financial statements
included in the 2021 Form 10-K.
Note
2 – Summary of Significant Accounting Policies
A detailed description of our significant accounting
policies can be found in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
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
The Company has $580 of restricted cash which
is included in cash and cash equivalents as of March 31, 2022. The restricted cash balance represents escrow funds deposited by Lifeway
in connection with the August 18, 2021 acquisition of certain assets of GlenOaks 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
Lifeway sells food and beverage products across
select product categories to customers predominantly within the United States (see Note 12 - Segments, Products and Customers). The Company
also sells bulk cream, a byproduct of its fluid milk manufacturing process. In accordance with ASC 606, Revenue from Contracts with Customers,
Lifeway recognizes revenue when control over the products transfers to its customers, which generally occurs upon delivery to its 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.
Lifeway accounts 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, the Company does not capitalize contract inception costs and it capitalizes product fulfillment costs in accordance with U.S.
GAAP and its inventory policies. Lifeway does not have any significant deferred revenue or unbilled receivables at the end of a period.
It generally does not receive noncash consideration for the sale of goods, nor does it grant payment financing terms greater than one
year.
Advertising and promotional costs
Lifeway expenses advertising costs as incurred
and is reported in Selling expense in the Company’s consolidated statement of operations. Total advertising expense was $1,204 and
$1,393 for the three months ended March 31, 2022 and 2021, respectively.
Segments
The Company is managed as a single reportable
segment. The Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), reviews financial
information on an aggregate basis for purposes of allocating resources and assessing financial performance, as well as for making strategic
operational decisions and managing the organization. Substantially all of Lifeway’s consolidated revenues relate to the sale of
cultured dairy products that it produces using the same processes and materials and are sold to consumers through a common network of
distributors and retailers in the United States.
Recent accounting pronouncements
Issued by not yet effective
In October 2021, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“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 evaluating the impact of the new guidance
and does not currently expect the adoption of this ASU to have a material impact on its 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 U.S. 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 evaluating the impact of the
new guidance and does not currently expect the adoption of this ASU to have a material impact on its 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 | |
| | |
| |
| |
March 31, 2022 | | |
December 31, 2021 | |
Ingredients | |
$ | 2,207 | | |
$ | 2,279 | |
Packaging | |
| 2,933 | | |
| 2,723 | |
Finished goods | |
| 3,509 | | |
| 3,283 | |
Total inventories | |
$ | 8,649 | | |
$ | 8,285 | |
Note 4 – Property, Plant and Equipment, net
Property, plant and equipment consisted of the following:
Schedule of property, plant and equipment | |
| | |
| |
| |
March 31, 2022 | | |
December 31, 2021 | |
Land | |
$ | 1,565 | | |
$ | 1,565 | |
Buildings and improvements | |
| 17,961 | | |
| 17,920 | |
Machinery and equipment | |
| 32,420 | | |
| 32,073 | |
Vehicles | |
| 640 | | |
| 640 | |
Office equipment | |
| 900 | | |
| 900 | |
Construction in process | |
| 378 | | |
| 417 | |
| |
| 53,864 | | |
| 53,515 | |
Less accumulated depreciation | |
| (34,042 | ) | |
| (33,385 | ) |
Total property, plant and equipment, net | |
$ | 19,822 | | |
$ | 20,130 | |
Note 5 – Goodwill and Intangible Assets
Goodwill
Goodwill consisted of the following:
Schedule of goodwill | |
| |
| |
Total | |
| |
| |
Balance at December 31, 2021, before accumulated impairment loses | |
$ | 12,948 | |
Accumulated impairment losses | |
| (1,244 | ) |
Balance at December 31, 2021 | |
$ | 11,704 | |
Balance at March 31, 2022 | |
$ | 11,704 | |
Intangible Assets
Other intangible assets, net consisted of the following:
Schedule of finite-lived intangible assets | |
| | |
| | |
| | |
| | |
| | |
| |
| |
March 31, 2022 | | |
December 31, 2021 | |
| |
Gross | | |
| | |
Net | | |
Gross | | |
| | |
Net | |
| |
Carrying | | |
Accumulated | | |
Carrying | | |
Carrying | | |
Accumulated | | |
Carrying | |
| |
Amount | | |
Amortization | | |
Amount | | |
Amount | | |
Amortization | | |
Amount | |
Intangible assets with finite lives: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Recipes | |
$ | 44 | | |
$ | (44 | ) | |
$ | – | | |
$ | 44 | | |
$ | (44 | ) | |
$ | – | |
Customer lists and other customer related intangibles | |
| 4,529 | | |
| (4,529 | ) | |
| – | | |
| 4,529 | | |
| (4,529 | ) | |
| – | |
Customer relationship | |
| 3,385 | | |
| (1,092 | ) | |
| 2,293 | | |
| 3,385 | | |
| (1,052 | ) | |
| 2,333 | |
Brand names | |
| 7,948 | | |
| (2,398 | ) | |
| 5,550 | | |
| 4,248 | | |
| (2,303 | ) | |
| 1,945 | |
Formula | |
| 438 | | |
| (438 | ) | |
| – | | |
| 438 | | |
| (438 | ) | |
| – | |
Total finite lived intangible assets | |
| 16,344 | | |
| (8,501 | ) | |
| 7,843 | | |
| 12,644 | | |
| (8,366 | ) | |
| 4,278 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Intangible assets with indefinite lives: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Brand names (1) | |
| – | | |
| – | | |
| – | | |
| 3,700 | | |
| – | | |
| 3,700 | |
Total intangible assets | |
$ | 12,644 | | |
$ | (8,501 | ) | |
$ | 7,843 | | |
$ | 16,344 | | |
$ | (8,366 | ) | |
$ | 7,978 | |
| (1) | During the fourth quarter of 2021, the Company completed an assessment of the useful life of its one indefinite-lived
brand name intangible asset and determined that it should adjust the estimated useful life from an indefinite length to 15 years. The
change in accounting estimate was effective January 1, 2022, at which time the Company began amortizing the intangible asset over 15 years.
The cost and accumulated amortization is included in Brand Names in the intangible assets with finite lives in the table above as of January
1, 2022. The Company has reclassified the $3,700 net book value as of December 31, 2021 from goodwill to finite lived intangible assets
to conform the presentation as of March 31, 2022. |
Estimated amortization expense on intangible assets
for the next five years is as follows:
Schedule of amortization expense on intangible assets | |
| |
Year | |
Amortization | |
Nine months ended December 31, 2022 | |
$ | 405 | |
2023 | |
$ | 540 | |
2024 | |
$ | 540 | |
2025 | |
$ | 540 | |
2026 | |
$ | 540 | |
Note 6 – Accrued Expenses
Accrued expenses consisted of the following:
Schedule of accrued expenses | |
| | |
| |
| |
March 31, 2022 | | |
December 31, 2021 | |
Payroll and incentive compensation | |
$ | 2,444 | | |
$ | 2,951 | |
Real estate taxes | |
| 295 | | |
| 359 | |
Current portion of operating lease liabilities | |
| 118 | | |
| 131 | |
Other | |
| 333 | | |
| 283 | |
Total accrued expenses | |
$ | 3,190 | | |
$ | 3,724 | |
Note 7 – Debt
Note payable consisted of the following:
Schedule of debt | |
| | |
| |
| |
March 31, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Term loan due August 18, 2026. Interest (2.42% at March 31, 2022) payable monthly. | |
$ | 4,250 | | |
$ | 4,500 | |
Unamortized deferred financing costs | |
| (28 | ) | |
| (30 | ) |
Total note payable | |
| 4,222 | | |
| 4,470 | |
Less current portion | |
| (1,000 | ) | |
| (1,000 | ) |
Total long-term portion | |
$ | 3,222 | | |
$ | 3,470 | |
The scheduled maturities of the term loan, excluding deferred financing
costs, at March 31, 2022 are as follows:
Schedule of maturities of long-term debt | |
| |
Nine months ended December 31, 2022 | |
$ | 750 | |
2023 | |
| 1,000 | |
2024 | |
| 1,000 | |
2025 | |
| 1,000 | |
2026 | |
| 500 | |
Total term loan | |
$ | 4,250 | |
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. 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 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%.
The Modified Credit Agreement includes 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, and a minimum working capital financial covenant, as defined, of no less than $11.25 million,
in 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 the Company’s assets.
Lifeway was in compliance with the fixed charge
coverage ratio and minimum working capital covenants at March 31, 2022.
Revolving Credit Facility
As of March 31, 2022, the Company had $2,777
outstanding under the Revolving Credit Facility. The Company had $2,223
available for future borrowings under the Revolving Credit Facility as of March 31, 2022. Lifeway’s interest rate on debt
outstanding under the Revolving Credit Facility as of March 31, 2022 was 2.24%.
Note 8 – Leases
The Company 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 one year
to five years. Some of its 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. Lifeway does not currently have leases which
meet the finance lease classification as defined under ASC 842.
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, it directs the use of the asset
and obtain substantially all the economic benefits of the asset.
The Company does 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 $65 and $78
(including short term leases) for the three months ended March 31, 2022 and 2021, respectively.
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.
Lifeway has elected the practical expedient to combine lease and non-lease components into a single component for all of its leases. When
the Company is unable to determine an implicit interest rate, it uses its incremental borrowing rate based on the information available
at the commencement date in determining the present value of future payments for those leases. Lifeway includes 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 it 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 | |
Nine months ended March 31, 2022 | |
$ | 120 | |
2023 | |
| 63 | |
2024 | |
| 46 | |
2025 | |
| 22 | |
2026 | |
| 6 | |
Thereafter | |
| – | |
Total lease payments | |
| 257 | |
Less: Interest | |
| (41 | ) |
Present value of lease liabilities | |
$ | 216 | |
The weighted-average remaining lease term for
its operating leases was 2.4 years as of March 31, 2022. The weighted average discount rate of its operating leases was 12.9% as of March
31, 2022. Cash paid for amounts included in the measurement of lease liabilities was $43 and $142 for the three months ended March 31,
2022 and 2021, respectively.
Note 9 – Commitments and contingencies
Litigation
Lifeway is involved in various legal proceedings,
claims, disputes, regulatory matters, audits, and proceedings arising in the ordinary course of, or incidental to the Company’s
business, including commercial disputes, product liabilities, intellectual property matters and employment-related matters.
Lifeway records provisions in the consolidated
financial statements for pending legal matters when it believes it is probable that a loss will be incurred and the amount of such loss
can be reasonably estimated. The Company evaluates, on a periodic basis, developments in legal matters that could affect the amount of
any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not
both probable and estimable, it does not establish an accrued liability. Currently, none of its accruals for outstanding legal matters
are material individually or in the aggregate to its 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 its business, financial condition, results of operations,
or cash flows. However, if the Company is ultimately required to make payments in connection with an adverse outcome, it is possible
that such contingency could have a material adverse effect on the Company’s business, financial condition, results of operations
or cash flows.
Note 10 – Income taxes
Income taxes were recognized at effective rates
of 18.1% and 31.2%
for the three months ended March 31, 2022 and 2021, respectively.
The Company has historically calculated the provision
for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year income,
excluding unusual or infrequently occurring discrete items, for the reporting period. In accordance with the authoritative guidance, the
Company used a discrete effective tax rate method to calculate income taxes for the quarter ended March 31, 2022 because small changes
in the estimated level and mix of annual income or loss by jurisdiction would result in significant changes in the estimated annual effective
tax rate making the historical method unreliable.
The Company’s 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 jurisdictional mix of earnings, enacted tax legislation, state income taxes, the impact of non-deductible items, changes
in valuation allowances, settlement of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits.
The Company records discrete income tax items such as enacted tax rate changes and completed tax audits in the period in which they occur.
Unrecognized tax benefits were $0
and $96 at March 31, 2022 and 2021,
respectively. The Company settled its one unrecognized tax benefit during the quarter ended March 31, 2022. The Company does not expect
material changes to its unrecognized tax benefits during the next twelve months. 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.
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, 2022, 3.281 million shares remain available under the Omnibus Incentive Plan. While the Company
plans to continue to issue awards pursuant to the Plan at least annually, it 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, 2022:
Schedule of stock option activity | |
| | |
| | |
| | |
| |
| |
Options | | |
Weighted average exercise price | | |
Weighted average remaining contractual life | | |
Aggregate intrinsic value | |
| |
| | |
| | |
| | |
| |
Outstanding at December 31, 2021 | |
| 41 | | |
$ | 10.42 | | |
| 4.22 | | |
$ | – | |
Granted | |
| – | | |
| – | | |
| – | | |
| – | |
Exercised | |
| – | | |
| – | | |
| – | | |
| – | |
Forfeited | |
| – | | |
| – | | |
| – | | |
| – | |
Outstanding at March 31, 2022 | |
| 41 | | |
$ | 10.42 | | |
| 3.97 | | |
$ | – | |
Exercisable at March 31, 2022 | |
| 41 | | |
$ | 10.42 | | |
| 3.97 | | |
$ | – | |
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 the Company’s closing stock price on the grant date. Lifeway expenses RSAs over the service period. Board members may elect
to defer receipt of their awards until their departure from the Board of Directors, subject to shareholder ratification at the 2022 annual
shareholders meeting. The following table summarizes RSA activity during the three months ended March 31, 2022.
Schedule of RSA Activity | |
Restricted Stock Awards | | |
Weighted Average Grant Date Fair Value | |
| |
| | |
| |
Outstanding at December 31, 2021 | |
| 94 | | |
$ | 4.50 | |
Granted | |
| – | | |
| – | |
Shares issued upon vesting | |
| – | | |
| – | |
Forfeited | |
| – | | |
| – | |
Outstanding at March 31, 2022 | |
| 94 | | |
| 4.50 | |
Vested and deferred at March 31, 2022 | |
| 35 | | |
$ | 5.69 | |
For the three months ended March 31, 2022 and
2021 total pre-tax stock-based compensation expense recognized in the consolidated statements of operations was $63
and $36,
respectively. For the three months ended March 31, 2022 and 2021 tax-related benefits of $18
and $11,
respectively, were also recognized. Future compensation expense related to restricted stock awards was $135
as of March 31, 2022 and will be recognized on a weighted average basis over the next 1.12
years.
Long-Term Incentive Plan Compensation
Lifeway established long-term incentive-based
compensation programs for fiscal year 2019 (the “2019 Plan”) and for fiscal year 2021 (the “2021 Plan”) for certain
senior executives and key employees (the “participants”). 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. 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.
2020 CEO Incentive Award
During the fourth quarter 2020, Lifeway awarded
a long-term equity-based incentive of $750 to its 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, 2022 and 2021, $85 and $90 was expensed
as stock-based compensation expense in the consolidated statements of operations, respectively. As of March 31, 2022, the total remaining
unearned compensation was $274, of which $144 will be recognized in 2022, $106 in 2023, $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
three months ended March 31, 2022 and 2021, $166
and $0 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. As of March 31,
2022, the total remaining unearned compensation was $516,
of which $283
will be recognized in 2022, $194
in 2023, $39
in 2024, respectively, subject to vesting. As of March 31, 2022, 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 March 31, 2022. 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, the Company matches employee contributions under a
prescribed formula. For the three months ended March 31, 2022 and 2021 total contribution expense recognized in the consolidated statements
of operations was $129 and $113, respectively.
Note 12
– Products and Customers
Lifeway’s primary product is drinkable kefir.
The Company manufactures (directly or through a co-manufacturer) and markets products under the Lifeway, Fresh Made, and GlenOaks Farms
brand names, as well as under private labels on behalf of certain customers.
The Company’s product categories are:
|
· |
Drinkable Kefir, a cultured dairy product sold in a variety of organic and non-organic sizes, flavors, and types. |
|
· |
European-style soft cheeses, including farmer cheese, white cheese, and Sweet Kiss. |
|
· |
Cream and other, which primarily consists of cream, a byproduct of raw milk processing. |
|
· |
Drinkable Yogurt, sold in a variety of sizes and flavors. |
|
· |
ProBugs, a line of kefir products designed for children. |
|
· |
Other Dairy, which primarily consists of Fresh Made butter and sour cream. |
Net sales by product category were as
follows for the three months ended March 31:
Schedule of sales of products by category | |
| | |
| | |
| | |
| |
| |
2022 | | |
2021 | |
| |
$ | | |
% | | |
$ | | |
% | |
Drinkable Kefir other than ProBugs | |
$ | 26,362 | | |
| 77% | | |
$ | 24,203 | | |
| 82% | |
Cheese | |
| 3,024 | | |
| 9% | | |
| 3,199 | | |
| 11% | |
Cream and other | |
| 1,968 | | |
| 6% | | |
| 863 | | |
| 3% | |
Drinkable yogurt | |
| 1,551 | | |
| 5% | | |
| – | | |
| 0% | |
ProBugs Kefir | |
| 782 | | |
| 2% | | |
| 680 | | |
| 2% | |
Other dairy | |
| 412 | | |
| 1% | | |
| 431 | | |
| 2% | |
Net Sales | |
$ | 34,099 | | |
| 100% | | |
$ | 29,376 | | |
| 100% | |
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 three months ended March 31, 2022 and 2021, 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, the Company’s 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.
On January 4, 2022, the Company notified the Chairperson that it was terminating the agreement effective January
17, 2022. The Chairperson will continue as Chairperson of the Board of Directors.
Service fees earned are included in general and
administrative expenses in the accompanying consolidated statements of operations and were $22
and $125 during
each of the three months ended March 31, 2022 and 2021, respectively.
Lifeway is also a party to a royalty agreement
with the Chairperson of its Board of Directors under which it pays 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, 2022 and 2021.