Lifeway Foods, Inc. - Quarter Report: 2009 March (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
______________________________________
|
(Mark
One)
|
|
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For
the quarterly period ended: March 31, 2009
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o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For
the transition period from __________ to __________
Commission
File Number: 000-17363
______________________________________
LIFEWAY
FOODS, INC.
(Exact
Name of Registrant as Specified in its Charter)
______________________________________
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Illinois
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36-3442829
|
|
(State
or Other Jurisdiction of Incorporation or
Organization)
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(I.R.S.
Employer Identification No.)
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6431 West Oakton, Morton Grove, IL
60053
(Address
of Principal Executive Offices, Zip Code)
(847-967-1010)
(Registrant’s
Telephone Number, Including Area Code)
|
Indicate
by check mark whether the registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the past 12 months (or for such shorter period
that the registrant was required to
file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes o
No x
|
|
Indicate
by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any,
every Interactive Data file required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405
of
this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and
post such files). Yes o
No o
|
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer
or a smaller reporting company. See definition of “large accelerated
filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
|
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company x
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
o
No x
|
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As
of April 30, 2009, the issuer had 16,819,920 shares of common
stock, no par value, outstanding.
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LIFEWAY
FOODS, INC.
CONTENTS
TO FORM 10-Q
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PART
I —
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FINANCIAL
INFORMATION
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Page(s)
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ITEM
1.
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FINANCIAL
STATEMENTS.
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2
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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7
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ITEM
2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
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22
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ITEM
3.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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24
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ITEM 4T.
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CONTROLS
AND PROCEDURES.
|
24
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PART
II —
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OTHER
INFORMATION
|
|
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ITEM
1.
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LEGAL
PROCEEDINGS.
|
24
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ITEM 1A.
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RISK
FACTORS.
|
24
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ITEM
2.
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UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|
24
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ITEM
3.
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DEFAULTS
UPON SENIOR SECURITIES.
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25
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ITEM
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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25
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ITEM
5.
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OTHER
INFORMATION.
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25
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ITEM
6.
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EXHIBITS.
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25
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SIGNATURES
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26
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EXHIBIT
INDEX
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27
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1
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
MARCH
31, 2009 and 2008
AND
DECEMBER 31, 2008
2
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Consolidated
Statements of Financial Condition
March
31, 2009 and 2008 (Unaudited) and December 31, 2008
|
(Unaudited)
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||||||||||||
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March
31,
|
December
31,
|
|||||||||||
|
2009
|
2008
|
2008
|
||||||||||
|
ASSETS
|
||||||||||||
|
Current
assets
|
||||||||||||
|
Cash
and cash equivalents
|
$ | 607,098 | $ | 392,790 | $ | 277,248 | ||||||
|
Marketable
securities
|
4,286,451 | 6,790,850 | 5,262,168 | |||||||||
|
Inventories
|
3,641,748 | 3,669,990 | 3,097,542 | |||||||||
|
Accounts
receivable, net of allowance for doubtful accounts of $35,011 and
$39,460 at March 31, 2009 and 2008 and $110,011 at December
31, 2008
|
6,062,316 | 4,926,058 | 4,765,865 | |||||||||
|
Prepaid
expenses and other current assets
|
23,051 | 9,087 | 23,226 | |||||||||
|
Other
receivables
|
27,472 | 134,298 | 40,314 | |||||||||
|
Deferred
income taxes
|
862,607 | 467,695 | 919,649 | |||||||||
|
Refundable
income taxes
|
73,174 | — | 356,416 | |||||||||
|
Total
current assets
|
15,583,917 | 16,390,768 | 14,742,428 | |||||||||
|
Property
and equipment, net
|
13,723,923 | 9,854,945 | 11,062,714 | |||||||||
|
Intangible
assets
|
||||||||||||
|
Goodwill
and other non amortizable brand asset
|
12,253,845 | 5,414,858 | 5,414,858 | |||||||||
|
Other
intangible assets, net of accumulated amortization of $1,092,112
and $681,837 at March 31, 2009 and 2008 and $921,422 at December
31, 2008
|
6,765,526 | 3,175,801 | 2,936,216 | |||||||||
|
Total
intangible assets
|
19,019,371 | 8,590,659 | 8,351,074 | |||||||||
|
Other
assets
|
500,000 | 500,000 | 500,000 | |||||||||
|
Total
assets
|
$ | 48,827,211 | $ | 35,336,372 | $ | 34,656,216 | ||||||
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
||||||||||||
|
Current
liabilities
|
||||||||||||
|
Current
maturities of notes payable
|
$ | 6,982,001 | $ | 1,131,725 | $ | 928,444 | ||||||
|
Accounts
payable
|
2,368,732 | 1,966,926 | 2,260,272 | |||||||||
|
Accrued
expenses
|
486,718 | 392,384 | 458,282 | |||||||||
|
Margin
payable
|
423,032 | — | — | |||||||||
|
Accrued
income taxes
|
— | 203,529 | — | |||||||||
|
Total
current liabilities
|
10,260,483 | 3,694,564 | 3,646,998 | |||||||||
|
Notes
payable
|
8,376,389 | 3,813,825 | 3,108,014 | |||||||||
|
Deferred
income taxes
|
1,763,059 | 1,679,859 | 1,607,155 | |||||||||
|
Stockholders’
equity
|
||||||||||||
|
Common
stock, no par value; 20,000,000 shares authorized; 17,273,776 shares
issued; 16,843,476 shares outstanding at March 31, 2009; 17,273,776
shares issued; 16,792,826 shares outstanding at March 31, 2008; and
17,273,776 shares issued; 16,720,842 shares outstanding at December 31,
2008
|
6,509,267 | 6,509,267 | 6,509,267 | |||||||||
|
Paid-in-capital
|
1,886,375 | 1,137,709 | 1,202,009 | |||||||||
|
Treasury
stock, at cost
|
(3,056,859 | ) | (2,437,517 | ) | (3,302,025 | ) | ||||||
|
Retained
earnings
|
23,931,173 | 21,360,037 | 22,383,707 | |||||||||
|
Accumulated
other comprehensive loss, net of taxes
|
(842,676 | ) | (421,372 | ) | (498,909 | ) | ||||||
|
Total
stockholders’ equity
|
28,427,280 | 26,148,124 | 26,294,049 | |||||||||
|
Total
liabilities and stockholders’ equity
|
$ | 48,827,211 | $ | 35,336,372 | $ | 34,656,216 | ||||||
See accompanying notes to financial statements
3
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Consolidated
Statements of Income and Comprehensive Income
For the
Three Months Ended March 31, 2009 and 2008 (Unaudited)
and the
Year Ended December 31, 2008
|
(Unaudited)
|
||||||||||||
|
Three
Months Ended
|
Year
Ended
|
|||||||||||
|
March
31,
|
December
31,
|
|||||||||||
|
2009
|
2008
|
2008
|
||||||||||
|
Sales
|
$ | 13,736,080 | $ | 11,122,238 | $ | 44,461,455 | ||||||
|
Cost
of goods sold
|
8,000,052 | 7,442,083 | 30,926,114 | |||||||||
|
Depreciation
expense
|
216,774 | 189,424 | 777,715 | |||||||||
|
Total
cost of goods sold
|
8,216,826 | 7,631,507 | 31,703,829 | |||||||||
|
Gross
profit
|
5,519,254 | 3,490,731 | 12,757,626 | |||||||||
|
Selling
Expenses
|
1,307,925 | 1,059,166 | 4,098,176 | |||||||||
|
General
and Administrative
|
1,497,126 | 985,046 | 4,149,010 | |||||||||
|
Amortization
expense
|
170,690 | 79,861 | 319,446 | |||||||||
|
Total
Operating Expenses
|
2,975,741 | 2,124,073 | 8,566,632 | |||||||||
|
Income
from operations
|
2,543,513 | 1,366,658 | 4,190,994 | |||||||||
|
Other
income (expense):
|
||||||||||||
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Interest
and dividend income
|
62,211 | 103,133 | 343,329 | |||||||||
|
Rental
Income
|
9,347 | 11,647 | 48,886 | |||||||||
|
Interest
expense
|
(154,383 | ) | (85,956 | ) | (298,619 | ) | ||||||
|
Impairment
of marketable securities
|
(958,879 | ) | ||||||||||
|
Gain
(loss) on sale of marketable securities, net
|
(149,790 | ) | 51,029 | (733,647 | ) | |||||||
|
Total
other income (Expense)
|
(232,615 | ) | 79,853 | (1,598,930 | ) | |||||||
|
Income
before provision for income
taxes
|
2,310,898 | 1,446,511 | 2,592,064 | |||||||||
|
Provision
for income taxes
|
763,432 | 557,906 | 679,789 | |||||||||
|
Net
income
|
$ | 1,547,466 | $ | 888,605 | $ | 1,912,275 | ||||||
|
Basic
and diluted earnings per common
share
|
0.09 | 0.05 | 0.11 | |||||||||
|
|
||||||||||||
|
Weighted
average number of shares
outstanding
|
16,846,671 | 16,814,740 | 16,765,080 | |||||||||
|
COMPREHENSIVE INCOME
|
||||||||||||
|
Net
income
|
$ | 1,547,466 | $ | 888,605 | $ | 1,912,275 | ||||||
|
Other
comprehensive income (loss), net of tax:
|
||||||||||||
|
Unrealized
gains (losses) on marketable securities (net of tax
benefits)
|
(343,767 | ) | (182,376 | ) | (720,517 | ) | ||||||
|
Less
reclassification adjustment for (gains) losses included in net
income (net of taxes)
|
(29,954 | ) | 430,651 | |||||||||
|
Comprehensive
income
|
$ | 1,203,699 | $ | 676,275 | $ | 1,622,409 | ||||||
See accompanying notes to financial statements
4
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Consolidated
Statements of Changes in Stockholder’s Equity
For the
Three Months Ended March 31, 2009 (Unaudited)
and the
Year Ended December 31, 2008
|
Common
Stock,
No
Par Value
|
#
|
Accumulated
|
||||||||||||||||||||||||||||||||||
|
20,000,000
Shares
|
of Shares
|
Other
|
||||||||||||||||||||||||||||||||||
|
Authorized
|
of
|
Comprehensive
|
||||||||||||||||||||||||||||||||||
|
#
of Shares
|
#
of Shares
|
Treasury
|
Common
|
Paid
In
|
Treasury
|
Retained
|
Income
(Loss),
|
|||||||||||||||||||||||||||||
|
Issued
|
Outstanding
|
Stock
|
Stock
|
Capital
|
Stock
|
Earnings
|
Net
of Tax
|
Total
|
||||||||||||||||||||||||||||
|
Balances
at December 31, 2007
|
17,273,776 | 16,827,726 | 446,050 | 6,509,267 | 1,120,669 | (2,078,165 | ) | 20,471,432 | (209,043 | ) | 25,814,160 | |||||||||||||||||||||||||
|
Redemption
of stock
|
— | (112,009 | ) | 112,009 | — | — | (1,239,488 | ) | — | — | (1,239,488 | ) | ||||||||||||||||||||||||
|
Issuance
of treasury stock for compensation
|
— | 8,750 | (8,750 | ) | — | 81,340 | 15,628 | — | — | 96,968 | ||||||||||||||||||||||||||
|
Other
comprehensive income (loss):
|
||||||||||||||||||||||||||||||||||||
|
Unrealized
losses on securities, net of taxes and reclassification
adjustment
|
— | — | — | — | — | — | — | (289,866 | ) | (289,866 | ) | |||||||||||||||||||||||||
|
Net
income for the year ended December 31, 2008
|
— | — | — | — | — | — | 1,912,275 | — | 1,912,275 | |||||||||||||||||||||||||||
|
Balances
at December 31, 2008
|
17,273,776 | 16,724,467 | 549,309 | 6,509,267 | 1,202,009 | (3,302,025 | ) | 22,383,707 | (498,909 | ) | 26,294,049 | |||||||||||||||||||||||||
|
Redemption
of stock
|
— | (15,195 | ) | 15,195 | — | — | (101,628 | ) | — | — | (101,628 | ) | ||||||||||||||||||||||||
|
Issuance
of treasury stock for compensation
|
— | 5,257 | (5,257 | ) | — | 39,628 | 11,532 | — | — | 51,160 | ||||||||||||||||||||||||||
|
Issuance
of treasury stock for Fresh Made acquisition
|
— | 128,947 | (128,947 | ) | — | 644,738 | 335,262 | — | — | 980,000 | ||||||||||||||||||||||||||
|
Other
comprehensive income (loss):
|
||||||||||||||||||||||||||||||||||||
|
Unrealized
gains on securities, net of taxes and reclassification
adjustment
|
— | — | — | — | — | — | — | (343,767 | ) | (343,767 | ) | |||||||||||||||||||||||||
|
Net
income for the three months ended March 31,
2009
|
— | — | — | — | — | — | 1,547,466 | — | 1,547,466 | |||||||||||||||||||||||||||
|
Balances
at March 31, 2009
|
17,273,776 | 16,843,476 | 430,300 | $ | 6,509,267 | $ | 1,886,375 | $ | (3,056,859 | ) | $ | 23,931,173 | $ | (842,676 | ) | $ | 28,427,280 | |||||||||||||||||||
See accompanying notes to financial statements
5
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
For the
Three Months Ended March 31, 2009 and 2008 (Unaudited)
and the
Year Ended December 31, 2008
|
March
31,
|
March
31,
|
December
31,
|
||||||||||
|
2009
|
2008
|
2008
|
||||||||||
|
Cash flows from operating
activities:
|
||||||||||||
|
Net
income
|
$ | 1,547,466 | $ | 888,605 | $ | 1,912,275 | ||||||
|
Adjustments
to reconcile net income to net cash flows from operating
activities, net of acquisition:
|
||||||||||||
|
Depreciation
and amortization
|
387,464 | 269,285 | 1,092,995 | |||||||||
|
(Gain)Loss
on sale of marketable securities, net
|
149,790 | (51,029 | ) | 733,647 | ||||||||
|
Impairment
of marketable securities
|
— | — | 958,879 | |||||||||
|
Deferred
income taxes
|
8,549 | (39,280 | ) | (509,386 | ) | |||||||
|
Treasury
stock issued for compensation
|
51,160 | 20,790 | 96,968 | |||||||||
|
Increase
(decrease) in allowance for doubtful accounts
|
— | — | 70,551 | |||||||||
|
(Increase)
decrease in operating assets:
|
||||||||||||
|
Accounts
receivable
|
(1,136,258 | ) | (716,396 | ) | (626,754 | ) | ||||||
|
Other
receivables
|
106,826 | (91,187 | ) | 2,797 | ||||||||
|
Inventories
|
28,242 | (163,436 | ) | 409,012 | ||||||||
|
Refundable
income taxes
|
(155,386 | ) | 240,880 | (115,536 | ) | |||||||
|
Prepaid
expenses and other current assets
|
(13,965 | ) | 12,166 | (1,973 | ) | |||||||
|
Increase
(decrease) in operating liabilities:
|
||||||||||||
|
Accounts
payable
|
401,833 | 372,596 | 665,942 | |||||||||
|
Accrued
expenses
|
94,334 | (21,655 | ) | 44,243 | ||||||||
|
Margin
payable
|
423,032 | — | — | |||||||||
|
Accrued
income taxes
|
(197,694 | ) | 203,529 | — | ||||||||
|
Net
cash provided by operating activities
|
1,695,393 | 924,868 | 4,733,660 | |||||||||
|
Cash flows from investing
activities:
|
||||||||||||
|
Purchases
of marketable securities
|
(1,757,574 | ) | (1,976,684 | ) | (5,782,452 | ) | ||||||
|
Sale
of marketable securities
|
2,318,620 | 1,864,617 | 5,323,423 | |||||||||
|
Purchases
of property and equipment
|
(349,849 | ) | (365,421 | ) | (2,157,315 | ) | ||||||
|
Acquisition
of Fresh Made, net of cash acquired
|
(2,850,888 | ) | — | — | ||||||||
|
Net
cash used in investing activities
|
(2,639,691 | ) | (477,488 | ) | (2,616,344 | ) | ||||||
|
Cash flows from financing
activities:
|
||||||||||||
|
Proceeds
of note payable
|
1,729,990 | — | — | |||||||||
|
Purchases
of treasury stock, net
|
(101,628 | ) | (363,102 | ) | (1,239,488 | ) | ||||||
|
Repayment
of notes payable
|
(354,214 | ) | (287,373 | ) | (1,196,465 | ) | ||||||
|
Net
cash used in financing activities
|
1,274,148 | (650,475 | ) | (2,435,953 | ) | |||||||
|
Net
increase (decrease) in cash and cash equivalents
|
329,850 | (203,095 | ) | (318,637 | ) | |||||||
|
Cash
and cash equivalents at the beginning of the period
|
277,248 | 595,885 | 595,885 | |||||||||
|
Cash
and cash equivalents at the end of the period
|
$ | 607,098 | $ | 392,790 | $ | 277,248 | ||||||
See accompanying notes to financial
statements
6
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
and
December 31, 2008
Note
1 – NATURE OF BUSINESS
Lifeway
Foods, Inc. (the “Company”) commenced operations in February 1986 and
incorporated under the laws of the state of Illinois on May 19, 1986. The
Company’s principal business activity is the production of dairy products.
Specifically, the Company produces Kefir, a drinkable product which is similar
to but distinct from yogurt, in several flavors sold under the name “Lifeway’s
Kefir;” a plain farmer’s cheese sold under the name “Lifeway’s Farmer’s Cheese;”
a fruit sugar-flavored product similar in consistency to cream cheese sold under
the name of “Sweet Kiss;” and a dairy beverage, similar to Kefir, with increased
protein and calcium, sold under the name “Basics Plus.” The Company
also produces several soy-based products under the name “Soy Treat” and a
vegetable-based seasoning under the name “Golden Zesta.” The Company currently
distributes its products throughout the Chicago Metropolitan area and various
cities in the East Coast through local food stores. In addition, the
products are sold throughout the United States and Ontario, Canada by
distributors. The Company also distributes some of its products to Eastern
Europe.
Note
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary
of the significant accounting policies applied in the preparation of the
accompanying financial statements follows:
Principles of
consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, LFI Enterprises, Inc., Helios Nutrition, Ltd., Pride
of Main Street, L.L.C., Starfruit, L.L.C. and Fresh Made Dairy. All significant
intercompany accounts and transactions have been eliminated.
Use of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 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 allowance for doubtful accounts, the valuation
of goodwill, intangible assets and deferred taxes.
Revenue
Recognition
Sales
represent sales of Company produced dairy products that are recorded at the time
of shipment and the following four criteria have been met: (i) The
product has been shipped and the Company has no significant remaining
obligations; (ii) Persuasive evidence of an agreement exists;
(iii) The price to the buyer is fixed or determinable and
(iv) Collection is probable. In addition, shipping costs
invoiced to the customers are included in net sales and the related cost in cost
of sales.
Cash and cash
equivalents
All
highly liquid investments purchased with an original maturity of three months or
less are considered to be cash equivalents.
The
Company maintains cash deposits at several institutions located in the greater
Chicago, Illinois and Philadelphia, Pennsylvania metropolitan
areas.
7
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
and
December 31, 2008
Note
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Bank
balances of amounts reported by financial institutions are categorized as
follows:
|
March
31,
|
December
31,
|
|||||||||||
|
2009
|
2008
|
2008
|
||||||||||
|
Amounts
insured
|
$ | 648,222 | $ | 280,180 | $ | 847,711 | ||||||
|
Uninsured
and uncollateralized amounts
|
— | 762,102 | — | |||||||||
|
Total
bank balances
|
$ | 648,222 | $ | 1,042,282 | $ | 847,711 | ||||||
Marketable
securities
All
investment securities are classified as available-for-sale, are carried at fair
value or quoted market prices. Unrealized gains and on available-for-sale
securities losses are reported as a separate component of stockholders’ equity.
Amortization, accretion, interest and dividends, realized gains and losses, and
declines in value judged to be other-than-temporary on available-for-sale
securities are recorded in other income. All of the Company’s securities are
subject to a periodic impairment evaluation. This evaluation depends on the
specific facts and circumstances. Factors that we consider in determining
whether an other-than-temporary decline in value has occurred include: the
market value of the security in relation to its cost basis; the financial
condition of the investee; and the intent and ability to retain the investment
for a sufficient period of time to allow for possible recovery in the market
value of the investment.
Accounts
receivable
Credit
terms are extended to customers in the normal course of business. The
Company performs ongoing credit evaluations of its customers’ financial
condition and generally requires no collateral.
Accounts
receivable are recorded at invoice amounts, and reduced to their estimated net
realizable value by recognition of an allowance for doubtful
accounts. The Company’s estimate of the allowance for doubtful
accounts is based upon historical experience, its evaluation of the current
status of specific receivables, and unusual circumstances, if
any. Accounts are considered past due if payment is not made on a
timely basis in accordance with the Company’s credit terms. Accounts
considered uncollectible are charged against the allowance.
Inventories
Inventories
are stated at the lower of cost or market, cost being determined by the
first-in, first-out method.
Property and
equipment
Property
and equipment are stated at depreciated cost or fair value where depreciated
cost is not recoverable. Depreciation is computed using the
straight-line method. When assets are retired or otherwise disposed
of, the cost and related accumulated depreciation are removed from the accounts,
and any resulting gain or loss is recognized in income for the
period. The cost of maintenance and repairs is charged to income as
incurred; significant renewals and betterments are capitalized.
8
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
and
December 31, 2008
Note
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Property
and equipment are being depreciated over the following useful
lives:
|
Category
|
Years
|
|
|
Buildings
and improvements
|
31
and 39
|
|
|
Machinery
and equipment
|
5 –
12
|
|
|
Office
equipment
|
5 –
7
|
|
|
Vehicles
|
5
|
Intangible
assets
The
Company accounts for intangible assets at historical cost. Intangible
assets acquired in a business combination are recorded under the purchase method
of accounting at their estimated fair values at the date of
acquisition. Goodwill represents the excess purchase price over the
fair value of the net tangible and other intangible assets
acquired. Goodwill is not amortized and is reviewed for impairment at
least annually. Brand assets represent the fair value of brands
acquired. Brand assets have an indefinite life, therefore are not
amortized, rather are reviewed periodically for impairment. The
Company amortizes other intangible assets over their estimated useful lives, as
disclosed in the table below.
The
Company reviews intangible assets and their related useful lives at least once a
year to determine if any adverse conditions exist that would indicate the
carrying value of these assets may not be recoverable. The
Company conducts more frequent impairment assessments if certain conditions
exist, including: a change in the competitive landscape, any internal
decisions to pursue new or different strategies, a loss of a significant
customer, or a significant change in the market place including changes in the
prices paid for the Company’s products or changes in the size of the market for
the Company’s products.
If the
estimate of an intangible asset’s remaining useful life is changed, the
remaining carrying amount of the intangible asset is amortized prospectively
over the revised remaining useful life.
Intangible
assets are being amortized over the following useful lives:
|
Category
|
Years
|
|
|
Recipes
|
4
|
|
|
Customer
lists and other customer
related intangibles
|
7-10
|
|
|
Lease
agreement
|
7
|
|
|
Trade
names
|
15
|
|
|
Formula
|
10
|
|
|
Customer
relationships
|
12
|
9
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
and
December 31, 2008
Note
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Income
taxes
Deferred
income taxes arise from temporary differences resulting from income and expense
items reported for financial accounting and tax purposes in different periods.
Deferred taxes are classified as current or non-current, depending on the
classification of the assets and liabilities to which they
relate. Deferred taxes arising from temporary differences that are
not related to an asset or liability are classified as current or non-current
depending on the periods in which the temporary differences are expected to
reverse.
The
principal sources of temporary differences are different depreciation and
amortization methods for financial statement and tax purposes, unrealized gains
or losses related to marketable securities, capitalization of indirect costs for
tax purposes, and the recognition of an allowance for doubtful accounts for
financial statement purposes.
As of
January 1, 2007, the Company adopted FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an interpretation of FASB
Statement No. 109” (FIN 48), which clarifies the accounting and disclosure
for uncertainty in tax positions, as defined. Pursuant to FIN 48, the Company
has analyzed filing positions in all of the federal and state jurisdictions
where it is required to file income tax returns, as well as all open tax years
in these jurisdictions. The only periods subject to examination for the
Company’s federal return are the 2004 through 2007 tax years. The Company
believes that its income tax filing positions and deductions would be sustained
on audit and does not anticipate any adjustments that would result in a material
change to its financial position. Therefore, no reserves for uncertain income
tax positions have been recorded pursuant to FIN 48. In addition, the Company
did not record a cumulative effect adjustment related to the adoption of FIN
48.
The
Company’s policy for recording interest and penalties associated with audits is
to record such items as a component of income before taxes. There were no such
items during the periods covered in this report.
Treasury
stock
Treasury
stock is recorded using the cost method.
Advertising
costs
The
Company expenses advertising costs as incurred. During the year ended
December 31, 2008 and for the three months ended March 31, 2009 and 2008,
approximately $1,530,207, $347,247 and $403,623 of such costs respectively, were
expensed.
Earning per common
share
Earnings
per common share were computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding during
the period. For the three months ended March 31, 2009 and 2008
and the year ended December 31, 2008, diluted and basic earnings per share
were the same, as the effect of dilutive securities options outstanding was not
significant.
10
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
and
December 31, 2008
Note
3 – Acquisition
On
February 6, 2009, the Company completed a Stock Purchase Agreement
(the “Stock Agreement”) by and among Lifeway, Ilya Mandel, an individual and
Michael Edelson, an individual (each a “Seller” and collectively
“Sellers”).
Lifeway
purchased from Sellers all of the issued and outstanding stock (the “Shares”) of
Fresh Made, Inc., a Pennsylvania corporation (“Fresh”). The
consideration for the Shares was an aggregate of $8,048,000, less certain
offsets for any selling expenses in excess of certain limits set forth in the
Stock Agreement and other payments and funded debt all as set forth in the Stock
Agreement, a note in the principal amount of $2,735,000, due on February 6,
2011, 128,948 shares of common stock of Lifeway valued at a total of $980,000
(“Lifeway’s Common Stock”), the cancellation of a loan in the principal amount
of $265,000 and not more than $98,000 in funds held in Fresh’s two accounts with
Vist Financial Corp. The issuance of Lifeway’s Common Stock was
exempted from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended.
Also on
February 6, 2009, Lifeway entered into and consummated a Real Property Purchase
Agreement (the “Real Property Agreement”) by and among Sellers and
Lifeway. Pursuant to the Real Property Agreement, Lifeway acquired
1.1355 acres of land in Philadelphia, PA (the “Property”) from
Sellers. The consideration for the Property was
$2,000,000.
The
acquisition was accounted for using the purchase accounting method of
accounting, and accordingly, the purchase price was allocated to assets acquired
and the liabilities assumed based on the fair value as of the merger
date. Acquisition costs for legal and professional fees have been
included in General and Administrative costs.
The
estimated fair value of assets acquired, including the real property, and
liabilities assumed consisted of the following:
|
Cash
and cash equivalents
|
$ | 226,000 | ||
|
Accounts
receivable (contractual amounts totaling $546,000)
|
546,000 | |||
|
Other
current assets
|
373,000 | |||
|
Building
and other fixed assets
|
2,528,000 | |||
|
Customer
list
|
4,000,000 | |||
|
Non
amortizable goodwill and brand asset
|
6,816,000 | |||
|
Current
liabilities
|
(461,000 | ) | ||
|
Total
fair value of assets acquired and laiblities assumed
|
$ | 14,028,000 |
11
Note
4 – INTANGIBLE ASSETS
Intangible
assets, and the related accumulated amortization, consist of the
following:
|
March
31, 2009
|
March
31, 2008
|
December
31, 2008
|
||||||||||||||||||||||
|
Cost
|
Accumulated
Amortization
|
Cost
|
Accumulated
Amortization
|
Cost
|
Accumulated
Amortization
|
|||||||||||||||||||
|
Recipes
|
$ | 43,600 | $ | 43,600 | $ | 43,600 | $ | 38,831 | $ | 43,600 | $ | 43,600 | ||||||||||||
|
Customer
lists and other customer related intangibles
|
4,305,200 | 284,052 | 305,200 | 151,873 | 305,200 | 182,938 | ||||||||||||||||||
|
Lease
acquisition
|
87,200 | 58,133 | 87,200 | 45,676 | 87,200 | 55,019 | ||||||||||||||||||
|
Other
|
6,638 | 6,638 | 6,638 | 3,651 | 6,638 | 4,647 | ||||||||||||||||||
|
Customer
relationship
|
985,000 | 218,889 | 985,000 | 136,806 | 985,000 | 198,368 | ||||||||||||||||||
|
Contractual
backlog
|
12,000 | 12,000 | 12,000 | 12,000 | 12,000 | 12,000 | ||||||||||||||||||
|
Trade
names
|
1,980,000 | 352,000 | 1,980,000 | 220,000 | 1,980,000 | 319,000 | ||||||||||||||||||
|
Formula
|
438,000 | 116,800 | 438,000 | 73,000 | 438,000 | 105,850 | ||||||||||||||||||
| $ | 7,857,638 | $ | 1,092,112 | $ | 3,857,638 | $ | 681,837 | $ | 3,857,638 | $ | 921,422 | |||||||||||||
Amortization
expense is expected to be as follows for the 12 months ending March
31:
|
2010
|
$ |
672,614
|
||
|
2011
|
669,375
|
|||
|
2012
|
661,402
|
|||
|
2013
|
635,450
|
|||
|
2014
|
624,550
|
|||
|
Thereafter
|
3,502,135
|
|||
| $ |
6,765,526
|
Amortization
expense during the three months ended March 31, 2009 and 2008 and for the year
ended December 31, 2008 was $170,690, $79,861 and $319,446,
respectively.
Goodwill
and brand assets increased during the period ending March 31, 2009 due to the
acquisition of Fresh Made (See Note 3).
Note
5 – MARKETABLE SECURITIES
The cost
and fair value of marketable securities classified as available for sale are as
follows:
|
March 31, 2009
|
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
||||||||||||
|
Equities
|
$ | 1,429,461 | $ | 46,956 | $ | ( 363,537 | ) | $ | 1,112,880 | |||||||
|
Mutual
Funds
|
704,256 | 160 | ( 376,113 | ) | 328,303 | |||||||||||
|
Preferred
Securities
|
826,295 | — | ( 397,324 | ) | 428,971 | |||||||||||
|
Corporate
Bonds
|
506,165 | 2,959 | ( 25,193 | ) | 483,931 | |||||||||||
|
Government
agency Obligations
|
1,929,788 | 6,539 | ( 3,961 | ) | 1,932,366 | |||||||||||
|
Total
|
$ | 5,395,965 | $ | 56,614 | $ | ( 1,166,128 | ) | $ | 4,286,451 | |||||||
12
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
and
December 31, 2008
Note
5 – MARKETABLE SECURITIES - Continued
|
March 31, 2008
|
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
||||||||||||
|
Equities
|
$ | 3,074,223 | $ | 114,067 | $ | ( 481,142 | ) | $ | 2,707,148 | |||||||
|
Mutual
Funds
|
927,055 | 3,744 | ( 144,622 | ) | 786,177 | |||||||||||
|
Preferred
Securities
|
1,655,421 | 7,680 | ( 167,259 | ) | 1,495,842 | |||||||||||
|
Corporate
Bonds
|
1,249,426 | 1,585 | ( 55,070 | ) | 1,195,942 | |||||||||||
|
Municipal
Bonds
|
4,586 | 330 | — | 4,916 | ||||||||||||
|
Government
agency Obligations
|
597,978 | 2,956 | ( 108 | ) | 600,825 | |||||||||||
|
Total
|
$ | 7,508,689 | $ | 130,362 | $ | ( 848,201 | ) | $ | 6,790,850 | |||||||
|
December 31, 2008
|
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
||||||||||||
|
Equities
|
$ | 2,116,004 | $ | 75,333 | $ | ( 279,487 | ) | $ | 1,911,850 | |||||||
|
Mutual
Funds
|
888,182 | 202 | ( 339,970 | ) | 548,414 | |||||||||||
|
Preferred
Securities
|
1,541,423 | 13,075 | ( 308,963 | ) | 1,245,535 | |||||||||||
|
Corporate
Bonds
|
783,761 | 1,559 | ( 19,289 | ) | 766,031 | |||||||||||
|
Municipal
Bonds
|
4,586 | 414 | — | 5,000 | ||||||||||||
|
Government
agency Obligations
|
778,140 | 8,668 | ( 1,470 | ) | 785,338 | |||||||||||
|
Total
|
$ | 6,112,096 | $ | 99,251 | $ | ( 949,179 | ) | $ | 5,262,168 | |||||||
Proceeds
from the sale of marketable securities were $5,323,423, $2,318,620 and
$1,864,617 during the year ended December 31, 2008 and for the three months
ended March 31, 2009 and 2008 respectively.
Gross
gains of $384,574, $103,520 and $217,112 and gross losses of $1,118,221,
$243,310 and $166,083 were realized on these sales during the year ended
December 31, 2008 and for the three months ended March 31, 2009 and 2008,
respectively.
The
following table shows the gross unrealized losses and fair value of Company’s
investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position, at March 31, 2009:
13
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
and
December 31, 2008
Note
5 – MARKETABLE SECURITIES - Continued
|
Less
Than 12 Months
|
12
Months or Greater
|
Total
|
||||||||||||||||||||||
|
Description
of Securities
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||||||||||
|
Equities
|
$ | 872,423 | $ | ( 316,691 | ) | $ | 59,422 | $ | ( 46,846 | ) | $ | 931,845 | $ | ( 363,537 | ) | |||||||||
|
Mutual
Funds
|
148,400 | ( 71,155 | ) | 172,520 | ( 304,958 | ) | 320,920 | ( 376,113 | ) | |||||||||||||||
|
Preferred
Securities
|
180,313 | ( 15,874 | ) | 248,658 | ( 381,450 | ) | 428,971 | ( 397,324 | ) | |||||||||||||||
|
Corporate
Bonds
|
24,233 | ( 714 | ) | 274,811 | ( 24,479 | ) | 299,044 | ( 25,193 | ) | |||||||||||||||
|
Government
Agency Obligations
|
— | — | 695,308 | ( 3,961 | ) | 695,308 | ( 3,961 | ) | ||||||||||||||||
| $ | 1,225,369 | $ | ( 404,434 | ) | $ | 1,450,719 | $ | ( 761,694 | ) | $ | 2,676,088 | $ | ( 1,166,128 | ) | ||||||||||
For the
year ended December 31, 2008, we recorded other than temporary impairments
related to investments in marketable securities in certain investments of
$958,879. The impairments recognized relate to securities that were
in an unrealized loss position at December 31, 2008 that were subsequently sold
and equity holdings that we consider other than temporarily impaired due to the
recent performance of the issuers of those securities.
Equities,
Mutual Funds, Corporate Bonds and Government Agency Obligations - The Company’s
investments in equity securities, mutual funds, corporate bonds and government
agency obligations consist of investments in common stock, preferred stock and
debt securities of companies in various industries. The Company
evaluated the near-term prospects of the issuer in relation to the severity and
duration of the impairment. Based on that evaluation and the Company’s ability
and intent to hold these investments for a reasonable period of time sufficient
for a forecasted recovery of fair value, the Company does not consider any
material investments to be other-than-temporarily impaired at March 31,
2009.
Preferred
Securities - The Company’s investments in preferred securities consist of
investments in preferred stock of companies in various
industries. The Company evaluated the continuing performance of the
securities, the credit worthiness of the issuers as well as the near-term
prospects of the security in relation to the severity and duration of the
impairment. Based on that evaluation and the Company’s ability and intent to
hold these investments for a reasonable period of time sufficient for a
forecasted recovery of fair value, the Company does not consider any material
investments to be other-than-temporarily impaired at March 31,
2009.
14
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
and
December 31, 2008
Note
6 – INVENTORIES
Inventories
consist of the following:
|
March
31,
|
December
31,
|
|||||||||||
|
2009
|
2008
|
2008
|
||||||||||
|
Finished
goods
|
$ | 1,397,435 | $ | 1,201,472 | $ | 1,343,811 | ||||||
|
Production
supplies
|
1,661,817 | 1,357,834 | 1,291,484 | |||||||||
|
Raw
materials
|
582,496 | 1,110,684 | 462,247 | |||||||||
|
Total
inventories
|
$ | 3,641,748 | $ | 3,669,990 | $ | 3,097,542 | ||||||
Note
7 – PROPERTY AND EQUIPMENT
Property
and equipment consist of the following:
|
March
31,
|
December
31,
|
|||||||||||
|
2009
|
2008
|
2008
|
||||||||||
|
Land
|
$ | 969,232 | $ | 969,232 | $ | 969,232 | ||||||
|
Buildings
and improvements
|
9,569,074 | 6,772,762 | 7,138,042 | |||||||||
|
Machinery
and equipment
|
9,605,436 | 8,166,465 | 8,229,202 | |||||||||
|
Vehicles
|
964,956 | 581,458 | 610,558 | |||||||||
|
Office
equipment
|
184,609 | 102,830 | 180,351 | |||||||||
|
Construction
in process
|
2,630,334 | 1,047,623 | 2,309,045 | |||||||||
| 23,923,641 | 17,640,370 | 19,436,430 | ||||||||||
|
Less
accumulated depreciation
|
10,199,718 | 7,785,425 | 8,373,716 | |||||||||
|
Total
property and equipment
|
$ | 13,723,923 | $ | 9,854,945 | $ | 11,062,714 | ||||||
Depreciation
expense during the year ended December 31, 2008 and for the three months ended
March 31, 2009 and 2008 was $777,715, $216,774 and $189,424,
respectively.
Note 8 – ACCRUED EXPENSES
Accrued
expenses consist of the following:
|
March
31,
|
December
31,
|
|||||||||||
|
2009
|
2008
|
2008
|
||||||||||
|
Accrued
payroll and payroll taxes
|
$ | 181,384 | $ | 101,670 | $ | 98,089 | ||||||
|
Accrued
property tax
|
225,303 | 220,253 | 291,819 | |||||||||
|
Other
|
80,031 | 70,461 | 68,374 | |||||||||
| $ | 486,718 | $ | 392,384 | $ | 458,282 | |||||||
15
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
and
December 31, 2008
Note
9 – NOTES PAYABLE
Notes
payable consist of the following:
|
March
31,
|
December
31,
|
|||||||||||
|
2009
|
2008
|
2008
|
||||||||||
|
Mortgage
note payable to a bank, payable in monthly installments of $3,273
including interest at 7%, with a balloon payment of $416,825 due September
25, 2011. Collateralized by real estate.
|
— | $ | 444,499 | $ | 438,926 | |||||||
|
Mortgage
note payable to a bank, payable in monthly installments of $19,513
including interest at 5.6%, with a balloon payment of $2,652,143 due July
14, 2010. Collateralized by real estate.
|
— | 2,816,481 | 2,760,288 | |||||||||
|
Note
payable to Amani Holding LLC, payable in quarterly installments of
$262,500 plus interest at the floating prime rate per annum (7.25% at
December 31, 2007) due September 1, 2010 secured by letter of
credit.
|
574,308 | 1,684,570 | 837,244 | |||||||||
|
Note
payable to Private Bank in monthly installments of $42,222, plus variable
interest rate, currently at 2.945%, with a balloon payment of $5,066,667
due February 6, 2014. Collateralized by substantially all
assets of the Company.
|
7,515,555 | — | — | |||||||||
|
Line
of credit with Private Bank at variable interest rate, currently at
2.945%, due on February 6, 2010. Collateralized by real
estate.
|
2,600,000 | — | — | |||||||||
|
Line
of credit with Morgan Stanley at variable interest rate, currently at
2.40%. Secured by marketable securities.
|
1,933,527 | — | — | |||||||||
|
Subordinated
notes payable to Ilya Mandel & Michael Edelson, payable in quarterly
installments of $341,875, plus interest at the floating rate per annum
(3.3% at March 31, 2009) due February 6, 2011.
|
2,735,000 | — | — | |||||||||
|
Total
notes payable
|
15,358,390 | 4,945,550 | 4,036,458 | |||||||||
|
Less
current maturities
|
6,982,001 | 1,131,725 | 928,444 | |||||||||
|
Total
long-term portion
|
$ | 8,376,389 | $ | 3,813,825 | $ | 3,108,014 | ||||||
16
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
and
December 31, 2008
Note
9 – NOTES PAYABLE - Continued
Maturities
of notes payables are as follows:
|
For
the Period Ended March 31,
|
|||||
|
2010
|
$ | 6,982,001 | |||
|
2011
|
1,874,167 | ||||
|
2012
|
506,667 | ||||
|
2013
|
506,667 | ||||
|
2014
|
5,488,888 | ||||
|
Total
|
$ | 15,358,390 | |||
Note
10 – PROVISION FOR INCOME TAXES
The
provision for income taxes consists of the following:
|
For
the
|
||||||||||||
|
For
the Three Months Ended
|
Year
Ended
|
|||||||||||
|
March
31,
|
December
31,
|
|||||||||||
|
2009
|
2008
|
2008
|
||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 610,611 | $ | 488,599 | $ | 1,005,159 | ||||||
|
State
and local
|
144,272 | 108,587 | 184,016 | |||||||||
|
Total
current
|
754,883 | 597,186 | 1,189,175 | |||||||||
|
Deferred
|
8,549 | ( 39,280 | ) | ( 509,386 | ) | |||||||
|
Provision
for income taxes
|
$ | 763,432 | $ | 557,906 | $ | 679,789 | ||||||
A
reconciliation of the provision for income taxes and the income tax computed at
the statutory rate is as follows:
|
For
the
|
||||||||||||
|
For
the Three Months Ended
|
Year
Ended
|
|||||||||||
|
March
31,
|
December
31,
|
|||||||||||
|
2009
|
2008
|
2008
|
||||||||||
|
Federal
income tax expense computed
at the statutory rate
|
$ | 828,045 | $ | 491,814 | $ | 881,302 | ||||||
|
State
and local tax expense, net
|
116,900 | 69,433 | 124,419 | |||||||||
|
Permanent
differences
|
( 181,513 | ) | ( 3,341 | ) | ( 150,772 | ) | ||||||
|
Other
|
— | — | ( 175,160 | ) | ||||||||
|
Provision
for income taxes
|
$ | 763,432 | $ | 557,906 | $ | 679,789 | ||||||
17
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
and
December 31, 2008
Note
10 – PROVISION FOR INCOME TAXES - Continued
Amounts
for deferred tax assets and liabilities are as follows:
|
March
31,
|
December
31,
|
|||||||||||
|
2009
|
2008
|
2008
|
||||||||||
|
Non-current
deferred tax liabilities arising
from:
Temporary
differences -
|
||||||||||||
|
accumulated
depreciation and amortization
|
$ | ( 1,763,059 | ) | $ | ( 1,679,859 | ) | $ | ( 1,607,155 | ) | |||
|
Current
deferred tax assets arising from:
|
||||||||||||
|
Unrealized
losses on marketable securities
|
458,320 | 296,468 | 351,020 | |||||||||
|
Impairment
of marketable securities
|
204,537 | — | 396,017 | |||||||||
|
Inventory
|
154,315 | 154,930 | 127,177 | |||||||||
|
Allowance
for doubtful accounts
|
14,460 | 16,297 | 14,460 | |||||||||
|
Allowance
for promotions
|
30,975 | — | 30,975 | |||||||||
|
Total
current deferred tax assets
(liabilities)
|
862,607 | 467,695 | 919,649 | |||||||||
|
Net
deferred tax liability
|
$ | ( 900,452 | ) | $ | ( 1,212,164 | ) | $ | ( 687,506 | ) | |||
Note
11 – SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid
for interest and income taxes are as follows:
|
|
||||||||||||
|
For
the Three Months Ended March
31, |
For
the Year
Ended |
|||||||||||
|
2009
|
2008
|
2008
|
||||||||||
|
Interest
|
$ | 74,743 | $ | 85,956 | $ | 307,620 | ||||||
|
Income
taxes
|
$ | 454,526 | $ | 133,250 | $ | 1,288,428 | ||||||
Note
12 – STOCK AWARD AND STOCK OPTION PLANS
The
Company has a registration statement filed with the Securities and Exchange
Commission in connection with a Consulting Service Compensation Plan covering up
to 1,200,000 of the Company’s common stock shares. Pursuant to such Plan, the
Company may issue common stock or options to purchase common stock to certain
consultants, service providers, and employees of the Company. The
option price, number of shares, grant date, and vesting terms are determined at
the discretion of the Company’s Board of Directors.
As of
December 31, 2008 and at March 31, 2009 and 2008, there were no stock options
outstanding or exercisable. There were approximately 940,000 shares
available for issuance under the Plan at March 31, 2009.
18
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
and
December 31, 2008
Note
12 – STOCK AWARD AND STOCK OPTION PLANS - Continued
On June
13, 2008, Lifeway’s Board of Directors approved awards of an aggregate amount
of 10,500 shares to be awarded under its Employee and Consulting Services
and Compensation Plan to certain key employees and consultants for services
rendered to the Company. The stock awards were made on June 13,
2008 and have vesting periods of one year. The expense for the awards is
measured as of July 1, 2008 at $11.87 per share for 10,500 shares, or
a total stock award expense of $124,635. This expense will be recognized as the
stock awards vest in 12 equal portions of $10,386, or 875 shares per month
for one year.
On May
18, 2007, Lifeway’s Board of Directors approved awards of an aggregate amount of
8,400 shares to be awarded under its Employee and Consulting Services and
Compensation Plan to certain key employees and consultants for services rendered
to the Company. The stock awards were made on June 1, 2007 and have
vesting periods of one year. The expense for the awards is measured as of June
1, 2007 at $9.90 per share for 8,400 shares, or a total stock award expense of
$83,160. This expense will be recognized as the stock awards vest in 12 equal
portions of $6,930, or 700 shares per month for one year.
Note
13 – FAIR VALUE MEASUREMENTS
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with U.S. GAAP, and expands
disclosures about fair value measurements. The Statement clarifies
that the exchange price is the price in an orderly transaction between market
participants to sell an asset or transfer a liability at the measurement
date. The statement emphasizes that fair value is a market-based
measurement and not an entity-specific measurement. The statement
establishes a fair value hierarchy used in fair value measurements and expands
the required disclosures of assets and liabilities measured at fair
value.
Level 1 –
Inputs use quoted prices in active markets for identical assets or liabilities
that the Company has the ability to access.
Level 2 –
Inputs use other inputs that are observable, either directly or
indirectly. These inputs include quoted prices for similar assets and
liabilities in active markets, and other inputs such as interest rates and yield
curves that are observable at commonly quoted intervals.
Level 3 –
Inputs are unobservable inputs, including inputs that are available in
situations where there is little, if any, market activity for the related asset
or liability.
In
instances where inputs used to measure fair value fall into different levels in
the above fair value hierarchy, fair value measurements in their entirety are
categorized based on the lowest level input that is significant to the
valuation. The Company’s assessment of the significance of particular
inputs to these fair measurements requires judgment and considers factors
specific to each asset or liability.
19
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
and
December 31, 2008
Note
13 – FAIR VALUE MEASUREMENTS - Continued
Disclosures
concerning assets and liabilities measured at fair value are as
follows:
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable
Inputs
(Level
3)
|
Balance
at
March
31, 2009
|
|||||||||||||
|
Assets
|
||||||||||||||||
|
Investment
securities- available - for - sale
|
$ | 4,286,251 | — | — | $ | 4,286,251 | ||||||||||
Note
14 – RECENT ACCOUNTING PRONOUNCEMENTS
In
December 2007, the FASB issued SFAS No. 141(R) “Business
Combinations.” SFAS No. 141(R) states that all business combinations
(whether full, partial or step acquisitions) will result in all assets and
liabilities of an acquired business being recorded at their acquisition date
fair values. Earn-outs and other forms of contingent consideration
and certain acquired contingencies will also be recorded at fair value at the
acquisition date. SFAS No. 141(R) also states acquisition costs will
generally be expensed as incurred; in-process research and development will be
recorded at fair value as an indefinite-lived intangible asset at the
acquisition date; changes in deferred tax asset valuation allowances and income
tax uncertainties after the acquisition date generally will affect income tax
expense; and restructuring costs will be expensed in periods after the
acquisition date. This statement is effective for financial
statements issued for fiscal years beginning after December 15,
2008. The Company will apply the provisions of this standard to any
acquisitions that it completes on or after December 15, 2008.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51.” This
statement amends ARB No. 51 to establish accounting and reporting
standards for the noncontrolling interest (minority interest) in a subsidiary
and for the deconsolidation of a subsidiary. Upon its adoption, noncontrolling
interests will be classified as equity in the consolidated balance
sheets. This statement also provides guidance on a subsidiary
deconsolidation as well as stating that entities need to provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. This statement is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. The adoption of this standard is not expected to
have a material impact on the Company’s financial condition, results of
operations or liquidity.
20
LIFEWAY
FOODS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
and
December 31, 2008
Note
14 – RECENT ACCOUNTING PRONOUNCEMENTS - Continued
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS No.
161”). This statement requires enhanced disclosures about (a) how and
why an entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows. SFAS No. 161 also requires that objectives for using
derivative instruments be disclosed in terms of underlying risk and accounting
designation and requires cross-referencing within the footnotes. This
statement also suggests disclosing the fair values of derivative instruments and
their gains and losses in a tabular format. This statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The adoption of this standard is
not expected to have a material impact on the Company’s financial condition,
results of operations or liquidity.
21
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Comparison
of Quarter Ended March 31, 2009 to Quarter Ended March 31, 2008
The
following analysis should be read in conjunction with the unaudited financial
statements of the Company and related notes included elsewhere in this quarterly
report and the audited financial statements and Management’s Discussion and
Analysis contained in our Form 10-K, for the fiscal year ended December 31,
2008.
Results
of Operations
Total
consolidated group sales increased by $2,613,842, (approximately 24%) to
$13,736,080 during the three month period ended March 31, 2009 from $11,122,238
during the same three month period in 2008. This increase is primarily
attributable to increased sales and awareness of Lifeway’s flagship line, Kefir,
as well as ProBugs™ Organic Kefir for kids. Additionally, Lifeway
recorded revenues from its February 6, 2009 acquisition of Fresh Made
Dairy. Included in the total group sales was $1,390,873 of revenue
related to this acquisition and recorded from the period of February 7, 2009 to
March 31, 2009.
Cost of
goods sold as a percentage of sales was approximately 60% during the first
quarter 2009, compared to about 69% during the same period in 2008. The decrease
was primarily attributable to the decreased cost of conventional milk, our
largest raw material, and the cost of transportation and other petroleum based
production supplies. Gross profit increased approximately 58% during
the first quarter 2009, when compared with the same period in 2008.
Operating
expenses as a percentage of sales were approximately 22% during the first
quarter 2009, compared to about 19% during the same period in 2008. This
increase is primarily attributable to the increase in professional fees related
to the February 6, 2009 acquisition of Fresh Made Dairy and a 114% increase in
amortization expense, a non cash expense, also related to the Fresh Made
acquisition. Many of the acquisition related professional fees are
non recurring expenses.
Total
operating income increased by $1,176,855, (approximately 86%) to $2,543,513
during the first quarter 2009, from $1,366,658 during the same period in
2008.
Total
other expenses for the first quarter 2009 were $232,615 compared with total
other income of $79,853 during the same period in 2008. This increase
is primarily attributable to a higher interest expense related to the February
6, 2009 Fresh Made acquisition. Interest expenses during the first
quarter 2009 were $154,383, which includes approximately a $55,000 pre -payment
penalty on one of Lifeway’s real estate mortgages related to the financing of
the acquisition. This pre-payment expense is a non recurring
expense. Additionally, interest income decreased by $40,922 to
$62,211 during the first quarter 2009 from $103,133 during the same period in
2008 primarily due to lower interest rates.
22
Total net
income was $1,547,466 or $.09 per share for the first quarter ended March 31,
2009, compared with $888,605 or $.05 per share in the same period in
2008. This represents a 74% increase in net income from the first
quarter 2009 when compared to the same period in 2008.
Total
intangible assets increased $10,428,712 to $19,019,371 as of March 31, 2009, up
from $8,590,659 as of March 31, 2008. This increase is primarily
attributable to an increase in goodwill and other intangible assets related to
the February 6, 2009 acquisition of Fresh Made Dairy. Intangible assets
are discussed in Note 4 of the Notes to Consolidated Financial
Statements.
Total
current liabilities increased $6,565,919 to $10,260,483 as of March 31, 2009, up
from $3,694,564 as of March 31, 2008. Additionally, the long term portion
of notes payable increased $4,562,564 to $8,376,389 as of March 31, 2009, up
from $3,813,825. These increases are primarily attributable to increases
in notes payable related to the February 6, 2009 acquisition of Fresh Made
Dairy. Notes payable are discussed in Note 9 of the Notes to Consolidated
Financial Statements.
Sources and Uses of Cash
Net cash
provided by operating activities was $1,695,393 during the three months ended
March 31, 2009, which is an increase of $770,525 when compared to the same
period in 2008. This increase is primarily attributable to the
increase in net income of $658,861.
Lifeway
had a net increase in cash and cash equivalents of $329,850 during the first
quarter of 2009 when compared to the same period in 2008.
Significant
portions of our assets are held in marketable securities. The majority of our
marketable securities are classified as available-for-sale on our balance sheet,
while the mortgage-backed securities are classified as trading. All
of these securities are stated thereon at market value as of the end of the
applicable period. Gains and losses on the portfolio are determined by the
specific identification method.
We
anticipate being able to fund the Company’s foreseeable liquidity requirements
internally. We continue to explore potential acquisition opportunities in our
industry in order to boost sales while leveraging our distribution system to
consolidate and lower costs.
23
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Not
applicable.
ITEM
4T. CONTROLS AND PROCEDURES.
Evaluation
of Disclosure Controls and Procedures
As of
March 31, 2009, we carried out an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were not effective at the reasonable assurance level as
of March 31, 2009 in ensuring that information required to be disclosed by us
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified under the Exchange Act rules and forms due to the
material weaknesses as disclosed in our Form 10-K filed on March 31, 2009. As a
result, we performed additional analysis and other post-closing procedures to
ensure our consolidated financial statements were prepared in accordance with
generally accepted accounting principles. Accordingly, management
believes the consolidated financial statements included in this Form 10-Q fairly
present, in all material respects, our financial condition, results of
operations and cash flows for the periods presented.
There was
no change in our internal control over financial reporting during our most
recently completed fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial
reporting.
PART
II — OTHER INFORMATION
None.
ITEM
1A. RISK FACTORS.
Not
applicable.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
(c) PURCHASES
OF THE COMPANY’S SECURITIES
|
Period
|
(a)
Total
Numbers
of
Shares
(or Units)
Purchased
|
(b)
Average Price Paid per Share (or Unit)
|
(c)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced
Plans or Programs
|
(d) Maximum Number (or
Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased
Under the Plans or Programs
|
|||||
| January 1, 2009 to January 31, 2009 |
—
|
— |
—
|
87,991
|
|||||
| February 1, 2009 to February 28, 2009 |
—
|
— |
—
|
87,991
|
|||||
|
March
1, 2009 to March 31, 2009*
|
15,195
|
6.69
|
15,195
|
72,796
|
|||||
|
*Total
|
15,195
|
$
|
6.69
|
15,195
|
72,796
|
||||
*
Pursuant to the share repurchase program approved November 20, 2008
for 100,000 split adjusted shares with a plan expiration date of one
year.
24
ITEM 3. DEFAULTS
UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM
5. OTHER INFORMATION.
None.
ITEM
6. EXHIBITS.
|
Exhibit
Number
|
Description
of Document
|
|
|
3.4
|
Amended
and Restated By-laws (incorporated by reference to
Exhibit No. 3.5 of Lifeway’s Current Report
on Form 8-K dated and filed on December 10, 2002). (File
No. 000-17363)
|
|
|
3.5
|
Articles
of Incorporation, as amended and currently in effect (incorporated by
reference to Exhibit 3.5 of
Lifeway’s Quarterly Report on Form 10-QSB for the quarter ended
June 30, 2000 and filed
on August 8, 2000). (File No. 000-17363)
|
|
|
31.1
|
Officer’s
Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley
Act of 2002.
|
|
|
31.2
|
Officer’s
Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley
Act of 2002.
|
|
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
|
|
25
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LIFEWAY
FOODS, INC.
(Registrant)
|
Date:
|
May
15, 2009
|
By:
|
/s/
Julie Smolyansky
|
||
|
Julie
Smolyansky
Chief
Executive Officer, President and Director
|
|||||
|
Date:
|
May
15, 2009
|
By:
|
/s/
Edward P. Smolyansky
|
||
|
Edward
P. Smolyansky
Chief
Financial and Accounting Officer and
Treasurer
|
|||||
26
EXHIBIT
INDEX
|
Exhibit
Number
|
Description
of Document
|
|
|
3.4
|
Amended
and Restated By-laws (incorporated by reference to
Exhibit No. 3.5 of Lifeway’s Current Report
on Form 8-K dated and filed on December 10, 2002). (File
No. 000-17363)
|
|
|
3.5
|
Articles
of Incorporation, as amended and currently in effect (incorporated by
reference to Exhibit 3.5 of
Lifeway’s Quarterly Report on Form 10-QSB for the quarter ended
June 30, 2000 and filed
on August 8, 2000). (File No. 000-17363)
|
|
|
31.1
|
Officer’s
Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley
Act of 2002.
|
|
|
31.2
|
Officer’s
Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley
Act of 2002.
|
|
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
|
|
27