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Lifeway Foods, Inc. - Quarter Report: 2009 March (Form 10-Q)

WWW.EXFILE.COM, INC. -- 888-775-4789 -- LIFEWAY FOODS, INC. -- 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
 
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)
 
______________________________________
 
 
Illinois
36-3442829
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
 
 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.
 
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer  o
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
 
As of April 30, 2009, the issuer had 16,819,920 shares of common stock, no par value, outstanding.
 



 

LIFEWAY FOODS, INC.
CONTENTS TO FORM 10-Q
 
 
PART I —
FINANCIAL INFORMATION
Page(s)
     
ITEM 1.
FINANCIAL STATEMENTS.
2
     
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
     
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
22
     
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
24
     
   ITEM 4T.
CONTROLS AND PROCEDURES.
24
     
PART II —
OTHER INFORMATION
 
     
ITEM 1.
LEGAL PROCEEDINGS.
24
     
    ITEM 1A.
RISK FACTORS.
24
     
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
24
     
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.
25
     
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
25
     
ITEM 5.
OTHER INFORMATION.
25
     
ITEM 6.
EXHIBITS.
25
     
SIGNATURES
 
26
     
EXHIBIT INDEX
 
27
 
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)
       
   
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):
                       
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
December 31,
 
   
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.
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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.

Net cash used in investing activities was $2,639,691 during the three months ended March 31, 2009, which is an increase of $2,162,203 when compared to the same period in 2008.  This increase is primarily due to the Company’s acquisition of Fresh Made, net of cash acquired.

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.
 
 
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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

ITEM 1.    LEGAL PROCEEDINGS.

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