Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☒ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
or
☐TRANSITION REPORT PURSUANT TO 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)
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6431 West Oakton St., Morton Grove, Illinois60053
(Address of principal executive offices) (Zip
Code)
(847)967-1010
(Registrant’s telephone number, including
area code)
Securities registered under Section 12(b) of
the Exchange Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, No Par Value LWAY Nasdaq Global Market
Securities registered under Section 12(g) of
the Exchange Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 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 ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on
and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Yes ☐ No ☒
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and
non-voting common equity held by non-affiliates computed by reference to the price at which the stock was last sold as of June 30, 2021
($5.18 per share as quoted on the Nasdaq Global Market) was $21,142,470.
As of July 6, 2022, 15,473,269
shares of the registrant’s common stock, no par value, were outstanding.
Table of Contents
Page
PART I
Item 1. Business 1
Item 1A. Risk Factors 7
Item 1B. Unresolved Staff Comments 17
Item 2. Properties 17
Item 3. Legal Proceedings 17
Item 4. Mine Safety Disclosures 17
PART II
Item 6. [RESERVED] 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 27
Item 8. Financial Statements and Supplementary Data 27
Item 9A. Controls and Procedures 28
Item 9B. Other Information 29
Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections 29
PART III
Item 10. Directors, Executive Officers and Corporate Governance 30
Item 11. Executive Compensation 36
Item 14. Principal Accountant Fees and Services 54
PART IV
Item 15. Exhibits, Financial Statement Schedules 56
Signatures 58
i
EXPLANATORY NOTE
Restatement
Except as otherwise indicated or unless context
otherwise requires, the terms “Lifeway,” “we,”, “us,”, “our,” or “the Company”
refer to Lifeway Foods, Inc. and its subsidiaries on a consolidated basis.
On April 29, 2022, as previously reported
in our Current Report on Form 8-K, filed with the Securities and Exchange Commission (“SEC”), management and the Audit and
Corporate Governance Committee of our Board of Directors concluded that our consolidated financial statements as of and for the year ended
December 31, 2020, and as of and for each of the quarterly periods ending in 2020 and 2021, should be restated and no longer be relied
upon.
Within this Annual Report on Form 10-K, we have
included restated audited consolidated financial statements as of and for the year ended December 31, 2020, as well as restated unaudited
consolidated financial information as of and for each of the quarterly periods ending in 2020 and 2021 (together, the “Restatement”).
Our consolidated financial statements as of and for the year ended 2020 included in this report have been restated from the consolidated
financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020.
The Restatement corrects a material error, made
in connection with our 2009 acquisition of Fresh Made, Inc., that resulted in a $1.18 million understatement of both deferred income tax
liabilities and goodwill. Specifically, the Company did not record a deferred income tax liability and corresponding increase to goodwill
related to the difference in the book and income tax bases for the $3.7 million Fresh Made, Inc. indefinite-lived brand name intangible
asset acquired. The Restatement had no impact on opening retained earnings of as of January 1, 2020 or the Company’s Consolidated
Statements of Operations, Consolidated Statements of Cash Flows and Consolidated Statements of Stockholders’ Equity for any period
subsequent to such date.
For additional discussion of the Restatement,
including the accounting errors identified and the resulting adjustments, see “Part II – Item 7 – Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and Note 1 – Basis of presentation included
in “Part II – Item 8 – Financial Statements and Supplementary Data.” “Note 17 – Correction of previously
issued unaudited consolidated financial statements, to the consolidated financial statements included in this Annual Report on Form 10-K
presents consolidated quarterly information for fiscal 2020 and 2021. For a description of the material weakness identified by Management
as a result of our internal reviews and Management’s plan to remediate this deficiency, see “Part II – Item 9A –
Controls and Procedures.”
We believe that presenting the information regarding the Restatement
in this Annual Report allows investors to review all pertinent data in a single presentation. We have not amended, and do not intend to
amend, our Annual Report on Form 10-K for the year ended December 31, 2020 or Quarterly Reports on Form 10-Q for each of the quarterly
periods in 2020 and 2021. Instead, the financial statements contained in such reports are superseded in their entirety by the restated
financial statements contained in this Annual Report on Form 10-K.
ii
FORWARD LOOKING STATEMENTS
In connection with the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995, readers are advised that this document, any document incorporated
by reference herein, and other documents we file with the SEC, contain forward looking statements. In addition, we, or others on our
behalf, may make forward looking statements in press releases or written statements, or in our communications and discussions with investors
and analysts in the normal course of business through meetings, webcasts, phone calls, and conference calls. Forward looking statements
are subject to certain risks and uncertainties, which could cause actual results to differ materially from those indicated by the forward
looking statements. These statements use words, variations of words, and negatives of words such as "may," "could,"
"believe," "future," "depend," "expect," "will," "result," "can,"
"remain," "assurance," "subject to," "require," "limit," "impose," "guarantee,"
"restrict," "continue," "become," "predict," "likely," "opportunities," "effect,"
"change," "future," "predict," and "estimate." Examples of forward looking statements include,
but are not limited to, (i) projections of revenues, income or loss, earnings or losses per share, capital expenditures, dividends, capital
structure and other financial items, (ii) statements of Lifeway Foods, Inc.’s (the “Company”, “Lifeway”,
“we”, or “our”) plans and objectives, including the introduction of new products, or estimates or predictions
of actions by customers, suppliers, competitors or regulatory authorities, (iii) statements of future economic performance, and (iv)
statements of assumptions underlying other statements and statements about Lifeway or its business.
These forward looking statements are based on
management’s beliefs, assumptions, estimates and observations of future events based on information available to our management
at the time the statements are made and include any statements that do not relate to any historical or current fact. These statements
are not guarantees of future performance and they involve certain risks, uncertainties and assumptions that are difficult to predict.
Actual outcomes and results may differ materially from what is expressed, implied or forecast by our forward looking statements due in
part to the risks, uncertainties, and assumptions that include:
· the actions and decisions of our customers or consumers;
· our ability to successfully implement our business strategy;
· changes in the pricing of commodities;
· the effects of government regulation;
These factors are not necessarily all of the important
factors that could cause actual results to differ materially from those expressed in any of our forward looking statements. Other unknown
or unpredictable factors could also have material adverse effects on future results. We intend these forward looking statements to speak
only at the date made. Except as otherwise required to be disclosed in periodic reports required to be filed by public companies with
the SEC pursuant to the SEC’s rules, we have no duty to update these statements, and we undertake no obligation to publicly update
or revise any forward looking statements, whether as a result of new information, future events or otherwise.
iii
PART I
ITEM 1 BUSINESS
OVERVIEW
Lifeway was founded in 1986 by Michael Smolyansky
shortly after he and his wife, Ludmila Smolyansky, emigrated from Eastern Europe to the United States. Lifeway was the first to successfully
introduce kefir to the U.S. consumer on a commercial scale, initially catering to ethnic consumers in the Chicago, Illinois metropolitan
area. In the thirty-five years that have followed, Lifeway has grown to become the largest producer and marketer of kefir in the U.S.
and an important player in the broader market spaces of probiotic-based products and natural, “better for you” foods.
PRODUCTS
Our primary product is drinkable kefir, a cultured
dairy product. Lifeway Kefir is tart and tangy, high in protein, calcium and vitamin D. Thanks to our exclusive blend of kefir cultures,
each cup of kefir contains 12 live and active cultures and 25 to 30 billion beneficial CFU (Colony Forming Units) at the time of manufacture.
We manufacture (directly or through co-packers)
and market products under the Lifeway, Fresh Made and Glen Oaks Farms brand names, as well as under private labels on behalf of certain
customers.
Our product categories are:
· ProBugs, a line of kefir products designed for children;
· Drinkable Yogurt, sold in a variety of sizes and flavors; and
· Other Dairy, which consists primarily of Fresh Made butter and sour cream.
Net sales of products by category were as follows
for the years ended December 31:
In thousands $ % $ %
(a) Includes Lifeway Kefir Shop sales
Product innovation and new product development
Lifeway is committed to maintaining its positions
as the leading producer of kefir and a recognized leader in the market for probiotic products. We routinely evaluate opportunities for
new product flavors and formulations, improved package design, new product configurations and other innovation opportunities. Beyond
our core drinkable kefir products, we have an ongoing effort to extend the strength of the Lifeway brand and leverage the capabilities
of the Lifeway organization into categories both inside and outside of the dairy aisle, including into non-food categories and into additional
channels, such as gyms and fitness studios. In 2021, we maintained the level of focus on product innovations, packaging innovations,
and growth opportunities. These product innovation and development efforts have led to additional revenue opportunities.
Lifeway considers research and development of
new products to be a significant part of our overall business philosophy. Where possible, we leverage our existing staff and facilities
to conduct our innovation, research, and development efforts, rather than maintaining a dedicated research and development staff and facilities
or relying solely on third parties. Until the second half of 2021, in light of the COVID-19 outbreak, our focus was on expanding sales
of our current products, and less on new product development. In August 2021, we purchased the Glen Oaks drinkable yogurt product line
and in December 2021 launched our drinkable oat-based kefir product line.
PRODUCTION
Manufacturing
During 2021 and 2020, approximately 98% and 99%
of our revenue, respectively, was derived from products manufactured at our own facilities. We currently operate the following manufacturing
and distribution facilities:
We own these manufacturing facilities. All
our fixed assets associated with manufacturing, storage, and distribution of our products are located in the United States.
Co-Packers
In addition to the products manufactured in our
own facilities, independent manufacturers (“co-packers”) manufacture some of our products. We have a co-packer agreement to
manufacture drinkable yogurt in California. We have co-packer agreements to manufacture drinkable and frozen kefir in Ireland and the
United Kingdom, respectively, to serve our European markets. During 2021 and 2020, approximately 2% and 1% of our revenue, respectively,
was derived from products manufactured by co-packers. Our domestic co-packer is Safe Quality Food (“SQF”) certified and follows
Good Manufacturing Practices (GMPs). Additionally, the co-packers are required to ensure our products are manufactured in accordance with
our quality specifications and that they are compliant with all applicable laws and regulations.
SALES AND DISTRIBUTION
Sales Organization
We sell our products primarily through our direct
sales force, brokers, and distributors. Our sales organization strives to cultivate strong, collaborative relationships with our customers
that facilitate favorable shelf placement for our products, which we believe will drive sales volumes when combined with our marketing
efforts and our brand strength. Our relationships with food brokers provide additional retail customer coverage as a supplement to our
direct sales force.
Distribution inside the United States
Lifeway’s products reach the consumer through
three primary “route-to-market” pathways:
· Retail-direct;
· Distributor; and
· Direct store delivery (“DSD”).
Under the retail-direct channel, we sell our products
to retailers and deliver it through either the retailers’ carriers or third-party carriers that deliver to such retailers’
distribution centers. In turn, our retailers then deliver the products to their respective stores. Customers in this route-to-market grouping
include Kroger, Walmart and Trader Joe’s. Under the retail direct-model, optimal product merchandising, assortments and product
presentation are attended to by the retailer with limited support from Lifeway’s broker network. Sales to our retail-direct customers
represent approximately 46% of our total net sales for the year ended 2021.
Under the distributor channel, we sell our products
to distributors and deliver it through either the distributors’ carriers or third-party carriers that deliver to such distributors’
designated warehouses. In turn, our distributors then sell and ship our products to their retail customers. Our distributors often use
a DSD model of their own to make deliveries directly to individual stores, but they also make deliveries to retailers’ distribution
centers. Our distributor customers include United Natural Foods (UNFI), KeHE Distributors, and C&S Wholesale Grocers. The distributor
attends to optimal product merchandising, assortments, and product presentations at the retail end of the channel, with support from Lifeway’s
direct sales force and broker network. Sales to our distributor customers represented approximately 51% of our total net sales for year
ended 2021.
Under the direct store delivery (DSD) route to
market, we sell our products to retailers and deliver it directly to the store using Company-owned vehicles and a team of Lifeway merchandisers
who engage face-to-face with store management to ensure optimal product assortments and presentations. We operate our DSD model in the
Chicago, Illinois metropolitan area only. Sales to our DSD customers represent approximately 2% of our total net sales for the year ended
2021.
In the Chicago, Illinois metropolitan area, Lifeway
operated two retail stores and a food truck under its Lifeway Kefir Shop subsidiary. This subsidiary was closed during 2021. The Lifeway
Kefir Shop sold frozen and drinkable kefir products, as well as certain Lifeway products, through these retail outlets. Sales through
these retail outlets represented less than 1% of net sales for the year ended 2021.
Distribution outside of the U.S.
Substantially all of Lifeway’s products
are distributed within the United States; however, certain of our distributors sell our products to retailers in Mexico and portions of
South America and the Caribbean. Additionally, Lifeway products reach consumers in the United Kingdom, Ireland, and the Middle East under
third party co-manufacturing agreements and in-country broker and distributor arrangements. Sales outside the United States represented
approximately 2% of net sales for the year ended 2021.
Channel- and Market-Specific Distribution and Broker Representation
Arrangements
Lifeway’s generally standardized agreements
with independent distributors and food brokers allow us the latitude to establish new relationships as opportunities and needs arise.
Where appropriate given the relationship, market, and business opportunity, we offer exclusive channels, markets, and/or territories to
our distributors and brokers.
We provide our independent distributors with
products at wholesale prices for distribution to their retail accounts. Lifeway believes that the prices at which we sell our products
to distributors are competitive with the prices generally paid by distributors for similar products in the markets served. Due to the
perishable nature of our products and the costs to return, we do not offer return privileges to any of our distributors or channel customers;
however, from time to time we do provide our customers with allowances for non-saleable product.
Lifeway engages independent food brokers generally
on a commission basis, subject in some cases to a minimum commission guarantee. The commissions vary based on the scope of services provided
and customers served. Our brokers represent our products to a variety of prospective buyers. These buyers could be specialty stores,
retail grocery chains, wholesalers, foodservice operators and distributors, drug chains, mass merchandisers, industrial users, schools
and universities, or military installations. With support from our direct sales force, brokers may provide other value-added services.
These may include scheduling and coordinating promotions, merchandising, centralized ordering, and data collection services.
MARKETING
We use a combination of sales incentives, trade
promotions, and consumer promotions to market our products.
Sales Incentives and Trade Promotion
Allowances
Lifeway offers various sales incentives and trade
promotional programs to its retailer and distributor customers from time to time in the normal course of business. These sales incentives
and trade promotion programs typically include rebates, in-store display and demo allowances, allowances for non-saleable product, coupons,
and other trade promotional activities. Trade promotions support price features, displays, and other merchandising of our products by
our retail and distributor customers. We record these arrangements as a reduction to net sales in our consolidated statements of operations.
Consumer Promotions and Marketing Campaigns
We engage in an ongoing and wide variety of marketing
and media campaigns - primarily digital and social media, print advertising, and television advertising. We complement these marketing
and media efforts by sponsoring cultural and community events, and various festivals, as well as participating in industry-related trade
shows and in-store promotional events. Our consumer marketing efforts also include cooperative advertising programs with our retail customers
and various couponing campaigns, online consumer relationship programs, and other similar forms of promotions.
Our marketing efforts are aimed at stimulating
demand with new and existing consumers by elevating awareness and consumption of kefir and probiotics, as well as enhancing our brand
equity. Our awareness marketing seeks to promote the verifiable nutritional profile, purity, benefits, and good taste of our kefir.
COMPETITION
Lifeway competes with a limited number of other
domestic kefir producers and consequently faces a small amount of direct competition for kefir products. However, Lifeway’s kefir-based
products compete with other dairy products, such as spoonable and drinkable yogurt, and, increasingly, with non-dairy probiotic products.
Many of our competitors are well-established and have significantly greater financial resources than Lifeway to promote their products.
SUPPLIERS
We purchase our ingredients such as milk, pectin,
and other ingredients from unaffiliated suppliers. In addition, we purchase significant quantities of packaging materials to package our
products and natural gas and electricity to operate our facilities. Purchases are made through purchase orders or contracts, and price,
delivery terms, and product specifications vary. Although the prices for our principal inputs can fluctuate based on economic, weather,
and other conditions, Lifeway believes it has ready access to alternative suppliers for all critical ingredients, packaging, and other
input requirements.
MAJOR CUSTOMERS
During the year ended December 31, 2021, two customers
collectively accounted for approximately 23% of our total net sales. These customers collectively accounted for approximately 32% of net
accounts receivable as of December 31, 2021.
SEGMENTS
Lifeway has determined that it has one reportable
segment based on how our chief operating decision maker manages the business and, in a manner, consistent with the internal reporting
provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing
Company performance, has been identified collectively as the Chief Executive Officer and, Chief Financial Officer. Substantially all of
our consolidated revenues relate to the sale of cultured dairy products that we produce using the same processes and materials and are
sold to consumers through a common network of distributors and retailers in the United States.
DANONE SA
Since October 1999, Danone SA, through subsidiaries
(collectively “Danone”), has been the beneficial owner of approximately 22% of the outstanding common stock of Lifeway. Lifeway
and Danone are parties to a Stockholders’ Agreement dated October 1, 1999, which as amended provides Danone the right to designate
one director nominee, provides Danone with anti-dilutive rights relating to certain future offerings and issuances of capital stock,
and grants Danone limited registration rights.
INTELLECTUAL PROPERTY
We believe that our rights in our trademarks
and service marks are important to our marketing efforts to develop brand recognition and differentiate our brand from our competitors
and are a valuable part of our business. We own many domestic and international trademarks and service marks. In addition, we own numerous
registered and unregistered copyrights, registered domain names, and proprietary trade secrets, trade dress, technology, know-how, processes,
and other proprietary rights that are not registered. Depending on the jurisdiction, trademarks are generally valid as long as they are
in use and/or their registrations are properly maintained, and they have not been found to have become generic. Registrations of trademarks
can also generally be renewed indefinitely as long as the trademarks are in use. We also have licenses to use certain trademarks inside
and outside of the United States and to certain product formulas, all subject to the terms of the agreements under which such licenses
are granted. Lifeway’s policy is to pursue registration of intellectual property whenever appropriate. We protect our intellectual
property rights by relying on a combination of trademark, copyright, trade dress, trade secret and other intellectual property laws,
and domain name dispute resolution systems; as well as licensing agreements, third-party confidentiality, nondisclosure, and assignment
agreements; and by policing third-party misuses of our intellectual property. We regard the Lifeway family of trademarks and other intellectual
property as having substantial value and as being an important factor in the marketing of our products. The loss of such protection would
have a material adverse impact on our operations and share price.
REGULATION
Lifeway is subject to extensive regulation by
federal, state, and local governmental authorities. In the United States, agencies governing the manufacture, marketing, and distribution
of our products include, among others, the Federal Trade Commission (“FTC”), the United States Food & Drug Administration
(“FDA”), the United States Department of Agriculture (“USDA”), the United States Environmental Protection Agency
(“EPA”), the Occupational Safety and Health Administration (“OSHA”), and their state and local equivalents. Under
various statutes, these agencies prescribe, among other things, the requirements and standards for quality, safety, and representation
of our products to consumers. We are also subject to federal laws and regulations relating to our products and production. For example,
as required by the National Organic Program (“NOP”), we rely on third parties to certify certain of our products and production
locations as organic. Additionally, our facilities are subject to various laws and regulations regarding the release of material into
the environment and the protection of the environment in other ways.
Internationally, we are subject to the laws and
regulatory authorities of the foreign jurisdictions in which we manufacture and sell our products, including the Food Standards Agency
in the United Kingdom; the National Service of Health, Food Safety and Agro-Food Quality (known by its Spanish-language acronym “SENASICA”)
and the Federal Commission for the Protection from Sanitary Risks (“COFEPRIS”) in Mexico; the Food Safety Authority in Ireland;
and the European Food Safety Authority, which supports the European Commission, as well as individual country, province, state, and local
regulations.
MILK INDUSTRY REGULATION
Our primary raw material is milk. The federal
government establishes minimum prices for raw milk purchased in federally regulated areas. Some states have established their own rules
for determining minimum prices. The federal government announces prices for raw milk each month. While we are subject to federal government
regulations that establish minimum prices for milk, and we also pay producer (“over-order”) premiums, federal order administration
costs, and other related charges that vary by milk product, location, and supplier.
FOOD SAFETY
Lifeway takes appropriate precautions to ensure
the safety of our products. In addition to routine inspections by state and federal regulatory agencies, including the USDA and FDA,
we have instituted Company-wide quality systems that address topics such as supplier control; ingredient, packaging, and product specifications;
preventive maintenance; pest control; and sanitation. Each of our facilities also has in place a hazard analysis critical control points
(“HACCP”) plan that identifies critical pathways for contaminants and mandates control measures that must be used to prevent,
eliminate or reduce relevant food-borne hazards. To the extent that the federal Food Safety Modernization Act applies to Lifeway’s
business, we develop food safety plans and implement preventive measures to protect against food contamination. We also maintain a product
recall plan, including lot identifiability and traceability measures that allow us to act quickly to reduce the risk of consumption of
any product that we suspect may pose a health issue.
We maintain various types of insurance, including
product liability and product recall coverages, which we believe to be sufficient to cover potential product liabilities.
We have also implemented the SQF program at our
Illinois and Wisconsin facilities. SQF is a fully integrated food safety and quality management protocol designed specifically for the
food sector. The SQF Code, based on universally accepted CODEX Alimentarius, HACCP guidelines and the Global Food Safety Initiative (“GFSI”)
standards, offers a comprehensive methodology to manage food safety and quality simultaneously. SQF certification provides an independent
and external validation that a product, process or service complies with international, regulatory and other specified standards.
SEASONALITY
Lifeway’s business is not seasonal.
EMPLOYEES
As of December 31, 2021, we employed 280 full-time
and two part-time employees, of which 93 were members of a union bargaining unit.
AVAILABLE INFORMATION
Lifeway maintains a corporate website for investors
at www.lifewayfoods.com and makes available, free of charge, through this website its annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports that we file with or furnish to the SEC as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the SEC.
ITEM 1A
RISK FACTORS
In evaluating and understanding us and our business,
you should carefully consider the risks described below, in conjunction with all of the other information included in this Annual Report
on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained
in Part II, Item 7 and “Quantitative and Qualitative Disclosures About Market Risk” contained in Part II, Item 7A. The risks
and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we
currently believe are not material, may become important factors that adversely affect our business. If any of the events or circumstances
described in the following risk factors actually occurs, our business, financial condition, results of operations, and future prospects
could be materially and adversely affected.
RISKS RELATED TO OUR BUSINESS
Our product categories face a high level
of competition, which could negatively impact our sales and results of operations.
We compete with a limited number of other domestic
kefir producers and consequently face a small amount of direct competition for kefir products. However, our kefir-based products compete
with other dairy products, notably spoonable and drinkable yogurt, and, increasingly, with non-dairy probiotic products that incorporate
kefir cultures but are not kefir. We face significant competition for limited retailer shelf space in each of our product categories.
Competition in our product categories is based on product innovation, product quality, price, brand recognition and loyalty, effectiveness
of marketing, promotional activity, and our ability to identify and satisfy consumer tastes and preferences. We believe that our brands
have benefited in many cases from being the first to introduce products in their categories, and their success has attracted competition
from other food and beverage companies that produce branded products, as well as from private label competitors. Some of our competitors,
such as Danone, General Mills, Chobani, Hain Celestial Group, and Nestle, have substantial financial and marketing resources. These competitors
and others may be able to introduce innovative products more quickly or market their products more successfully than we can, which could
cause our growth rate to be slower than we anticipate and could cause sales to decline.
We also compete with producers of non-dairy products,
such as Millennium Products and PepsiCo, that have lower ingredient and production-related costs. As a result, these competing producers
may be able to offer their products to customers at a lower price point. This could cause us to lower our prices, resulting in lower
profitability or, in the alternative, cause us to lose market share if we fail to lower prices. Furthermore, private label competitors
are generally able to sell their products at lower prices because private label products typically have lower marketing costs than their
branded counterparts. If our products fail to compete successfully with other branded or private label offerings, demand for our products
and our sales volumes could be negatively impacted.
Additionally, due to high levels of competition,
certain of our key retailers may demand price concessions on our products or may become more resistant to price increases for our products.
Increased price competition and resistance to price increases have had, and may continue to have, a negative effect on our results of
operations.
We may not be able to successfully implement our business strategy
for our brands on a timely basis or at all.
We believe that our future success depends, in
part, on our ability to implement our strategy of leveraging our existing brands with our new products to maintain our market position
in our product categories; drive increased sales; acquire or establish new brands; and create strategic alliances including potential
joint ventures. Our ability to implement this strategy depends, among other things, on our ability to:
· compete successfully in the product categories in which we choose to operate;
· increase our brand recognition and loyalty;
· negotiate acquisitions and joint ventures on terms acceptable to us; and
If we fail to execute these and other important
elements of our business strategy, our business and results of operations could be adversely affected.
One key element of our business strategy is to
introduce timely, new, cost-effective, and appealing products and to innovate successfully within our existing product categories. However,
consumer tastes and preferences change rapidly, and evolve over time. Factors that may affect consumer tastes and preferences include:
Our future investments may not produce the results
we expect when we expect them for a variety of reasons including those described herein. Our future product development and innovation
will be reliant on our ability to identify and develop potential new growth opportunities. This process is inherently risky and will
result in investments of substantial time and resources for which we may not achieve any return or value. Successful product development
and innovation is also affected by our ability to launch new or improved products successfully and on a timely and cost-effective basis.
We may have to pay cash, incur debt, or issue
equity, equity-linked, or debt securities to fund our business strategy, or may be unable to fund that strategy. Any of these events
could adversely affect our financial results and our business. We could experience similar effects if we invest resources in a strategy
that ultimately proves unsuccessful. If, due to a failure of our strategy or any other reason, consumer demand for our products declines,
our sales volumes, results of operations, and our business could be negatively affected, and we may not be able to create or sustain
growth or successfully implement our business strategy.
Interruption of our supply chain could affect our ability to
manufacture or distribute products, could adversely affect our business and sales, and/or could increase our operating costs and capital
expenditures.
We have several supply agreements with suppliers
and co-packers that require them to provide us with specific finished goods, including packaging and kefir. For some of these products,
we essentially rely on a single supplier or co-packer as our sole source for the item. The failure for any reason of any such sole source
or other co-packer to fulfill its obligations under the applicable agreements with us or the termination or renegotiation of any such
sourcing agreement could result in disruptions to our supply of finished goods and have an adverse effect on our results of operations.
Additionally, our suppliers and co-packers are subject to risk, including labor disputes, union organizing activities, financial liquidity,
inclement weather, natural disasters, supply constraints, and general economic and political conditions that could limit their ability
to timely provide us with acceptable products, which could disrupt our supply of finished goods, or require that we incur additional
expense by providing financial accommodations to the supplier or co-packer or taking other steps to seek to minimize or avoid supply
disruption, such as establishing new arrangements with other providers. A new arrangement may not be available on terms as favorable
to us as our existing arrangements, if at all.
Our inability to maintain sufficient internal
capacity or establish satisfactory co-packing, warehousing and distribution arrangements could limit our ability to operate our business
or implement our strategic plan and could negatively affect our sales volumes and results of operations.
Disruption of our manufacturing or distribution
chains or information technology systems, including disruption due to cybersecurity threats, could adversely affect our business.
The success of our business depends, in part,
on maintaining a strong production platform and we rely primarily on internal production resources to fulfill our manufacturing needs.
Our ongoing initiatives to expand our production platform and our productive capacity could fail to achieve such objectives and, in any
case, could increase our operating costs beyond our expectations and could require significant additional capital expenditures. If we
cannot maintain sufficient production, warehousing, and distribution capacity, either internally or through third party agreements, we
may be unable to meet customer demand and/or our manufacturing, distribution, and warehousing costs may increase, which could negatively
affect our business.
Furthermore, damage or disruption to our manufacturing
or distribution capabilities due to weather, natural disaster, fire, environmental incident, terrorism, cybersecurity threats and other
security breaches, pandemic, strikes, the financial or operational instability of key distributors, warehousing, and transportation providers,
or other reasons could impair our ability to manufacture or distribute our products.
We rely on a limited number of production and
distribution facilities. A disruption in operations at any of these facilities or any other disruption in our supply chain relating to
common carriers, supply of raw materials and finished goods, or otherwise, whether as a result of casualty, natural disaster, power loss,
telecommunications failure, cybersecurity threat, terrorism, labor shortages, contractual disputes or other causes, could significantly
impair our ability to operate our business and adversely affect our relationship with our customers. Furthermore, our insurance coverage
may not be adequate to cover all related costs.
Our information technology systems are also critical
to the operation of our business and essential to our ability to successfully perform day-to-day operations. These systems include, without
limitation, networks, applications, and outsourced services in connection with the operation of our business. A failure of our information
technology systems to perform as we anticipate could disrupt our business and result in transaction errors, processing inefficiencies,
and sales losses, causing our business to suffer. In addition, our information technology systems may be vulnerable to damage or interruption
from circumstances beyond our control, including fire, natural disasters, systems failures, and cybersecurity threats. Cybersecurity
threats in particular are persistent, evolve quickly and include, without limitation, computer viruses, unauthorized attempts to access
information, denial of service attacks, and other electronic security breaches. Like our customers, suppliers, subcontractors and other
third parties with whom we do business generally, we expect that we will continue to be the subject of cybersecurity threats. In some
cases, we must rely on the safeguards put in place by the third parties with whom we do business to protect against security threats.
We believe we have implemented appropriate measures and controls and have invested in sufficient resources to appropriately identify
and monitor these threats and mitigate potential risks, including risks involving our customers and suppliers. However, there can be
no assurance that any such actions will be sufficient to prevent cybersecurity breaches, disruptions to mission critical systems, the
unauthorized release of sensitive information or corruption of data, or harm to facilities or personnel.
These threats and other events could disrupt
our operations, or the operations of our customers, suppliers, subcontractors and other third parties; could require significant management
attention and resources; could result in the loss of business, regulatory actions and potential liability; and could negatively impact
our reputation among our customers and the public. Any of these outcomes could have a negative impact on our financial condition, results
of operations, or liquidity.
Our debt and financial obligations could
adversely affect our financial condition, our ability to obtain future financing, and our ability to operate our business.
We have outstanding debt obligations that could
adversely affect our financial condition and limit our ability to successfully implement our business strategy. Furthermore, from time
to time, we may need additional financing to support our business and pursue our business strategy, including strategic acquisitions.
Our ability to obtain additional financing, if and when required, will depend on investor demand, our operating performance, the condition
of the capital markets, and other factors. We cannot assure that additional financing will be available to us on favorable terms when
required, or at all. If we raise additional funds through the issuance of equity, equity-linked, or debt securities, those securities
may have rights, preferences, or privileges senior to those of our common stock, and, in the case of equity and equity-linked securities,
our existing stockholders may experience dilution.
As of December 31, 2021, we had $2.77 million
outstanding under the Revolving Credit Facility and $4.47 million outstanding under the note payable, net of $30 thousand of unamortized
deferred financing. Our loan agreements contain certain restrictions and requirements that among other things:
· impose on us financial and operational restrictions.
Our ability to meet our debt service obligations
will depend on our future performance, which will be affected by the other risk factors described in this Annual Report on Form 10-K.
If we do not generate enough cash flow to pay our debt service obligations, we may be required to refinance all or part of our existing
debt, sell our assets, borrow more money or raise equity. There is no guarantee that we will be able to take any of these actions on
a timely basis, on terms satisfactory to us, or at all.
Our Revolving Credit Facility and term loan bear
interest at variable rates. If market interest rates increase, it will increase our debt service requirements, which could adversely affect
our cash flow.
Our loan agreements also contain provisions that restrict our ability
to:
· borrow money or guarantee debt;
· create liens;
· make specified types of investments and acquisitions;
· pay dividends on or redeem or repurchase stock;
· enter into new lines of business;
· enter into transactions with affiliates; and
· sell assets or merge with other companies.
These restrictions on the operation of our business
could harm our ability to execute on our business strategy by, among other things, limiting our ability to take advantage of financing,
merger and acquisition opportunities, and other corporate opportunities. Various risks, uncertainties, and events beyond our control
could affect our ability to comply with these covenants. Unless cured or waived, a default would permit lenders to accelerate the maturity
of the debt under the credit agreement and to foreclose upon the collateral securing the debt.
Loss of our key management or other personnel,
or an inability to attract such management and other personnel, could negatively impact our business.
We depend on the skills, working relationships,
and continued services of key personnel, including our experienced senior management team. We also depend on our ability to attract and
retain qualified personnel to operate and expand our business. If we lose one or more members of our senior management team whose responsibilities
cannot otherwise be distributed among our other officers, or if we fail to attract talented new employees, our business and results of
operations could be negatively affected.
Employee strikes and other labor-related
disruptions may adversely affect our operations.
We have a union contract governing the terms
and conditions of employment for a significant portion of our workforce. Although we believe union relations since the union’s
certification as the exclusive bargaining representative of this portion of our workforce have been amicable, there is no assurance that
this will continue in the future or that we will not be subject to future union organizing activity. There are potential adverse effects
of labor disputes with our own employees or by others who provide warehousing, transportation, and distribution, both domestic and foreign,
of our raw materials or other products. Strikes or work stoppages or other business interruptions could occur if we are unable to renew
collective bargaining agreements on satisfactory terms or enter into new agreements on satisfactory terms, which could impair manufacturing
and distribution of our products or result in a loss of sales, which could adversely impact our business, financial condition, or results
of operations. The terms and conditions of existing, renegotiated, or new collective bargaining agreements could also increase our costs
or otherwise affect our ability to fully implement future operational changes to enhance our efficiency or to adapt to changing business
needs or strategy.
Our intellectual property rights are valuable, and any inability
to protect them could reduce the value of our products and brands.
We consider our intellectual property rights,
particularly our trademarks, but also our copyrights, registered domain names, and proprietary trade secrets, technology, know-how, processes
and other proprietary rights to be a significant and valuable aspect of our business. We attempt to protect our intellectual property
rights by relying on a combination of trademark, copyright, trade dress, trade secret, and other intellectual property laws, and domain
name dispute resolution systems; as well as licensing agreements, third-party confidentiality, nondisclosure, and assignment agreements;
and by policing third-party misuses of our intellectual property. Our failure to obtain or maintain adequate protection of our intellectual
property rights, or any change in law or other changes that serve to lessen or remove the current legal protections of our intellectual
property, may diminish our competitiveness and could materially harm our business.
We also face the risk of claims that we have
infringed third parties’ intellectual property rights. Any claims of intellectual property infringement, even those without merit,
could be expensive and time consuming to defend, cause us to cease making, licensing, or using products that incorporate the challenged
intellectual property, require us to redesign or rebrand our products or packaging, divert management’s attention and resources,
or require us to enter into royalty or licensing agreements to obtain the right to use a third party’s intellectual property. Any
royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all. Additionally, a successful claim
of infringement against us could result in our being required to pay significant damages, enter into costly license or royalty agreements,
or stop the sale of certain products, any of which could have a negative effect on our results of operations.
The Smolyansky family controls a substantial portion of our common
stock and has the ability to control the outcome of matters submitted for stockholder approval.
Members of the Smolyansky family together control
49.61% of our common stock and collectively, they could significantly influence any matter requiring approval by our stockholders, including
the election of all of our directors and the approval or rejection of any merger, change of control, or other significant corporate transaction.
It is unlikely that any person interested in acquiring Lifeway will be able to do so without obtaining the consent of some members of
the Smolyansky family. The Smolyansky family’s interests may not always be aligned with other stockholders’ interests. By
exercising their influence, members of the Smolyansky family could cause Lifeway to take actions that are at odds with the investment
goals of institutional, short-term, non-voting, or other non-controlling investors, or that have a negative effect on our stock price.
Recently identified material weaknesses in our internal control
over financial reporting could have a significant adverse effect on our business and the price of our common stock.
Maintaining effective internal control over financial
reporting is necessary for us to produce reliable financial statements. As a public reporting company, we are subject to the rules and
regulations established from time to time by the SEC and Nasdaq. These rules and regulations require, among other things, that we have,
and periodically evaluate, procedures with respect to our internal control over financial reporting. In addition, as a public company
we are required to document and test our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act so
that our management can certify as to the effectiveness of our internal control over financial reporting.
We have identified a material weakness in our
internal control. A description of the material weakness can be found in Item 9A of this Annual Report on Form 10-K.
Unless and until this material weakness has been
remediated or should new material weaknesses arise or be discovered in the future, material misstatements could occur and go undetected
in our interim or annual consolidated financial statements, and we may be required to restate our financial statements. In addition, we
may experience delays in satisfying our reporting obligations or to comply with SEC rules and regulations, which could result in investigations
and sanctions by regulatory authorities. Any of these results could adversely affect our business and the value of our common stock.
RISKS RELATED TO OUR INDUSTRY
The consolidation of our customers or the
loss of any of our largest customers could negatively impact our sales and results of operations.
Customers, such as supermarkets and food distributors,
continue to consolidate. This consolidation has produced larger, more sophisticated organizations with increased negotiating and buying
power that are able to resist price increases or demand increased promotional programs, as well as operate with lower inventories, decrease
the number of brands that they carry and increase their emphasis on private label products, all of which could negatively impact our