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, 2022
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 ☒
If securities are registered pursuant to Section
12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction
of an error to previously issued financial statements. ☐
Indicate by
check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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, 2022 ($4.97 per
share as quoted on the Nasdaq Global Market) was $37,694,687.
As of March 20, 2023, 14,644,762 shares of the
registrant’s common stock, no par value, were outstanding.
Portions of the Registrant’s Proxy Statement
for the Annual Meeting of Shareholders to be held on June 15, 2023, are incorporated by reference into Part III.
Table of Contents
Page
PART I
Item 1. Business 1
Item 1A. Risk Factors 7
Item 1B. Unresolved Staff Comments 16
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Mine Safety Disclosures 16
PART II
Item 6. [RESERVED] 18
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 24
Item 8. Financial Statements and Supplementary Data 24
Item 9A. Controls and Procedures 25
Item 9B. Other Information 26
Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections 26
PART III
Item 10. Directors, Executive Officers and Corporate Governance 27
Item 11. Executive Compensation 27
Item 14. Principal Accountant Fees and Services 27
PART IV
Item 15. Exhibits, Financial Statement Schedules 28
Signatures 31
i
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.
ii
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-six 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 $ % $ %
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 avenues. 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 fresh categories and into additional channels of trade, such as Convenience; Foodservice; Club; and Drug. In 2022, 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 Farms drinkable yogurt product
line, and launched our drinkable oat-based kefir product line in December 2021.
PRODUCTION
Manufacturing
During 2022 and 2021, approximately 96% and 98% 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 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 a co-packer agreement to manufacture drinkable kefir in Ireland, to serve our European
markets. During 2022 and 2021, approximately 4% and 2% 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 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, assortment and product presentation
are attended to by the retailer. Sales to our retail-direct customers represent approximately 50% of our total net sales for the year
ended 2022.
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, assortment, 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 48% of our total net sales for year
ended 2022.
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
2022.
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 1% of net sales for the year ended 2022.
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, television advertising, and event marketing. We complement
these marketing and media efforts with 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 positive nutritional attributes and flavor of our products.
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, 2022, two customers
collectively accounted for approximately 22% of our total net sales. Two customers collectively accounted for approximately 28% of net
accounts receivable as of December 31, 2022.
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 as the Chief Executive Officer. Substantially all 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 24% 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.
Changes in these laws or regulations, or the introduction of new laws
or regulations, could increase the costs of doing business for the Company, our customers, or suppliers, or restrict our actions, causing
our results of operations to be adversely affected.
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, 2022, we employed 289 full-time
and two part-time employees, of which 103 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, 2022, we had $2.77 million outstanding
under the Revolving Credit Facility and $3,72 million outstanding under the note payable, net of $25 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.
Although the members of the Smolyansky family
together control less than 50% of our common stock 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.
Our business could be negatively affected as a result of the
actions of stockholders.
Our business could be negatively affected as
a result of stockholder actions, which could cause us to incur significant expense, hinder execution of our business strategy, and impact
the trading value of our securities. Stockholder actions, including potential proxy contests, requires significant time and attention
by management and our Board, potentially interfering with our ability to execute our strategic plan. We may be required to incur significant
legal fees and other expenses related to stockholder actions, and the attention of our management may be diverted by such actions. While
we welcome our stockholders’ constructive input, there can be no assurance that stockholder actions would not result in negative
impacts to the Company. Any of these impacts could materially and adversely affect our business and operating results, and the market
price of our Common Stock could be subject to significant fluctuation or otherwise be adversely affected by stockholder actions.
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 business.
The consolidation of retail customers also increases the risk that a significant adverse impact on their business could have a corresponding
material adverse impact on our business.
Two of our customers together accounted for 22% of
our net sales in the fiscal year ended December 31, 2022. Where we enter into written agreements with our customers, they are generally
terminable after short notice periods by the customer. In addition, our customers sometimes award contracts based on competitive bidding,
which could result in lower profits for contracts we win and the loss of business for contracts we lose. The loss of any large customer,
the reduction of purchasing levels, or the cancellation of any business from a large customer for an extended period of time could negatively
affect our sales and results of operations.
We rely on sales made by or through our independent
distributors to customers. Distributors purchase directly for their own account for resale. The loss of, or business disruption at, one
or more of these distributors may harm our business. If we are required to obtain additional or alternative distribution agreements or
arrangements in the future, we cannot be certain that we will be able to do so on satisfactory terms or in a timely manner. Our inability
to enter into satisfactory distribution agreements may inhibit our ability to implement our business plan or to establish markets necessary
to expand the distribution of our products successfully.
We are subject to the risk of product contamination
and product liability claims, which could harm our reputation, force us to recall products and incur substantial costs.
The sale of food products for human consumption involves
the risk of injury to consumers. Such injuries may result from tampering by unauthorized third parties, inadvertent mislabeling, product
contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during
the storage, processing, handling or transportation phases. We also may be subject to liability if our products or production processes
violate applicable laws or regulations, including environmental, health, and safety requirements, or in the event our products cause injury,
illness, or death.
Under certain circumstances, we may be required to
recall or withdraw products, suspend production of our products, or cease operations, which may lead to a material adverse effect on our
business. In addition, customers may cancel orders for such products as a result of such events. Even if a situation does not necessitate
a recall or market withdrawal, and even if we and each of our co-packers and suppliers comply in all material respects with all applicable
laws and regulations, we may become subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful
or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or physical harm, including
the risk of reputational harm being magnified and/or distorted through the rapid dissemination of information over the Internet, including
through news articles, blogs, chat rooms, and social media, could adversely affect our reputation with existing and potential customers
and consumers and our corporate and brand image. Moreover, claims or liabilities of this type might not be covered by our insurance or
by any rights of indemnity or contribution that we may have against others. We maintain product liability and product recall insurance
in amounts that we believe to be adequate. However, we cannot be sure that we will not incur claims or liabilities for which we are not
insured or that exceed the amount of our insurance coverage. A product liability judgment against us or a product recall could have a
material adverse effect on our business, consolidated financial condition, results of operations or liquidity.
We rely on independent certification for several of our products
and facilities.
We rely on independent certification, such as certifications
of our products as “organic,” or “gluten-free,” to differentiate our products from others. The loss of any independent
certifications could adversely affect our market position as a probiotic-based product and natural, “better for you” foods
company, which could harm our business. We rely on independent SQF certification at some of our facilities, a certification that some
of our customers require us to maintain.
We must comply with the requirements of independent
organizations or certification authorities in order to label our products as certified. For example, we can lose our “organic”