WWW.EXFILE.COM, INC. -- 888-775-4789 -- LIFEWAY FOODS, INC. -- FORM 10-Q/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q/A

AMENDMENT NO. 1
______________________________________
 
(Mark One)
  

x
 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended:  June 30, 2009
 
o
 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
 
Commission File Number: 000-17363
 
______________________________________
 
LIFEWAY FOODS, INC.
(Exact Name of Registrant as Specified in its Charter)
 
______________________________________
 
 
Illinois
36-3442829
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
 
 6431 West Oakton, Morton Grove, IL 60053
(Address of Principal Executive Offices, Zip Code)
 
(847-967-1010)
(Registrant’s Telephone Number, Including Area Code) 
 
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of  the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  o   No  x
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  o   No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer o
Accelerated filer o
Non-accelerated filer  o
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o   No  x
 
As of December 1, 2009, the issuer had 16,775,930 shares of common stock, no par value, outstanding.
 
 
 EXPLANATORY NOTE

This amendment to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 of Lifeway Foods, Inc. (as originally filed on August 14, 2009, the “Form 10-Q”) is being filed to correct typographical errors in the Form 10-Q.  The Form 10-Q is restated herein in its entirety. The disclosures in this amendment (the “Form 10-Q/A”) continue to speak as of the date of the Form 10-Q, and do not reflect events occurring after the filing of the Form 10-Q. Accordingly, this Form 10-Q/A should be read in conjunction with our other filings made with the Securities and Exchange Commission subsequent to the filing of the 10-Q, including any amendments to those filings. The filing of this Form 10-Q/A shall not be deemed an admission that the Form 10-Q when made included any untrue statement of a material fact or omitted to state a material fact necessary to make a statement not misleading.

 
 
LIFEWAY FOODS, INC.
CONTENTS TO FORM 10-Q/A
 
 
PART I —
FINANCIAL INFORMATION
Page(s)
     
ITEM 1.
FINANCIAL STATEMENTS.
  4
     
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  8
     
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
  22
     
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  24
     
   ITEM 4T.
CONTROLS AND PROCEDURES.
  24
     
PART II —
OTHER INFORMATION
  25
     
ITEM 1.
LEGAL PROCEEDINGS.
  25
     
    ITEM 1A.
RISK FACTORS.
  25
     
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  25
     
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.
  25
     
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  25
     
ITEM 5.
OTHER INFORMATION.
  27
     
ITEM 6.
EXHIBITS.
  27
     
SIGNATURES
  
  28
     
EXHIBIT INDEX
  
  29
 
 
-2-
 
LIFEWAY FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 and 2008

AND DECEMBER 31, 2008
 
 
 
 
 
 
 
 
 
 
 
 
 

 
-3-
PART I — FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS.
 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 2009 and 2008 (Unaudited) and December 31, 2008

   
(Unaudited)
        
   
June 30
    
December 31,
  
   
2009
    
2008
    
2008
  
ASSETS
                  
                   
Current assets
                  
Cash and cash equivalents
  
$
582,766
    
$
342,039
    
$
277,248
  
Marketable securities
    
4,659,161
      
6,472,027
      
5,262,168
  
Inventories
    
3,817,195
      
3,851,725
      
3,097,542
  
Accounts receivable, net of allowance for doubtful accounts of $110,011 and $35,011 at June 30, 2009 and 2008 and $110,011 at December 31, 2008
    
6,064,801
      
4,626,287
      
4,765,865
  
Prepaid expenses and other current assets
    
55,669
      
12,582
      
23,226
  
Other receivables
    
65,730
      
49,571
      
40,314
  
Deferred income taxes
    
638,372
      
602,227
      
919,649
  
Refundable income taxes
    
778,125
      
—
      
356,416
  
Total current assets
    
16,661,819
      
15,956,458
      
14,742,428
  
                         
Property and equipment, net
    
13,793,929
      
10,769,676
      
11,062,714
  
                         
Intangible assets
                        
Goodwill and other non amortizable brand asset
    
12,154,091
      
5,414,858
      
5,414,858
  
Other intangible assets, net of accumulated amortization of $1,260,810 and $761,699 at June 30, 2009 and 2008 and $921,422 at December 31, 2008
    
6,596,829
      
3,095,939
      
2,936,216
  
Total intangible assets
    
18,750,920
      
8,510,797
      
8,351,074
  
                         
Other assets
    
500,000
      
500,000
      
500,000
  
                         
Total assets
  
$
49,706,668
    
$
35,736,931
    
$
34,656,216
  
                         
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY
                        
                         
Current liabilities
                        
Current maturities of notes payable
  
$
6,219,788
    
$
1,130,612
    
$
928,444
  
Accounts payable
    
2,024,313
      
1,873,644
      
2,260,272
  
Accrued expenses
    
617,662
      
548,706
      
458,282
  
Margin payable
    
—
      
407,479
      
—
  
Accrued income taxes
    
—
      
395,093
      
—
  
Total current liabilities
    
8,861,763
      
4,355,534
      
3,646,998
  
                         
Notes payable
    
7,907,847
      
3,517,841
      
3,108,014
  
                         
Deferred income taxes
    
1,941,740
      
1,647,550
      
1,607,155
  
                         
Stockholders’ equity
                        
Common stock, no par value; 20,000,000 shares authorized; 17,273,776 shares issued; 16,812,955 shares outstanding at June 30, 2009; 17,273,776 shares issued; 16,740,407 shares outstanding at June 30, 2008; and 17,273,776 shares issued; 16,724,467 shares outstanding at December 31, 2008
    
6,509,267
      
6,509,267
      
6,509,267
  
Paid-in-capital
    
1,912,845
      
1,149,068
      
1,202,009
  
Treasury stock, at cost
    
( 3,353,490
)
    
( 3,110,637
)
    
( 3,302,025
)
Retained earnings
    
26,463,077
      
22,271,730
      
22,383,707
  
Accumulated other comprehensive loss, net of taxes
    
( 536,381
)
    
( 603,422
)
    
( 498,909
)
Total stockholders’ equity
    
30,995,318
      
26,216,006
      
26,294,049
  
                         
Total liabilities and stockholders’ equity
  
$
49,706,668
    
$
35,736,931
    
$
34,656,216
  
 
See accompanying notes to financial statements
 
-4-
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the Three and Six Months Ended June 30, 2009 and 2008 (Unaudited)
and the Year Ended December 31, 2008
 
   
(Unaudited)
    
(Unaudited)
        
   
Three Months Ended
    
Six Months Ended
    
Year Ended
  
   
June 30,
    
June 30,
    
December 31,
  
   
2009
    
2008
    
2009
    
2008
    
2008
  
                               
Sales
    
14,479,429
    
$
11,523,393
    
$
28,215,509
    
$
22,645,631
      
44,461,455
  
                                         
Cost of goods sold
    
7,978,110
      
7,455,696
      
16,102,691
      
14,897,779
      
30,926,114
  
Depreciation expense
    
353,654
      
195,128
      
570,428
      
384,552
      
777,715
  
                                         
Total cost of goods sold
    
8,331,764
      
7,650,824
      
16,673,119
      
15,282,331
      
31,703,829
  
                                         
Gross profit
    
6,147,665
      
3,872,569
      
11,542,390
      
7,363,300
      
12,757,626
  
                                         
Selling Expenses
    
1,386,815
      
1,154,126
      
2,694,740
      
2,213,292
      
4,098,176
  
General and Administrative
    
1,437,505
      
1,092,420
      
2,810,103
      
2,077,466
      
4,149,010
  
Amortization expense
    
168,698
      
79,862
      
339,388
      
159,723
      
319,446
  
                                         
Total Operating Expenses
    
2,993,018
      
2,326,408
      
5,844,231
      
4,450,481
      
8,566,632
  
                                         
Income from operations
    
3,154,647
      
1,546,161
      
5,698,159
      
2,912,819
      
4,190,994
  
                                         
Other income (expense):
                                        
Interest and dividend income
    
48,506
      
62,862
      
110,717
      
165,995
      
343,329
  
Rental Income
    
11,947
      
11,647
      
21,294
      
23,294
      
48,886
  
Interest expense
    
( 110,090
)
    
( 68,969
)
    
( 264,473
)
    
( 154,924
)
    
( 298,619
)
Impairment of marketable securities
    
—
      
—
      
—
      
—
      
( 958,879
)
Loss on Disposition of Equipment
    
( 2,825
)
    
—
      
( 2,825
)
    
—
      
—
  
Gain (loss) on sale of marketable securities, net
    
53,638
      
( 87,174
)
    
( 96,152
)
    
( 36,145
)
    
( 733,647
)
Total other income (Expense)
    
1,176
      
( 81,634
)
    
( 231,439
)
    
( 1,780
)
    
( 1,598,930
)
                                         
Income before provision for
                                        
   income taxes
    
3,155,823
      
1,464,527
      
5,466,720
      
2,911,039
      
2,592,064
  
                                         
Provision for income taxes
    
623,918
      
552,809
      
1,387,350
      
1,110,715
      
679,789
  
                                         
Net income
  
$
2,531,905
    
$
911,718
    
$
4,079,370
    
$
1,800,324
    
$
1,912,275
  
                                         
Basic and diluted earnings per common share
    
0.15
      
0.05
      
0.24
      
0.11
      
0.11
  
                                         
Weighted average number of  shares outstanding
    
16,823,691
      
16,765,094
      
16,823,691
      
16,789,727
      
16,765,080
  
                                         
COMPREHENSIVE INCOME
                                        
                                         
Net income
  
$
2,531,905
    
$
911,718
    
$
4,079,370
    
$
1,800,324
    
$
1,912,275
  
                                         
Other comprehensive income (loss), net of tax:
                                        
Unrealized gains (losses) on marketable securities (net of tax benefits)
    
306,293
      
( 233,221
)
    
( 37,472
)
    
( 415,596
)
    
( 720,517
)
Less reclassification adjustment for (gains) losses included in net income (net of taxes)
            
51,171
              
21,217
      
430,651
  
                                         
Comprehensive income
  
$
2,838,198
    
$
729,668
    
$
4,041,898
    
$
1,405,945
    
$
1,622,409
  
 
See accompanying notes to financial statements
 
-5-
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders Equity
For the Six Months Ended June 30, 2009 (Unaudited)
and the Year Ended December 31, 2008
 
   
# of Shares
Issued
    
Common Stock,
No Par Value
20,000,000
Shares
Authorized
# of Shares
Outstanding
    
# of Shares
of
Treasury
Stock
    
Common
Stock
    
Paid In
Capital
    
Treasury
Stock
    
Retained
Earnings
    
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
    
Total
  
                                                       
Balances at December 31, 2007
    
17,273,776
      
16,827,726
      
446,050
      
6,509,267
      
1,120,669
      
(2,078,165
)
    
20,471,432
      
(209,043
)
    
25,814,160
  
                                                                         
Redemption of stock
    
—
      
(112,009
)
    
112,009
      
—
      
—
      
(1,239,488
)
    
—
      
—
      
(1,239,488
)
                                                                         
Issuance of treasury stock for compensation
    
—
      
8,750
      
(8,750
)
    
—
      
81,340
      
15,628
      
—
      
—
      
96,968
  
                                                                         
Other comprehensive income (loss):
                                                                        
Unrealized losses on securities, net of taxes and reclassification adjustment
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
(289,866
)
    
(289,866
)
                                                                         
Net income for the year ended December 31, 2008
    
—
      
—
      
—
      
—
      
—
      
—
      
1,912,275
      
—
      
1,912,275
  
                                                                         
                                                                         
Balances at December 31, 2008
    
17,273,776
      
16,724,467
      
549,309
      
6,509,267
      
1,202,009
      
(3,302,025
)
    
22,383,707
      
(498,909
)
    
26,294,049
  
                                                                         
Redemption of stock
    
—
      
(48,341
)
    
48,341
      
—
      
—
      
(402,947
)
    
—
      
—
      
(402,947
)
                                                                         
Issuance of treasury stock for compensation
    
—
      
7,882
      
(7,882
)
    
—
      
66,098
      
16,220
      
—
      
—
      
82,318
  
                                                                         
Issuance of treasury stock for Fresh Made acquisition
    
—
      
128,947
      
(128,947
)
    
—
      
644,738
      
335,262
      
—
      
—
      
980,000
  
                                                                         
Other comprehensive income (loss):
                                                                        
Unrealized gains on securities, net of taxes and reclassification adjustment
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
(37,472
)
    
(37,472
)
                                                                         
Net income for the six months ended June 30, 2009
    
—
      
—
      
—
      
—
      
—
      
—
      
4,079,370
      
—
      
4,079,370
  
                                                                         
                                                                         
Balances at June 30, 2009
    
17,273,776
      
16,812,955
      
460,821
    
$
6,509,267
    
$
1,912,845
    
$
(3,353,490
 
)
  
$
26,463,077
    
$
(536,381
)
  
$
30,995,318
  
 
See accompanying notes to financial statements
 
-6-
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2009 and 2008 (Unaudited)
and the Year Ended December 31, 2008
 
   
(Unaudited)
        
   
Six Months Ended
        
   
June 30,
    
June 30,
    
December 31,
  
   
2009
    
2008
    
2008
  
                   
Cash flows from operating activities:
                  
Net income
  
$
4,079,370
    
$
1,800,324
    
$
1,912,275
  
Adjustments to reconcile net income to net cash flows from operating activities, net of acquisition:
                        
Depreciation and amortization
    
909,816
      
544,275
      
1,092,995
  
(Gain)Loss on sale of marketable securities, net
    
96,152
      
36,145
      
733,647
  
Loss on disposition of assets
    
2,825
      
—
      
—
  
Impairment of marketable securities
    
—
      
—
      
958,879
  
Deferred income taxes
    
179,796
      
( 78,035
)
    
( 509,386
)
Treasury stock issued for compensation
    
82,318
      
34,650
      
96,968
  
Increase (decrease) in allowance for doubtful accounts
    
—
      
( 4,449
)
    
70,551
  
(Increase) decrease in operating assets:
                        
Accounts receivable
    
( 752,978
)
    
( 412,176
)
    
( 626,754
)
Other receivables
    
( 25,416
)
    
( 6,460
)
    
2,797
  
Inventories
    
( 346,800
)
    
( 345,171
)
    
409,012
  
Refundable income taxes
    
( 435,205
)
    
240,880
      
( 115,536
)
Prepaid expenses and other current assets
    
5,029
      
8,950
      
( 1,973
)
Increase (decrease) in operating liabilities:
                        
Accounts payable
    
( 440,911
)
    
279,314
      
665,942
  
Accrued expenses
    
36,719
      
134,667
      
44,243
  
Margin payable
    
—
      
—
      
—
  
Accrued income taxes
    
—
      
395,093
      
—
  
Net cash provided by operating activities
    
3,390,715
      
2,628,007
      
4,733,660
  
                         
Cash flows from investing activities:
                        
Purchases of marketable securities
    
( 3,342,662
)
    
( 3,490,650
)
    
( 5,782,452
)
Sale of marketable securities
    
4,127,666
      
3,299,791
      
5,323,423
  
Increase in margin
    
—
      
407,479
      
—
  
Purchases of property and equipment
    
( 714,052
)
    
( 1,475,280
)
    
( 2,157,315
)
Acquisition of Fresh Made, net of cash acquired
    
( 2,898,224
)
    
—
      
—
  
Net cash used in investing activities
    
( 2,827,272
)
    
( 1,258,660
)
    
( 2,616,344
)
                         
Cash flows from financing activities:
                        
Proceeds of note payable
    
1,742,085
      
—
      
—
  
Purchases of treasury stock, net
    
( 402,947
)
    
( 1,038,723
)
    
( 1,239,488
)
Repayment of notes payable
    
( 1,597,063
)
    
( 584,470
)
    
( 1,196,465
)
Net cash provided (used) in financing activities
    
( 257,925
)
    
( 1,623,193
)
    
( 2,435,953
)
                         
Net increase (decrease) in cash and cash equivalents
    
305,518
      
( 253,846
)
    
( 318,637
)
                         
Cash and cash equivalents at the beginning of the period
    
277,248
      
595,885
      
595,885
  
                         
Cash and cash equivalents at the end of the period
  
$
582,766
    
$
342,039
    
$
277,248
  

 See accompanying notes to financial statements
 
-7-
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2009 and 2008
and December 31, 2008

Note 1 – NATURE OF BUSINESS

Lifeway Foods, Inc. (The “Company”) commenced operations in February 1986 and incorporated under the laws of the state of Illinois on May 19, 1986. The Company’s principal business activity is the production of dairy products. Specifically, the Company produces Kefir, a drinkable product which is similar to but distinct from yogurt, in several flavors sold under the name “Lifeway’s Kefir;” a plain farmer’s cheese sold under the name “Lifeway’s Farmer’s Cheese;” a fruit sugar-flavored product similar in consistency to cream cheese sold under the name of “Sweet Kiss;” and a dairy beverage, similar to Kefir, with increased protein and calcium, sold under the name “Basics Plus.”  The Company also produces several soy-based products under the name “Soy Treat” and a vegetable-based seasoning under the name “Golden Zesta.” The Company currently distributes its products throughout the Chicago Metropolitan area and various cities in the East Coast through local food stores.  In addition, the products are sold throughout the United States and Ontario, Canada by distributors. The Company also distributes some of its products to Eastern Europe.


Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows:

Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, LFI Enterprises, Inc., Helios Nutrition, Ltd., Pride of Main Street, L.L.C., Starfruit, L.L.C. and Fresh Made, Inc. All significant intercompany accounts and transactions have been eliminated.

Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Significant estimates made in preparing the consolidated financial statements include the allowance for doubtful accounts, the valuation of goodwill, intangible assets and deferred taxes.

Revenue Recognition
Sales represent sales of Company produced dairy products that are recorded at the time of shipment and the following four criteria have been met: (i)  The product has been shipped and the Company has no significant remaining obligations; (ii)  Persuasive evidence of an agreement exists; (iii)  The price to the buyer is fixed or determinable and (iv)  Collection is probable.  In addition, shipping costs invoiced to the customers are included in net sales and the related cost in cost of sales.

Cash and cash equivalents
All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents.

The Company maintains cash deposits at several institutions located in the greater Chicago, Illinois and Philadelphia, Pennsylvania metropolitan areas.
 
 
-8-
 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2009 and 2008
and December 31, 2008



Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Bank balances of amounts reported by financial institutions are categorized as follows:

   
June 30,
    
December 31,
  
   
2009
    
2008
    
2008
  
Amounts insured
  
$
1,411,079
    
$
251,589
    
$
847,711
  
Uninsured and uncollateralized amounts
    
402,977
      
889,463
      
—
  
Total bank balances
  
$
1,814,056
    
$
1,141,052
    
$
847,711
  

Marketable securities
All investment securities are classified as available-for-sale, are carried at fair value or quoted market prices. Unrealized gains and losses on available-for-sale securities are reported as a separate component of stockholders’ equity. Amortization, accretion, interest and dividends, realized gains and losses, and declines in value judged to be other-than-temporary on available-for-sale securities are recorded in other income. All of the Company’s securities are subject to a periodic impairment evaluation. This evaluation depends on the specific facts and circumstances. Factors that we consider in determining whether an other-than-temporary decline in value has occurred include: the market value of the security in relation to its cost basis; the financial condition of the investee; and the intent and ability to retain the investment for a sufficient period of time to allow for possible recovery in the market value of the investment.

Accounts receivable
Credit terms are extended to customers in the normal course of business.  The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral.

Accounts receivable are recorded at invoice amounts, and reduced to their estimated net realizable value by recognition of an allowance for doubtful accounts.  The Company’s estimate of the allowance for doubtful accounts is based upon historical experience, its evaluation of the current status of specific receivables, and unusual circumstances, if any.  Accounts are considered past due if payment is not made on a timely basis in accordance with the Company’s credit terms.  Accounts considered uncollectible are charged against the allowance.

Inventories
Inventories are stated at the lower of cost or market, cost being determined by the first-in, first-out method.
 
Property and equipment
Property and equipment are stated at depreciated cost or fair value where depreciated cost is not recoverable.  Depreciation is computed using the straight-line method.  When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period.  The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized.
 
 
-9-
 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2009 and 2008
and December 31, 2008

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

Property and equipment are being depreciated over the following useful lives:

Category
  
Years
Buildings and improvements
  
31 and 39
Machinery and equipment
  
5 – 12
Office equipment
  
5 – 7
Vehicles
  
5

Intangible assets
The Company accounts for intangible assets at historical cost.  Intangible assets acquired in a business combination are recorded under the purchase method of accounting at their estimated fair values at the date of acquisition.  Goodwill represents the excess purchase price over the fair value of the net tangible and other intangible assets acquired.  Goodwill is not amortized and is reviewed for impairment at least annually.  Brand assets represent the fair value of brands acquired.  Brand assets have an indefinite life, therefore are not amortized, rather are reviewed periodically for impairment.  The Company amortizes other intangible assets over their estimated useful lives, as disclosed in the table below.

The Company reviews intangible assets and their related useful lives at least once a year to determine if any adverse conditions exist that would indicate the carrying value of these assets may not be recoverable.   The Company conducts more frequent impairment assessments if certain conditions exist, including:  a change in the competitive landscape, any internal decisions to pursue new or different strategies, a loss of a significant customer, or a significant change in the market place including changes in the prices paid for the Company’s products or changes in the size of the market for the Company’s products.

If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life.

Intangible assets are being amortized over the following useful lives:

Category
  
Years
Recipes
  
4
Customer lists and other customer related intangibles
  
7-10
Lease agreement
  
7
Trade names
  
15
Formula
  
10
Customer relationships
  
12
 
 
-10-
 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2009 and 2008
and December 31, 2008



Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

Income taxes
Deferred income taxes arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of the assets and liabilities to which they relate.  Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.
 
The principal sources of temporary differences are different depreciation and amortization methods for financial statement and tax purposes, unrealized gains or losses related to marketable securities, capitalization of indirect costs for tax purposes, and the recognition of an allowance for doubtful accounts for financial statement purposes.

As of January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. Pursuant to FIN 48, the Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The only periods subject to examination for the Company’s federal return are the 2004 through 2007 tax years. The Company believes that its income tax filing positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48. In addition, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48.

The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income before taxes. There were no such items during the periods covered in this report.

Treasury stock
Treasury stock is recorded using the cost method.

Advertising costs
The Company expenses advertising costs as incurred.  During the year ended December 31, 2008 and for the six months ended June 30, 2009 and 2008, approximately $1,530,207, $780,116 and $893,710 of such costs respectively, were expensed.

Earning per common share
Earnings per common share were computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period.  For the six months ended June 30, 2009 and 2008 and the year ended December 31, 2008, diluted and basic earnings per share were the same, as the effect of dilutive securities options outstanding was not significant.
 
 
-11-
 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2009 and 2008
and December 31, 2008



Note 3 – ACQUISITION
 
On February 6, 2009, Lifeway Foods, Inc., a Illinois corporation (“Lifeway”) completed a Stock Purchase Agreement (the “Stock Agreement”) by and among Lifeway, Ilya Mandel, an individual and Michael Edelson, an individual (each a “Seller” and collectively “Sellers”).
 
Lifeway purchased from Sellers all of the issued and outstanding stock (the “Shares”) of Fresh Made, Inc., a Pennsylvania corporation (“Fresh”).  The consideration for the Shares was an aggregate of $8,048,000, less certain offsets for any selling expenses in excess of certain limits set forth in the Stock Agreement and other payments and funded debt all as set forth in the Stock Agreement, a note in the principal amount of $2,735,000, due on February 6, 2011, 128,948 shares of common stock of Lifeway valued at a total of $980,000 (“Lifeway’s Common Stock”), the cancellation of a loan in the principal amount of $265,000 and not more than $98,000 in funds held in Fresh’s two accounts with Vist Financial Corp.  The issuance of Lifeway’s Common Stock was exempted from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
 
Also on February 6, 2009, Lifeway entered into and consummated a Real Property Purchase Agreement (the “Real Property Agreement”) by and among Sellers and Lifeway.  Pursuant to the Real Property Agreement, Lifeway acquired 1.1355 acres of land in Philadelphia, PA (the “Property”) from Sellers.  The consideration for the Property was approximately $2,000,000.
 
The acquisition was accounted for using the purchase accounting method of accounting, and accordingly, the purchase price was allocated to assets acquired and the liabilities assumed based on the fair value as of the merger date.  Acquisition costs for legal and professional fees have been included in General and Administrative costs.
 
The estimated fair value of assets acquired, including the real property, and liabilities assumed consisted of the following:

Cash and cash equivalents
  
$
226,000
  
Accounts receivable (contractual amounts totaling $546,000)
    
546,000
  
Other current assets
    
361,000
  
Building and other fixed assets
    
2,617,000
  
Customer list
    
4,000,000
  
Non amortizable goodwill and brand asset
    
6,739,000
  
Current liabilities
    
( 461,000
)
       Total fair value of assets acquired and liablities assumed
  
$
14,028,000
  

 
-12-
 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2009 and 2008
and December 31, 2008



Note 4 – INTANGIBLE ASSETS
 
Intangible assets, and the related accumulated amortization, consist of the following:

   
June 30, 2009
    
June 30, 2008
    
December 31, 2008
  
   
Cost
    
Accumulated Amortization
    
Cost
    
Accumulated Amortization
    
Cost
    
Accumulated Amortization
  
Recipes
  
$
43,600
    
$
43,600
    
$
43,600
    
$
40,420
    
$
43,600
    
$
43,600
  
Customer lists and other customer related intangibles
    
4,305,200
      
385,166
      
305,200
      
162,228
      
305,200
      
182,938
  
Lease acquisition
    
87,200
      
61,245
      
87,200
      
48,790
      
87,200
      
55,019
  
Other
    
6,638
      
6,638
      
6,638
      
3,984
      
6,638
      
4,647
  
Customer relationship
    
985,000
      
239,410
      
985,000
      
157,327
      
985,000
      
198,368
  
Contractual backlog
    
12,000
      
12,000
      
12,000
      
12,000
      
12,000
      
12,000
  
Trade names
    
1,980,000
      
385,000
      
1,980,000
      
253,000
      
1,980,000
      
319,000
  
Formula
    
438,000
      
127,750
      
438,000
      
83,950
      
438,000
      
105,850
  
   
$
7,857,638
    
$
1,260,809
    
$
3,857,638
    
$
761,699
    
$
3,857,638
    
$
921,422
  

Amortization expense is expected to be as follows for the 12 months ending June 30:

2010
  
$
672,250
  
2011
    
669,707
  
2012
    
658,288
  
                         2013
    
627,275
  
2014
    
624,550
  
Thereafter
    
3,344,759
  
   
$
6,596,829
  

Amortization expense during the six months ended June 30, 2009 and 2008 and for the year ended December 31, 2008 was $339,388, $159,723 and $319,446, respectively.

Goodwill and brand assets increased during the period ending June 30, 2009 due to the acquisition of Fresh Made (See Note 3).
 
Note 5 – MARKETABLE SECURITIES

The cost and fair value of marketable securities classified as available for sale are as follows:

June 30, 2009
  
Cost
    
Unrealized
Gains
    
Unrealized
Losses
    
Fair
Value
  
                         
Equities
  
$
1,536,976
    
$
57,665
    
$
( 178,926
)
  
$
1,415,715
  
Mutual Funds
    
617,082
      
842
      
( 267,818
)
    
350,106
  
Preferred Securities
    
680,527
      
14,361
      
( 207,218
)
    
487,670
  
Corporate Bonds
    
506,165
      
5,836
      
( 7,781
)
    
504,220
  
Government agency Obligations
    
1,889,963
      
15,201
      
( 3,714
)
    
1,901,450
  
Total
  
$
5,230,713
    
$
93,905
    
$
( 665,457
)
  
$
4,659,161
  
 
 
-13-
 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2009 and 2008
and December 31, 2008


Note 5 – MARKETABLE SECURITIES - Continued
 
June 30, 2008
  
Cost
    
Unrealized
Gains
    
Unrealized
Losses
    
Fair
Value
  
                         
Equities
  
$
3,190,184
    
$
58,147
    
$
( 569,316
)
  
$
2,679,015
  
Mutual Funds
    
827,737
      
4,371
      
( 138,044
)
    
694,064
  
Preferred Securities
    
1,657,944
      
4,395
      
( 304,967
)
    
1,357,372
  
Corporate Bonds
    
1,288,708
      
387
      
( 73,012
)
    
1,216,083
  
Municipal Bonds
    
4,586
      
352
      
—
      
4,938
  
Government agency Obligations
    
530,845
      
—
      
( 10,290
)
    
520,555
  
Total
  
$
7,500,004
    
$
67,652
    
$
( 1,095,629
)
  
$
6,472,027
  

December 31, 2008
  
Cost
    
Unrealized
Gains
    
Unrealized
Losses
    
Fair
Value
  
                         
Equities
  
$
2,116,004
    
$
75,333
    
$
( 279,487
)
  
$
1,911,850
  
Mutual Funds
    
888,182
      
202
      
( 339,970
)
    
548,414
  
Preferred Securities
    
1,541,423
      
13,075
      
( 308,963
)
    
1,245,535
  
Corporate Bonds
    
783,761
      
1,559
      
( 19,289
)
    
766,031
  
Municipal Bonds
    
4,586
      
414
      
—
      
5,000
  
Government agency Obligations
    
778,140
      
8,668
      
( 1,470
)
    
785,338
  
Total
  
$
6,112,096
    
$
99,251
    
$
( 949,179
)
  
$
5,262,168
  

Proceeds from the sale of marketable securities were $5,323,423, $4,127,666 and $3,299,791 during the year ended December 31, 2008 and for the six months ended June 30, 2009 and 2008 respectively.

Gross gains of $384,574, $235,408 and $279,278 and gross losses of $1,118,221, $331,562 and $366,452 were realized on these sales during the year ended December 31, 2008 and for the six months ended June 30, 2009 and 2008, respectively.

The following table shows the gross unrealized losses and fair value of Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2009:
 
 
-14-
 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2009 and 2008
and December 31, 2008



Note 5 – MARKETABLE SECURITIES - Continued

   
Less Than 12 Months
    
12 Months or Greater
    
Total
  
Description of Securities
  
Fair Value
    
Unrealized Losses
    
Fair Value
    
Unrealized Losses
    
Fair Value
    
Unrealized Losses
  
                                     
Equities
  
$
537,047
    
$
( 113,772
)
  
$
270,700
    
$
( 65,154
)
  
$
807,747
    
$
( 178,926
)
Mutual Funds
    
95,391
      
( 33,238
)
    
248,327
      
( 234,580
)
    
343,718
      
( 267,818
)
Preferred Securities
    
21,527
      
( 3,368
)
    
365,740
      
( 203,850
)
    
387,267
      
( 207,218
)
Corporate Bonds
    
—
      
—
      
212,531
      
( 7,781
)
    
212,531
      
( 7,781
)
Government Agency Obligations
    
—
      
—
      
202,046
      
( 3,714
)
    
202,046
      
( 3,714
)
   
$
653,965
    
$
( 150,378
)
  
$
1,299,344
    
$
( 515,079
)
  
$
1,953,309
    
$
( 665,457
)

For the year ended December 31, 2008, we recorded other than temporary impairments related to investments in marketable securities in certain investments of $958,879.  The impairments recognized relate to securities that were in an unrealized loss position at December 31, 2008 that were subsequently sold and equity holdings that we consider other than temporarily impaired due to the recent performance of the issuers of those securities.

Equities, Mutual Funds, Corporate Bonds and Government Agency Obligations - The Company’s investments in equity securities, mutual funds, corporate bonds and government agency obligations consist of investments in common stock, preferred stock and debt securities of companies in various industries.  The Company evaluated the near-term prospects of the issuer in relation to the severity and duration of the impairment. Based on that evaluation and the Company’s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider any material investments to be other-than-temporarily impaired at June 30, 2009.

Preferred Securities - The Company’s investments in preferred securities consist of investments in preferred stock of companies in various industries.  The Company evaluated the continuing performance of the securities, the credit worthiness of the issuers as well as the near-term prospects of the security in relation to the severity and duration of the impairment. Based on that evaluation and the Company’s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider any material investments to be other-than-temporarily impaired at June 30, 2009.
 
Note 6 – INVENTORIES

Inventories consist of the following:
 
     
June 30,
    
December 31,
  
     
2009
    
2008
    
2008
  
 
Finished goods
  
$
1,500,090
    
$
1,276,812
    
$
1,343,811
  
 
Production supplies
    
1,704,240
      
1,476,944
      
1,291,484
  
 
Raw materials
    
612,865
      
1,097,969
      
462,247
  
 
Total inventories
  
$
3,817,195
    
$
3,851,725
    
$
3,097,542
  
 
 
-15-
 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2009 and 2008
and December 31, 2008
 
Note 7 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following:
 
     
June 30,
    
December 31,
  
     
2009
    
2008
    
2008
  
 
Land
  
$
1,178,160
    
$
969,232
    
$
969,232
  
 
Buildings and improvements
    
9,769,348
      
7,054,840
      
7,138,042
  
 
Machinery and equipment
    
12,213,069
      
8,199,914
      
8,229,202
  
 
Vehicles
    
961,245
      
581,458
      
610,558
  
 
Office equipment
    
208,213
      
116,203
      
180,351
  
 
Construction in process
    
—
      
1,828,582
      
2,309,045
  
       
24,330,035
      
18,750,229
      
19,436,430
  
 
Less accumulated depreciation
    
10,536,106
      
7,980,553
      
8,373,716
  
 
Total property and equipment
  
$
13,793,929
    
$
10,769,676
    
$
11,062,714
  

Depreciation expense during the year ended December 31, 2008 and for the six months ended June 30, 2009 and 2008 was $777,715, $570,428 and $384,552, respectively.
 
Note 8 – ACCRUED EXPENSES

Accrued expenses consist of the following:

   
June 30,
    
December 31,
  
   
2009
    
2008
    
2008
  
Accrued payroll and payroll taxes
  
$
219,842
    
$
243,876
    
$
98,089
  
Accrued property tax
    
300,446
      
293,712
      
291,819
  
Other
    
97,374
      
11,118
      
68,374
  
   
$
617,662
    
$
548,706
    
$
458,282
  

Note 9 – NOTES PAYABLE

Notes payable consist of the following:

   
June 30,
    
December 31,
  
   
2009
    
2008
    
2008
  
Mortgage note payable to a bank, payable in monthly installments of $3,273 including interest at 7%, with a balloon payment of $416,825 due September 25, 2011.  Collateralized by real estate.
    
—
    
$
443,275
    
$
438,926
  
                         
Mortgage note payable to a bank, payable in monthly installments of $19,513 including interest at 5.6%, with a balloon payment of $2,652,143 due July 14, 2010. Collateralized by real estate.
    
—
      
2,798,264
      
2,760,288
  
                         
Note payable to Amani Holding LLC, payable in quarterly installments of $262,500 plus interest at the floating prime rate per annum (7.25% at December 31, 2007) due September 1, 2010 secured by letter of credit.
    
—
      
1,406,914
      
837,244
  
                         
Note payable to Private Bank in monthly installments of $42,222, plus variable interest rate, currently at 2.945%, with a balloon payment of $5,066,667 due February 6, 2014.  Collateralized by substantially all assets of the Company.
    
7,388,889
      
—
      
—
  
                         
Line of credit with Private Bank at variable interest rate, currently at 2.945%, due on February 6, 2010.  Collateralized by real estate.
    
2,400,000
      
—
      
—
  
                         
Line of credit with Morgan Stanley at variable interest rate, currently at 2.40%.  Secured by marketable securities.
    
1,945,621
      
—
      
—
  
                         
Subordinated notes payable to Ilya Mandel & Michael Edelson, payable in quarterly installments of $341,875, plus interest at the floating rate per annum (3.3% at June 30, 2009) due February 6, 2011.
    
2,393,125
      
—
      
—
  
                         
Total notes payable
    
14,127,635
      
4,648,453
      
4,036,458
  
Less current maturities
    
6,219,788
      
1,130,612
      
928,444
  
Total long-term portion
  
$
7,907,847
    
$
3,571,841
    
$
3,108,014
  
 
-16-
 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2009 and 2008
and December 31, 2008

Note 9 – NOTES PAYABLE - Continued

Maturities of notes payables are as follows:
 
For the Period Ended June 30,
  
2010
  
$
6,219,788
  
2011
    
1,532,292
  
2012
    
506,667
  
2013
    
506,667
  
2014
    
5,362,221
  
Total
  
$
14,127,635
  

Note 10 – PROVISION FOR INCOME TAXES

The provision for income taxes consists of the following:
 
         
For the
  
   
For the Six Months Ended
    
Year Ended
  
   
June 30,
    
December 31,
  
   
2009
    
2008
    
2008
  
Current:
                  
Federal
  
$
974,424
    
$
969,123
    
$
1,005,159
  
State and local
    
233,131
      
219,627
      
184,016
  
Total current
    
1,207,555
      
1,188,750
      
1,189,175
  
Deferred
    
179,795
      
( 78,035
)
    
( 509,386
)
Provision for income taxes
  
$
1,387,350
    
$
1,110,715
    
$
679,789
  

A reconciliation of the provision for income taxes and the income tax computed at the statutory rate is as follows:

         
For the
  
   
For the Six Months Ended
    
Year Ended
  
   
June 30,
    
December 31,
  
   
2009
    
2008
    
2008
  
Federal income tax expense computed at the statutory rate
  
$
1,858,685
    
$
989,753
    
$
881,302
  
State and local tax expense, net
    
262,403
      
139,730
      
124,419
  
Permanent differences
    
( 733,738
)
    
( 18,768
)
    
( 150,772
)
Other
    
—
      
—
      
( 175,160
)
Provision for income taxes
  
$
1,387,350
    
$
1,110,715
    
$
679,789
  
 
 
-17-
 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2009 and 2008
and December 31, 2008

Note 10 – PROVISION FOR INCOME TAXES - Continued

Amounts for deferred tax assets and liabilities are as follows:
             
   
June 30,
    
December 31,
  
   
2009
    
2008
    
2008
  
Non-current deferred tax liabilities arising from:
Temporary differences -
                  
accumulated depreciation and amortization
  
$
( 1,941,740
)
  
$
( 1,647,550
)
  
$
( 1,607,155
)
Current deferred tax assets arising from:
                        
Unrealized losses on marketable securities
    
431,188
      
424,555
      
351,020
  
Impairment of marketable securities
    
—
      
—
      
396,017
  
Inventory
    
161,749
      
163,212
      
127,177
  
Allowance for doubtful accounts
    
14,460
      
14,460
      
14,460
  
Allowance for promotions
    
30,975
      
—
      
30,975
  
Total current deferred tax assets (liabilities)
    
638,372
      
602,227
      
919,649
  
Net deferred tax liability
  
$
( 1,303,368
)
  
$
( 1,045,323
 )   
$
( 687,506
)
 
Note 11 – SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest and income taxes are as follows:
 
         
For the
  
   
For the Six Months Ended
    
Year Ended
  
   
June 30,
    
December 31,
  
   
2009
    
2008
    
2008
  
Interest
  
$
250,553
    
$
154,924
    
$
307,620
  
Income taxes
  
$
1,563,750
    
$
552,777
    
$
1,288,428
  
 
Note 12 – STOCK AWARD AND STOCK OPTION PLANS

The Company has a registration statement filed with the Securities and Exchange Commission in connection with a Consulting Service Compensation Plan covering up to 1,200,000 of the Company’s common stock shares. Pursuant to such Plan, the Company may issue common stock or options to purchase common stock to certain consultants, service providers, and employees of the Company.  The option price, number of shares, grant date, and vesting terms are determined at the discretion of the Company’s Board of Directors.

As of December 31, 2008 and at June 30, 2009 and 2008, there were no stock options outstanding or exercisable.  There were approximately 940,000 shares available for issuance under the Plan at June 30, 2009.
 
 
-18-
 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2009 and 2008
and December 31, 2008



Note 12 – STOCK AWARD AND STOCK OPTION PLANS - Continued

On June 13, 2008, Lifeway’s Board of Directors approved awards of an aggregate amount of 10,500 shares to be awarded under its Employee and Consulting Services and Compensation Plan to certain key employees and consultants for services rendered to the Company.  The stock awards were made on June 13, 2008 and have vesting periods of one year. The expense for the awards is measured as of July 1, 2008 at $11.87 per share for 10,500 shares, or a total stock award expense of $124,635. This expense will be recognized as the stock awards vest in 12 equal portions of $10,386, or 875 shares per month for one year.

On May 18, 2007, Lifeway’s Board of Directors approved awards of an aggregate amount of 8,400 shares to be awarded under its Employee and Consulting Services and Compensation Plan to certain key employees and consultants for services rendered to the Company.  The stock awards were made on June 1, 2007 and have vesting periods of one year. The expense for the awards is measured as of June 1, 2007 at $9.90 per share for 8,400 shares, or a total stock award expense of $83,160. This expense will be recognized as the stock awards vest in 12 equal portions of $6,930, or 700 shares per month for one year.

Note 13 – FAIR VALUE MEASUREMENTS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”  SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements.  The Statement clarifies that the exchange price is the price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date.  The statement emphasizes that fair value is a market-based measurement and not an entity-specific measurement.  The statement establishes a fair value hierarchy used in fair value measurements and expands the required disclosures of assets and liabilities measured at fair value.

Level 1 – Inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2 – Inputs use other inputs that are observable, either directly or indirectly.  These inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 – Inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation.  The Company’s assessment of the significance of particular inputs to these fair measurements requires judgment and considers factors specific to each asset or liability.
 
 
-19-
 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2009 and 2008
and December 31, 2008



Note 13 – FAIR VALUE MEASUREMENTS - Continued

Disclosures concerning assets and liabilities measured at fair value are as follows:

   
Quoted Prices
in Active
Markets for
Identical
Assets (Level 1)
    
Significant
Other
Observable
Inputs (Level 2)
    
Significant
Unobservable
Inputs (Level 3)
    
Balance at
June 30, 2009
  
Assets
                        
Investment securities- available - for - sale
  
$
4,659,161
      
—
      
—
    
$
4,659,161
  

Note 14 – RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS No. 141(R) “Business Combinations.”  SFAS No. 141(R) states that all business combinations (whether full, partial or step acquisitions) will result in all assets and liabilities of an acquired business being recorded at their acquisition date fair values.  Earn-outs and other forms of contingent consideration and certain acquired contingencies will also be recorded at fair value at the acquisition date.  SFAS No. 141(R) also states acquisition costs will generally be expensed as incurred; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense; and restructuring costs will be expensed in periods after the acquisition date.  This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008.  The Company will apply the provisions of this standard to any acquisitions that it completes on or after December 15, 2008.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.”  This statement amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary and for the deconsolidation of a subsidiary. Upon its adoption, noncontrolling interests will be classified as equity in the consolidated balance sheets.  This statement also provides guidance on a subsidiary deconsolidation as well as stating that entities need to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008.  The adoption of this standard did not have a material impact on the Company’s financial condition, results of operations or liquidity.

 
-20-
 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2009 and 2008
and December 31, 2008



Note 14 – RECENT ACCOUNTING PRONOUNCEMENTS - Continued

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS No. 161”).  This statement requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  SFAS No. 161 also requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation and requires cross-referencing within the footnotes.  This statement also suggests disclosing the fair values of derivative instruments and their gains and losses in a tabular format.  This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  The adoption of this standard did not have a material impact on the Company’s financial condition, results of operations or liquidity.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
-21-
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Comparison of Quarter Ended June 30, 2009 to Quarter Ended June 30, 2008.

The following analysis should be read in conjunction with the unaudited financial statements of the Company and related notes included elsewhere in this quarterly report and the audited financial statements and Management’s Discussion and Analysis contained in our Form 10-K, for the fiscal year ended December 31, 2008, and in the Management’s Discussion and Analysis contained in our Form 10-Q, for the fiscal quarter ended March 31, 2009.

Results of Operations

Total consolidated group sales increased by $2,956,036, (approximately 26%) to $14,479,429 during the three month period ended June 30, 2009 from $11,523,393 during the same three month period in 2008. This increase is primarily attributable to increased sales and awareness of Lifeway’s flagship line, Kefir, as well as ProBugs® Organic Kefir for kids.  Additionally, Lifeway recorded revenues from its February 6, 2009 acquisition of Fresh Made Dairy.  Included in the total group sales was $2,152,730 of revenue related to this acquisition and recorded during the second quarter 2009.

Cost of goods sold as a percentage of sales was approximately 58% during the second quarter 2009, compared to approximately 66% during the same period in 2008. The decrease was primarily attributable to the decreased cost of conventional milk, our largest raw material, and the cost of transportation and other petroleum based production supplies.  Gross profit increased approximately 59% during the second quarter 2009, when compared with the same period in 2008.
 
Operating expenses as a percentage of sales were approximately 21% during the second quarter 2009, compared to approximately 20% during the same period in 2008.   This increase is primarily attributable to the increase in professional fees related to the February 6, 2009 acquisition of Fresh Made Dairy and a 111% increase in amortization expense, a non cash expense, also related to the Fresh Made acquisition.   Many of the acquisition related professional fees are non recurring expenses.

Total operating income increased by $1,608,486, (approximately 104%) to $3,154,647 during the second quarter 2009, from $1,546,161 during the same period in 2008.

Interest expense during the second quarter 2009 was $110,090 compared with interest expense of $68,969 during the same period a year ago.  This higher interest expense is primarily attributable to the issuance of the note payable related to the February 6, 2009 Fresh Made acquisition.  Notes payable are discussed in Note 9 of the Notes to Consolidated Financial Statements.

Total net income was $2,531,905 or $.15 per share for the second quarter ended June 30, 2009, compared with $911,718 or $.05 per share in the same period in 2008.  This represents a 178% increase in net income from the second quarter 2009 when compared to the same period in 2008.

Comparison of Six-Month Period Ended June 30, 2009 to Six-Month Period Ended June 30, 2008

Results of Operations

Sales increased by $5,569,878, (approximately 25%) to $28,215,509 during the six-month period ended June 30, 2009 from $22,645,631 during the same six-month period in 2008. This increase is primarily attributable to increased sales and awareness of Lifeway’s flagship line, Kefir, as well as Lifeway’s kids Kefir drink, ProBugs®. Aditionally, Lifeway recorded revenues from its February 6, 2009 acquisition of Fresh Made Dairy. Included in the total group sales was $3,543,603 of revenue related to this acquisition and recorded during the six-month period ended June 30, 2009.

 
-22-
Cost of goods sold as a percentage of sales, excluding depreciation expense, was approximately 57% during the six-month period ended June 30, 2009, compared to about 66% during the same period in 2008.  The decrease was primarily attributable to the decreased cost of conventional milk, our largest raw material, and the cost of transportation and other petroleum based production supplies.

Operating expenses as a percentage of sales for Lifeway Foods were approximately 21% during the six-month period ended June 30, 2009, compared to approximately 20% during the same period in 2008.  This increase is primarily attributable to the increase in professional fees related to the February 6, 2009 acquisition of Fresh Made Dairy and a 112% in amortization expense, a non cash expense, also related to the Fresh Made acquisition.   Many of the acquisition related professional fees are non recurring expenses.

Total other expenses during the six-month period ending June 30, 2009 were $231,439, compared with total other expenses of $1,780 during the same period in 2008.  This increase is primarily attributable to a higher interest expense related to the February 6, 2009 Fresh Made acquisition.  Interest expenses during the six-month period ending June 30, 2009 were $264,473, which includes approximately a $55,000 pre -payment penalty on one of Lifeway’s real estate mortgages related to the financing of the acquisition.  This pre-payment expense is a non recurring expense.

Total net income was $4,079,370, or $.24 per split adjusted share for the six-month period ended June 30, 2009, compared with $1,800,324, or $.11 per split adjusted share in the same period in 2008.

Sources and Uses of Cash

Net cash provided by operating activities was $3,390,715 during the six months ended June 30, 2009, which is an increase of $762,708 when compared to the same period in 2008.  This increase is primarily attributable to the increase in net income of $2,279,046.

Net cash used in investing activities was $2,827,272 during the six months ended June 30, 2009, which is an increase of $1,568,612 when compared to the same period in 2008.  This increase is primarily due to the Company’s acquisition of Fresh Made, net of cash acquired.  The Company purchased $714,052 worth of property, plant and equipment during the first six months of 2009 when compared to the purchase of $1,475,280 worth of property, plant in equipment during the same period in 2008.  This represents a decrease of $761,228 in the purchase of equipment during the six months ended June 30, 2009, when compared to the same period in 2008.  The Company also repaid its short term liability in the form of a margin loan in the amount of $407,479 during it’s second quarter of 2009.

Lifeway had a net increase in cash and cash equivalents of $305,518 during the six months ended June 30, 2009, compared to a net decrease in cash and cash equivalents of $253,846 during the same period in 2008.

Assets and Liabilities

Total assets were $49,706,668 during the six months ended June 30, 2009, which is an increase of $13,969,737 when compared to the same period in 2008.  This is primarily due the Company’s acquisition of Fresh Made, which increased intangible assets by $10,240,123 as of June 30, 2009 when compared to June 30, 2008.  Additionally, the value of the Company’s property, plant and equipment was $13,793,929 as of June 30, 2009, which is an increase of $3,024,253 from June 30, 2008.

Total current liabilities were $8,861,787 during the six months ended June 30, 2009, which is an increase of $4,506,253 when compared to the same period in 2008.  This is primarily due the Company’s acquisition of Fresh Made, which increased current maturities of notes payable by $5,089,176 as of June 30, 2009 when compared to June 30, 2008.

Significant portions of our assets are held in marketable securities. The majority of our marketable securities are classified as available-for-sale on our balance sheet, while the mortgage-backed securities are classified as trading.  All of these securities are stated thereon at market value as of the end of the applicable period. Gains and losses on the portfolio are determined by the specific identification method.

We anticipate being able to fund the Company’s foreseeable liquidity requirements internally. We continue to explore potential acquisition opportunities in our industry in order to boost sales while leveraging our distribution system to consolidate and lower costs.

 
-23-
Other Developments

On June 13, 2008, Lifeway’s Board of Directors approved awards of an aggregate amount of 10,500 shares to be awarded under its Employee and Consulting Services and Compensation Plan to certain key employees and consultants for services rendered to the Company.  The stock awards were made on June 13, 2008 and have vesting periods of one year. The expense for the awards is measured as of July 1, 2007 at $11.87 per share for 10,500 shares, or a total stock award expense of $124,634. This expense will be recognized as the stock awards vest in 12 equal portions of $10,386, or 875 shares per month for one year.
 
The Company has previously identified and disclosed the following material weaknesses in our internal control for financial reporting: (1) an incomplete and undocumented financial reporting process, including an overview of the financial disclosure principals, (2) no documented accounting procedures manual available for employee use, and (3) no documented accounting procedures in valuing of marketable securities other than temporary impairment. The Company has previously disclosed its intent to take corrective action and to implement additional controls in order to address these material weaknesses.  With respect to  (1), the Company has implemented use of a software program called Microsoft Business Solutions-Navision (“NAV”) as of June 1, 2009 to increase the financial reporting ability of the Company over the previous accounting software, to implement additional controls and strengthen the existing controls over the financial reporting process, and to allow for additional documentation of the financial reporting process.  With respect to (2), the Company has recently engaged a firm to assist with development of such manual which should be completed this year. Finally, with respect to (3), the Company has undertaken more frequent and vigorous discussions with its accountants and recently engaged a firm to assist with documenting such procedures.
 
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4T.    CONTROLS AND PROCEDURES.
 
Evaluation of Disclosure Controls and Procedures
 
As of June 30, 2009, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of June 30, 2009 in ensuring that information required to be disclosed by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the Exchange Act rules and forms due to the material weaknesses as disclosed in our Form 10-K filed on March 31, 2009 which we cannot yet determine have been remedied by implementation of the NAV software as described below. As a result, we performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with generally accepted accounting principles.  

Accordingly, management believes the consolidated financial statements included in this Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented. 
 
There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting, other than the following.  As of June 1, 2009, the Company implemented the software program Microsoft Business Solutions-Navision (“NAV”). The Company intends for the NAV software to increase the financial reporting ability of the Company over the Company’s previous accounting software, to implement additional controls and strengthen the existing controls over the financial reporting process, and to allow for additional documentation of the financial reporting process.
   
 
-24-
PART II — OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS.

None.

ITEM 1A.    RISK FACTORS.

Not applicable.
 
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
(a) 
Not applicable.

(b) 
Not applicable.

(c) 
Purchases of the Company’s Securities.

Period
  
(a) Total
Numbers of
Shares (or Units)
Purchased
  
(b) Average Price Paid per Share (or Unit)
  
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
  
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
April 1, 2009 to April 30, 2009 
  
24,431
    
8.24
  
24,431
  
48,365
May 1, 2009 to May 31, 2009 
  
4,000
    
10.45
  
4,000
  
44,365
June 1, 2009 to June 30, 2009*
  
4,715
    
11.94
  
4,715
  
39,650
*Total 
  
33,146
  
$ 
10.21
  
33,146
  
39,650
 
* Pursuant to the share repurchase program approved November 20, 2008 for 100,000 split adjusted shares with a plan expiration date of one year.   
 
ITEM 3.    DEFAULTS UPON SENIOR SECURITIES.

None.
 
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
Our Annual Meeting of stockholders was held on June 19, 2009. Proxies for the meeting were solicited pursuant to Regulation 14A under the Exchange Act. There was no solicitation of proxies in opposition to management’s nominees as listed in the proxy statement and all of management’s nominees were elected to our Board of Directors. Details of the voting are provided below:
 
 
 
-25-
Proposal 1:
 
To elect six (6) members of the Company’s Board of Directors to serve until the 2010 Annual Meeting of Stockholders (or until successors are elected or directors resign or are removed).
 
Proposal 1:
  
For
  
Withhold
  
Election of Directors
          
 
Director
        
           
 
Ludmila Smolyansky
13,474,028
  
756,191
  
   
94.69%
  
5.31%
  
 
Julie Smolyansky
13,474,891
  
755,328
  
   
94.69%
  
5.31%
  
 
Pol Sikar
14,220,816
  
9,403
  
   
99.93%
  
0.07%
  
 
Renzo Bernardi
14,223,331
  
6,888
  
   
99.95%
  
0.05%
  
 
Gustavo Carlos Valle
14,206,469
  
23,750
  
   
99.83%
  
0.17%
  
 
Julie Oberweis
14,214,931
  
15,288
  
   
99.89%
  
0.11%
  
 
Proposal 2:
 
Proposal 2:
For
  
Against
  
Abstain
  
Auditor Ratification
10,761,833
  
11,515
  
3,456,871
  
             
Plante & Moran, PLLC
            
             
Total Votes Represented by Proxy
    
14,230,219
      
Percentage of the Outstanding Votable Shares
    
84.62%
      
Outstanding Votable Shares
    
16,815,920
      

 
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ITEM 5.    OTHER INFORMATION.
 
On August 13, 2009, the Company announced its financial results for the fiscal quarter ended June 30, 2009 and certain other information. A copy of the Company’s press release announcing these financial results and certain other information is attached as Exhibit 99.1 hereto. The information contained in Exhibit 99.1 hereto is being furnished, and should not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities imposed by that Section. The information contained in Exhibit 99.1 shall not be incorporated by reference into any registration statement or other document or filing under the Securities Act of 1933, as amended, except as may be expressly set forth in a specific filing. The press release filed as an exhibit to this report includes “safe harbor” language pursuant to the Private Securities Litigation Reform Act of 1995, as amended, indicating that certain statements about the Company’s business and other matters contained in the press release are “forward-looking.” The press release also cautions investors that “forward-looking” statements may be different from actual operating results. Finally, the press release states that a more thorough discussion of risks and uncertainties which may affect the Company’s operating results is included in the Company’s reports on file with the Securities and Exchange Commission.
 
ITEM 6.    EXHIBITS.

Exhibit
Number
  
Description of Document
     
3.4
  
Amended and Restated By-laws (incorporated by reference to Exhibit No. 3.5 of Lifeway’s Current Report on Form 8-K dated and filed on December 10, 2002). (File No. 000-17363)
     
3.5
  
Articles of Incorporation, as amended and currently in effect (incorporated by reference to Exhibit 3.5 of Lifeway’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2000 and filed on August 8, 2000). (File No. 000-17363)
     
31.1
  
Officer’s Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
  
Officer’s Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
     
32.1
  
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
  
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
99.1
  
Press Release dated August 13, 2009. 

 
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SIGNATURES
 
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
LIFEWAY FOODS, INC.
(Registrant)
 
 
           
Date:
 December 2, 2009
  
By: 
 /s/ Julie Smolyansky
  
       
 Julie Smolyansky
 Chief Executive Officer,
 President and Director
  
           
           
Date:
 December 2, 2009
  
By: 
 /s/ Edward P. Smolyansky
  
       
 Edward P. Smolyansky
 Chief Financial and Accounting
 Officer and Treasurer
  
           
 
 

 
 
 
 
 
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EXHIBIT INDEX

Exhibit
Number
  
Description of Document
     
3.4
  
Amended and Restated By-laws (incorporated by reference to Exhibit No. 3.5 of Lifeway’s Current Report on Form 8-K dated and filed on December 10, 2002). (File No. 000-17363)
     
3.5
  
Articles of Incorporation, as amended and currently in effect (incorporated by reference to Exhibit 3.5 of Lifeway’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2000 and filed on August 8, 2000). (File No. 000-17363)
     
31.1
  
Officer’s Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
     
31.2
  
Officer’s Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
     
32.1
  
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
  
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
99.1
  
Press Release dated August 13, 2009. 

 
 
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