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| LWAY > SEC Filings for LWAY > Form 10-K on 31-Mar-2009 | All Recent SEC Filings |
31-Mar-2009
Annual Report
RESULTS OF OPERATIONS
The following analysis should be read in conjunction with the audited financial statements of the Company and related notes included elsewhere in this annual report and the unaudited financial statements and Management's Discussion and Analysis contained in our Form 10-QSB, for the fiscal quarters ended March 31, 2008, June 30, 2008, and September 30, 2008.
Comparison of Quarter Ended December 31, 2008 to Quarter Ended December 31, 2007
Sales increased by $401,371, (approximately 4%) to $10,575,543 during the three month period ended December 31, 2008 from $10,174,172 during the same three month period in 2007. This increase is primarily attributable to increased sales and awareness of Lifeway's flagship product, Kefir and Probugs, Lifeway's organic kids oriented Kefir. The company's flagship brand Lifeway, grew 8% in the fourth quarter 2008 when compared to the same quarter in 2007. The company's Helios Organic Kefir brand, which was acquired in August 2006, saw a decline in sales of $153,000 from $1,043,000 in the fourth quarter 2007 to $890,000 in the same period in 2008 or a decrease of 14.6%. The decrease is primarily attributable to the decline in demand of higher cost, premium organic products as well as an overall slowdown in demand associated with retailers who primarily sell these products. We believe that this slowdown in this premium priced food segment is temporary as macro economic conditions improve.
Cost of goods sold as a percentage of sales was approximately 82% during the fourth quarter 2008, compared to about 77% during the same period in 2007. This increase is primarily attributable to the increase in labor costs as well as the costs of packaging supplies and transportation expenses. During the fourth quarter 2008, oil related production supplies and fuel surcharges on product deliveries remained at higher levels when compared to the same period 2007, but have subsequently begun to decrease as the price of oil has decreased since the record highs experienced in August and September 2008. Historically, there is a several month lag when material suppliers institute price decreases based on the declining costs of the underlying materials. Additionally, as part of Lifeway's growth strategy, the company increased its product sampling and demonstration activities, couponing, and other promotional initiatives in the fourth quarter 2008, when compared to the same period in 2007, which has an impact on cost of goods sold. During the fourth quarter 2008, the company also created a reserve account for these types of promotional expenses off invoice in the amount $75,000 that did not exist in the fourth quarter 2007.
Even though the cost of conventional milk was lower in the fourth quarter 2008 compared to the same period a year ago, the cost of organic milk and other organic raw material ingredients increased approximately 10% during this same period. In the fourth quarter 2008, amount of organic products sold comprised approximately 30% of Lifeway's total sales. These products include Lifeway's Organic Kefir, Lifeway's Organic ProBugs kids Kefir, and Lifeway's Helios Organic Kefir lines.
Operating expenses as a percentage of sales was approximately 19% during the fourth quarter, 2008, compared to about 20% during the same period in 2007. This decrease is primarily attributable to a decrease in selling related expenses and operating synergies gained by the consolidation of the 2006 Helios Nutrition acquisition into our overall operations, as well as our continuing efforts to maximize efficiency through capital investments. Even though there were substantial professional fees and expenses paid in the fourth quarter, 2008 related to the February 6, 2009 acquisition of Fresh Made, Inc., we were able to lower the overall operating expenses as a percentage of sales during the fourth quarter, 2008, when compared to the same period a year ago.
Total other expenses for the fourth quarter 2008 were $1,252,744, compared with total other expenses of $91,373 during the same period in 2007. This increase is primarily attributable to a higher realized loss on the sale of marketable securities in 2008, when compared to the same period in 2007. During the fourth quarter 2008, the company realized losses in the amount of $587,243 and recognized an impairment to marketable securities in the amount of $687,971. During the fourth quarter 2007, the company realized losses in the amount of $123,799. Marketable securities are discussed in Note 4 of the Notes to Consolidated Financial Statements.
Total net loss for the group was $742,965, or $.04 per split adjusted share for the fourth quarter, 2008, compared with $153,109, or $.01 per split adjusted share in the same period in 2007.
Comparison of Year Ended December 31, 2008 to Year Ended December 31, 2007
Sales increased by $5,732,299 (approximately 15%) to $44,461,455 during the twelve month period ended December 31, 2008 from $38,729,156 during the same twelve month period in 2007. This increase is primarily attributable to increased sales and awareness of Lifeway's flagship product, Kefir and Probugs, Lifeway's organic kids oriented Kefir. The company's flagship brand, Lifeway Kefir grew approximately 17% in 2008 when compared to 2007. Included in that figure is Lifeway Probugs Organic Kefir, which increased sales 124% to $1,760,254 in 2008 compared to sales of $786,326 in 2007. In 2008, the Helios Kefir brand generated revenues of $4,482,848, compared to 2007 revenues of $4,563,026.
Cost of goods sold as a percentage of sales excluding depreciation expense was approximately 70% in 2008, compared to about 66% in 2007. This increase is primarily attributable to the increase in labor costs as well as the costs of packaging supplies and transportation expenses. During the 2008, oil related production supplies and fuel surcharges on product deliveries remained at higher levels when compared to 2007, but have subsequently begun to decrease as the price of oil has decreased since the record highs experienced in August and September 2008. Historically, there is a several month lag when material suppliers institute price decreases based on the declining costs of the underlying materials. Additionally, as part of Lifeway's growth strategy, the company increased its product sampling and demonstration activities, couponing, and other promotional initiatives in the fourth quarter 2008, when compared to the same period in 2007, which has an impact on cost of goods sold. During the fourth quarter 2008, the company also created a reserve account for these types of promotional expenses off invoice in the amount $75,000 that did not exist in the fourth quarter 2007. Milk prices on average were similar as a whole in 2008 when compared to 2007.
Operating expenses as a percentage of sales was approximately 19% in 2008, compared to about 20% in 2007. This decrease is primarily attributable to an increase in sales, a decrease in selling related expenses and operating synergies gained by the consolidation of the 2006 Helios Nutrition acquisition into our overall operations, as well as our continuing efforts to maximize efficiency through capital investments. Even though there were substantial professional fees and expenses related to the February 6, 2009 acquisition of Fresh Made, Inc. paid in the fourth quarter 2008, we were able to lower the overall operating expenses as a percentage of sales during the fourth quarter 2008, when compared to the same period a year ago.
Total other expenses for 2008 were $1,598,930, compared with total other income of $528,150 during the same period in 2007. This increase in expenses is primarily attributable to a higher realized loss on the sale of marketable securities in 2008, when compared to the same period in 2007. During 2008, the company realized losses in the amount of $733,647 and recognized an impairment to marketable securities in the amount of $958,879. During 2007, the company realized gains in the amount of $539,739. Marketable securities are discussed in Note 4 of the notes to the financial statements.
Provision for income taxes was $679,789, or a 26% tax rate in 2008 compared with $1,812,539 or a 37% tax rate in 2007. Income taxes are discussed in Note 9 of the Notes to Consolidated Financial Statements.
Total net income for the group was $1,912,275, or $.11 per split adjusted share for the twelve months ended December 31, 2008, compared with $3,152,660, or $.19 per split adjusted share in the same period in 2007.
SOURCES AND USES OF CASH IN 2008
Net cash provided by operating activities was $4,733,660 during the twelve months ended December 31, 2008, which is an increase of $2,386,523 compared to $2,347,137 of net cash provided by operating activities the same period in 2007. This increase in cash provided by operating activities is primarily due to a $1,393,370 swing in the impact inventories had on cash flows as of December 31, 2008, from the same period in 2007.
Net cash used in investing activities was $2,616,344 during the twelve months ended December 31, 2008, which is an increase of $1,715,014 compared to the same period in 2007. This increase is primarily due to the Company's sale of $7,168,246 of marketable securities during 2007 compared to selling $5,323,423 of marketable securities during 2008, therefore generating more cash by selling investments in 2007. The company also used $2,157,315 to purchase machinery and equipment in 2008 compared with using $1,824,879 to purchase machinery and equipment in 2007. The Company has no additional capital expenditures outside the ordinary course of business.
Net cash used in financing activities was $2,435,953 during the twelve months ended December 31, 2008, which is an increase of $38,219 compared to $2,397,734 of net cash used in financing activities during the same period in 2007. This increase is primarily attributable to the Company's repurchase of $1,239,488 of treasury shares during 2007, compared with the Company's repurchase of $752,603 of treasury shares during 2007.
A significant portion of our assets are held in marketable securities. All 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. Other than the February 6, 2009 acquisition of Fresh Made, Inc., we know of no trend, demand or event which would negatively affect liquidity in 2009. 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.
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 $124,635. 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 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.
As stated, the Company acquired Fresh Made, Inc. on February 6, 2009. This acquisition will affect the Company's sales and operating income as the Fresh Made operations are fully assimilated into the Company's operations.
We have never entered into any off-balance sheet financing arrangements and have never established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
Critical Accounting Policies
Lifeway's analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. US GAAP provides the framework from which to make these estimates, assumptions and disclosures. Lifeway chooses accounting policies within US GAAP that management believes are appropriate to accurately and fairly report Lifeway's operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions and has discussed the development and selection of critical accounting policies with its audit committee of the Board of Directors. For further information concerning accounting policies, refer to Note 2 - Nature of Business and Significant Accounting Policies in the notes to the consolidated financial statements.
Subsequent Events
On February 6, 2009, Lifeway Foods, Inc., a Illinois corporation ("Lifeway") entered into and consummated 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").
Upon the terms and subject to the conditions set forth in the Stock Agreement, 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 $8,050,000, less certain offsets for any selling expenses in excess of certain limits set forth in the Stock Agreement and other payments and funded debt all as set forth in the Stock Agreement, a note in the principal amount of $2,735,000, due on February 6, 2011, 128,948 shares of common stock of Lifeway valued at a total of $980,000 ("Lifeway's Common Stock"), the cancellation of a loan in the principal amount of $265,000 and not more than $98,000 in funds held in Fresh's two accounts with Vist Financial Corp. The issuance of Lifeway's Common Stock was exempted from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Also on February 6, 2009, Lifeway entered into and consummated a Real Property Purchase Agreement (the "Real Property Agreement") by and among Sellers and Lifeway. Pursuant to the Real Property Agreement, Lifeway acquired 1.1355 acres of land in Philadelphia, PA (the "Property") from Sellers. The consideration for the Property was $2,000,000.
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 this report, in reports subsequently filed by Lifeway with the SEC on Form 10-QSB and filed or furnished on Form 8-K, and in related comments by management, our use of the words "believe," "expect," "anticipate," "estimate," "forecast," "objective," "plan," "goal," "project," "explore," "priorities/targets," and similar expressions is intended to identify forward-looking statements. While these statements represent our current judgment on what the future may hold, and we believe these judgments are reasonable, actual results may differ materially due to numerous important factors that are described in this report and other factors that may be described in subsequent reports which Lifeway may file with the SEC on Form 10-QSB and filed or furnished on Form 8-K, including but not limited to:
• Changes in economic conditions, commodity prices;
• Shortages of and price increase for fuel, labor strikes or work stoppages, market acceptance of the Company's new products;
• Significant changes in the competitive environment;
• Changes in laws, regulations, and tax rates; and
• Management's ability to achieve reductions in cost and employment levels, to realize production efficiencies and to implement capital expenditures, all at of the levels and times planned by management.
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