Attached files

file filename
EX-31.1 - CERTIFICATION OF THE C.E.O. - Lifeway Foods, Inc.exh31-1_16822.htm
EX-31.2 - CERTIFICATION OF THE C.F.O. - Lifeway Foods, Inc.exh31-2_16822.htm
EX-32.1 - CERTIFICATION OF THE C.E.O. - Lifeway Foods, Inc.exh32-1_16822.htm
EX-32.2 - CERTIFICATION OF THE C.F.O. - Lifeway Foods, Inc.exh32-2_16822.htm
EX-99.1 - PRESS RELEASE DATED MAY 17, 2010 - Lifeway Foods, Inc.exh99-1_16822.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
______________________________________
 
(Mark One)
 

x
 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended:  March 31, 2010
 
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  x   No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  o   No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer  o
Smaller reporting company x
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o   No  x
 
As of April 30, 2010, the issuer had 16,717,802 shares of common stock, no par value, outstanding.
 


 
 
 
 
 
LIFEWAY FOODS, INC.
CONTENTS TO FORM 10-Q
 
 
PART I —
FINANCIAL INFORMATION
Page(s)
     
ITEM 1.
FINANCIAL STATEMENTS.
3
     
 
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.
23
     
   ITEM 4T.
CONTROLS AND PROCEDURES.
23
     
PART II —
OTHER INFORMATION
 
     
ITEM 1.
LEGAL PROCEEDINGS.
24
     
    ITEM 1A.
RISK FACTORS.
24
     
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
24
     
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.
24
     
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
24
     
ITEM 5.
OTHER INFORMATION.
24
     
ITEM 6.
EXHIBITS.
25
     
SIGNATURES
  26
     
EXHIBIT INDEX
  27
 

 
- 2 -

 

 









 
LIFEWAY FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2010 and 2009

AND DECEMBER 31, 2009














 
- 3 -

 
PART I — FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS.
 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
March 31, 2010 and 2009 (Unaudited) and December 31, 2009
   
(Unaudited)
             
   
March 31,
         
December 31,
 
   
2010
   
2009
   
2009
 
ASSETS
                 
                   
Current assets
                 
Cash and cash equivalents
  $ 652,177     $ 607,098     $ 630,407  
Investments
    4,397,781       4,286,451       4,392,125  
Certificates of deposits in financial institutions       550,000        —        652,005  
Inventories
    3,869,825       3,641,748       3,296,976  
Accounts receivable, net of allowance for doubtful accounts and discounts
    7,726,348       6,062,316       5,999,738  
Prepaid expenses and other current assets
    38,447       23,051       40,697  
Other receivables
    49,081       27,472       49,758  
Deferred income taxes
    303,431       862,607       251,456  
Refundable income taxes
    476,915       73,174       1,308,978  
Total current assets
    18,064,005       15,583,917       16,622,140  
                         
Property and equipment, net
    14,481,822       13,723,923       14,282,182  
                         
Intangible assets
                       
Goodwill and other non amortizable brand asset
    13,806,091       12,253,845       13,806,091  
Other intangible assets, net of accumulated amortization of $1,773,968 and $1,092,112 at March 31, 2010 and 2009 and $1,598,208 at December 31, 2009
    6,083,670       6,765,526       6,259,430  
Total intangible assets
    19,889,761       19,019,371       20,065,521  
                         
Other assets
    500,000       500,000       500,000  
                         
Total assets
  $ 52,935,588     $ 48,827,211     $ 51,469,843  
                         
LIABILITIES AND STOCKHOLDERS EQUITY
                       
                         
Current liabilities
                       
Checks written in excess of bank balances
  $ 533,458     $     $ 342,976  
Current maturities of notes payable
    4,733,354       6,982,001       4,842,315  
Accounts payable
    3,116,627       2,368,732       2,764,000  
Accrued expenses
    637,263       486,718       614,344  
Margins payable
          423,032        
Total current liabilities
    9,020,702       10,260,483       8,563,635  
                         
Notes payable
    6,502,222       8,376,389       6,890,214  
                         
Deferred income taxes
    3,318,273       1,763,059       3,444,664  
Total liabilities
    18,841,197       20,399,931       18,898,513  
                         
Stockholders’ equity
                       
Common stock, no par value; 20,000,000 shares authorized; 17,273,776 shares issued; 16,754,572 shares outstanding at March 31, 2010; 17,273,776 shares issued: 16,843,476 shares outstanding at March 31, 2009; 17,273,776 shares issued; 16,778,555 shares outstanding at December 31, 2009
    6,509,267       6,509,267       6,509,267  
Paid-in-capital
    1,992,257       1,886,375       1,965,786  
Treasury stock, at cost
    (4,182,190 )     (3,056,859 )     (3,846,773 )
Retained earnings
    29,722,098       23,931,173       27,953,409  
Accumulated other comprehensive loss, net of taxes
    52,959       (842,676 )     (10,359 )
Total stockholders’ equity
    34,094,391       28,427,280       32,571,330  
                         
Total liabilities and stockholders’ equity
  $ 52,935,588     $ 48,827,211     $ 51,469,843  
 
 
- 4 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the Three Months Ended March 31, 2010 and 2009 (Unaudited)
and the Year Ended December 31, 2009

   
(Unaudited)
             
   
Three Months Ended
         
Year Ended
 
   
March 31,
         
December 31,
 
   
2010
   
2009
   
2009
 
                   
Sales
    15,964,159       13,736,080       58,115,878  
                         
Cost of goods sold
    8,618,999       8,000,052       36,083,553  
Depreciation expense
    403,375       216,774       1,134,404  
                         
Total cost of goods sold
    9,022,374       8,216,826       37,217,957  
                         
Gross profit
    6,941,785       5,519,254       20,897,921  
                         
Selling Expenses
    2,527,473       1,307,925       5,987,917  
General and Administrative
    1,490,157       1,497,126       5,294,550  
Amortization expense
    175,760       170,690       676,786  
                         
Total Operating Expenses
    4,193,390       2,975,741       11,959,253  
                         
Income from operations
    2,748,395       2,543,513       8,938,668  
                         
Other income (expense):
                       
Interest and dividend income
    54,508       62,211       199,047  
Rental Income
    1,235       9,347       35,240  
Interest expense
    (95,942 )     (154,383 )     (442,703 )
Loss on Disposition of Equipment
                (2,826 )
Loss on sale of investments, net
    (29,259 )     (149,790 )     (278,474 )
Total other income (expense)
    (69,458 )     (232,615 )     (489,716 )
                         
Income before provision for income taxes
    2,678,937       2,310,898       8,448,952  
                         
Provision for income taxes
    910,248       763,432       2,879,250  
                         
Net income
  $ 1,768,689     $ 1,547,466     $ 5,569,702  
                         
Basic and diluted earnings per common share
    0.11       0.09       0.33  
                         
Weighted average number of shares outstanding
    16,761,774       16,846,671       16,798,164  
                         
COMPREHENSIVE INCOME
                       
                         
Net income
  $ 1,768,689     $ 1,547,466     $ 5,569,702  
                         
                         
Other comprehensive income (loss), net of tax:
                       
Unrealized gains (losses) on investments (net of tax)
    46,143       ( 431,694 )     325,086  
Less reclassification adjustment for (gains) losses included in net income (net of taxes)
    17,175       87,927       163,464  
                         
Comprehensive income
  $ 1,832,007     $ 1,203,699     $ 6,058,252  
 
 
 
- 5 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
For the Three Months Ended March 31, 2010 (Unaudited)
and the Year Ended December 31, 2009
   
Common Stock, No Par Value
20,000,000 Shares
   
# of Shares
                           
Accumulated
Other
       
      Authorized    
of
                           
Comprehensive
       
   
# of Shares
   
# of Shares
   
Treasury
   
Common
   
Paid In
   
Treasury
   
Retained
   
Income (Loss),
       
   
Issued
   
Outstanding
   
Stock
   
Stock
   
Capital
   
Stock
   
Earnings
   
Net of Tax
   
Total
 
                                                       
                                                       
Balances at December 31, 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
          ( 87,991 )     87,991                   ( 905,607 )                 ( 905,607 )
                                                                         
Issuance of treasury stock for compensation
          13,132       ( 13,132 )           119,039       25,597                   144,636  
                                                                         
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
                                              488,550       488,550  
                                                                         
Net income for the year ended December 31, 2009
                                        5,569,702             5,569,702  
                                                                         
                                                                         
Balances at December 31, 2009
    17,273,776       16,778,555       495,221     $ 6,509,267     $ 1,965,786     $ (3,846,773 )   $ 27,953,409     $ (10,359 )   $ 32,571,330  
                                                                         
Redemption of stock
          ( 28,365 )     28,365                   ( 340,105 )                 ( 340,105 )
                                                                         
Issuance of treasury stock for compensation
          4,382       ( 4,382 )           26,471       4,688                   31,159  
                                                                         
                                                                         
Other comprehensive income (loss):
                                                                       
Unrealized gains on securities, net of taxes and reclassification adjustment
                                              63,318       63,318  
                                                                         
Net income for the three months ended March 31, 2010
                                        1,768,689             1,768,689  
                                                                         
                                                                         
Balances at March 31, 2010
    17,273,776       16,754,572       519,204     $ 6,509,267     $ 1,992,257     $ (4,182,190 )   $ 29,722,098     $ 52,959     $ 34,094,391  
 
 
 
- 6 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended March, 30, 2010 and 2009 (Unaudited)
and the Year Ended December 31, 2009
   
(Unaudited)
             
   
March 31,
         
December 31,
 
   
2010
   
2009
   
2009
 
                   
Cash flows from operating activities:
                 
Net income
  $ 1,768,689     $ 1,547,466     $ 5,569,702  
Adjustments to reconcile net income to net cash flows from operating activities, net of acquisition:
                       
Depreciation and amortization
    579,135       387,464       1,811,190  
Loss on sale of investments, net
    29,259       149,790       278,474  
Loss on disposition of assets
                2,826  
Deferred income taxes
    (222,915 )     8,549       389,754  
Treasury stock issued for compensation
    31,159       51,160       144,636  
Decrease in allowance for doubtful accounts
                (75,000 )
(Increase) decrease in operating assets:
                       
Accounts receivable
    (1,726,610 )     (1,136,258 )     (612,915 )
Other receivables
    677       106,826       (7,758 )
Inventories
    (572,849 )     28,242       173,419  
Refundable income taxes
    832,063       (155,386 )     (475,635 )
Prepaid expenses and other current assets
    2,250       (13,965 )     9,506  
Increase (decrease) in operating liabilities:
                       
Accounts payable
    352,627       401,833       298,800  
Accrued expenses
    22,919       94,334       96,062  
Margin payable
          423,032        
Accrued income taxes
          (197,694 )      
Net cash provided by operating activities
    1,096,404       1,695,393       7,603,061  
                         
Cash flows from investing activities:
                       
Purchases of investments
    (356,498 )     (1,757,574 )     (6,156,682 )
Sale of investments
    531,455       2,318,620       6,928,321  
Purchases of property and equipment
    (603,015 )     (349,849 )     (1,766,280 )
Acquisition of Fresh Made, net of cash acquired
          (2,850,888 )     (11,042,546 )
Net cash used in investing activities
    (428,058 )     (2,639,691 )     (12,037,187 )
                         
Cash flows from financing activities:
                       
Proceeds of note payable
          1,729,990       9,353,504  
Checks written in excess of bank balances
    190,482             342,976  
Purchases of treasury stock, net
    (340,105 )     (101,628 )     (905,607 )
Repayment of notes payable
    (496,953 )     (354,214 )     (4,003,588 )
Net cash (used in) provided by in financing activities
    (646,576 )     1,274,148       4,787,285  
                         
Net increase in cash and cash equivalents
    21,770       329,850       353,159  
                         
Cash and cash equivalents at the beginning of the period
    630,407       277,248       277,248  
                         
Cash and cash equivalents at the end of the period
  $ 652,177     $ 607,098     $ 630,407  

 
- 7 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2010 and 2009
and December 31, 2009
 
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:
 
Basis of presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  However, such information reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of Management, necessary for fair statement of results for the interim periods.

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., Fresh Made, Inc and Starfruit Franchisor, L.L.C.  All significant intercompany accounts and transactions have been eliminated.  The financial statements include the results of operations from Fresh Made, Inc from February 6, 2009 through the end of the period (see Note 3).

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 and discounts, the valuation of investment securities, the valuation of goodwill, intangible assets, and deferred taxes.
 
Revenue Recognition
Sales of Company produced dairy products 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
March 31, 2010 and 2009
and December 31, 2009

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
 
Investments
All investment securities are classified as available-for-sale and are carried at fair value. 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 and net of anticipated discounts.  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.

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



 
- 9 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2010 and 2009
and December 31, 2009

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
 
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, but 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
 
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 investments, capitalization of indirect costs for tax purposes, purchase price adjustments, and the recognition of an allowance for doubtful accounts for financial statement purposes.

Reclassification
Certain 2009 balance sheet amounts have been reclassified to conform to the 2010 presentation.

 
- 10 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2010 and 2009
and December 31, 2009



Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
 
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 2006 through 2009 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.

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, 2009 and for the three months ended March 31, 2010 and 2009, approximately $1,689,540, $1,361,694 and $347,247 of such costs respectively, were expensed.

Earnings per common share
Earnings per common share were computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period.  For the three months ended March 31, 2010 and 2009 and for the year ended December 31, 2009, diluted and basic earnings per share were the same, as the effect of dilutive securities options outstanding was not significant.
 
Note 3 – ACQUISITION
 
On February 6, 2009, we completed a Stock Purchase Agreement (the “Stock Agreement”) under which Lifeway purchased 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 in cash, 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.  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, we entered into and consummated a Real Property Purchase Agreement (the “Real Property Agreement”) under which we acquired 1.1355 acres of land in Philadelphia, PA (the “Property”).  The consideration for the Property was approximately $2,000,000.

The acquisition was consummated to expand the geographic footprint of Lifeway as well as grow market share.  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.  None of the goodwill resulting from the acquisition is tax deductible.
 
 
- 11 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2010 and 2009
and December 31, 2009

Note 3 – ACQUISITION - Continued

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 $545,958)
    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
    8,391,000  
Current liabilities
    (461,000 )
Deferred tax liability associated with purchase adjustments
    (1,652,000 )
       Total fair value of assets acquired and liabilities assumed
  $ 14,028,000  

The following pro forma disclosures, including the effect of purchase accounting adjustments, depict the results of operations for the three months ended March 31, 2009 and the year ended December 31, 2009 as though the merger with Fresh had taken place as of January 1, 2009:

   
For the Three
Months Ended
March 31, 2009
   
For the Year
Ended
December 31, 2009
 
Gross revenue
  $ 14,851,663     $ 59,231,461  
                 
Net income
  $ 1,596,235     $ 5,618,471  
                 
Earnings per share
  $ 0.09     $ 0.33  

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

   
March 31, 2010
   
March 31, 2009
   
December 31, 2009
 
   
Cost
   
Accumulated Amortization
   
Cost
   
Accumulated Amortization
   
Cost
   
Accumulated Amortization
 
Recipes
  $ 43,600     $ 43,600     $ 43,600     $ 43,600     $ 43,600     $ 43,600  
Customer lists and other customer related intangibles
    4,305,200       695,568       4,305,200       284,052       4,305,200       587,393  
Lease acquisition
    87,200       70,590       87,200       58,133       87,200       67,473  
Other
    6,638       6,638       6,638       6,638       6,638       6,638  
Customer relationship
    985,000       300,972       985,000       218,889       985,000       280,454  
Contractual backlog
    12,000       12,000       12,000       12,000       12,000       12,000  
Trade names
    1,980,000       484,000       1,980,000       352,000       1,980,000       451,000  
Formula
    438,000       160,600       438,000       116,800       438,000       149,650  
    $ 7,857,638     $ 1,773,968     $ 7,857,638     $ 1,092,112     $ 7,857,638     $ 1,598,208  
 
 
- 12 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2010 and 2009
and December 31, 2009

Note 4 – INTANGIBLE ASSETS - Continued

Amortization expense is expected to be as follows for the years ending December 31:

2011
  $
703,040
 
2012
   
694,736
 
2013
   
668,783
 
                         2014
   
657,883
 
2015
   
657,883
 
Thereafter
   
2,701,345
 
    $
6,083,670
 

Amortization expense during the three months ended March 31, 2010 and 2009 and for the year ended December 31, 2009 was $175,760, $170,690 and $676,786, respectively.

Note 5 – INVESTMENTS

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

March 31, 2010
 
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
                         
Equities
  $ 1,278,619     $ 190,688     $ ( 120,631 )   $ 1,348,676  
Mutual Funds
    228,746       6,781       ( 4,326 )     231,201  
Preferred Securities
    388,705       7,450       ( 63,703 )     332,452  
Corporate Bonds
    1,595,713       84,119       ( 6,877 )     1,672,955  
Government Agency Obligations
    815,778       3,433       ( 6,714 )     812,497  
                                 
Total
  $ 4,307,561     $ 292,471     $ ( 202,251 )   $ 4,397,781  
 
March 31, 2009
 
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
                         
Equities
  $ 1,429,461     $ 46,956     $ ( 363,537 )   $ 1,112,880  
Mutual Funds
    704,256       160       ( 376,113 )     328,303  
Preferred Securities
    826,295             ( 397,324 )     428,971  
Corporate Bonds
    506,165       2,959       ( 25,193 )     483,931  
                                 
Government Agency Obligations
    1,929,788       6,539       ( 3,961 )     1,932,366  
Total
  $ 5,395,965     $ 56,614     $ ( 1,166,128 )   $ 4,286,451  


 
- 13 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2010 and 2009
and December 31, 2009

Note 5 – INVESTMENTS - Continued
 
December 31, 2009
 
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
                         
Equities
  $ 1,385,524     $ 177,024     $ (128,547 )   $ 1,434,001  
Mutual Funds
    172,543       7,453       ( 22,833 )     157,163  
Preferred Securities
    388,705       6,700       ( 95,753 )     299,652  
Corporate Bonds
    1,569,245       65,226       ( 6,772 )     1,627,699  
Government Agency Obligations
    893,755       2,989       ( 23,134 )     873,610  
                                 
Total
  $ 4,409,772     $ 259,392     $ (277,039 )   $ 4,392,125  

Proceeds from the sale of marketable securities were $6,928,321, $531,455 and $2,318,620 during the year ended December 31, 2009 and for the three months ended March 31, 2010 and 2009, respectively.

Gross gains of $351,419, $23,737 and $103,520 and gross losses of $629,893, $52,996 and $253,310 were realized on these sales during the year ended December 31, 2009 and for the three months ended March 31, 2010 and 2009, respectively.

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2010 and 2009 and at December 31, 2009:

   
Less Than 12 Months
   
12 Months or Greater
   
Total
 
March 31, 2010
 
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
                                     
Equities
  $ 79,393     $ ( 29,937 )   $ 205,060     $ ( 90,694 )   $ 284,453     $ ( 120,631 )
Mutual Funds
    414       ( 4 )     26,034       ( 4,322 )     26,448       ( 4,326 )
Preferred Securities
                310,252       ( 63,703 )     310,252       ( 63,703 )
Corporate Bonds
    164,144       ( 5,510 )     103,645       ( 1,367 )     267,789       ( 6,877 )
Government Agency Obligations
    479,469       ( 5,563 )     85,376       ( 1,151 )     564,845       ( 6,714 )
    $ 723,420     $ ( 41,014 )   $ 730,367     $ ( 161,237 )   $ 1,453,787     $ (202,251 )

 
 
- 14 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2010 and 2009
and December 31, 2009

Note 5 – INVESTMENTS - Continued
 
   
Less Than 12 Months
   
12 Months or Greater
   
Total
 
March 31, 2009
 
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
                                     
Equities
  $ 872,423     $ ( 316,691 )   $ 59,422     $ ( 46,846 )   $ 931,845     $ ( 363,537 )
Mutual Funds
    148,400       ( 71,155 )     172,520       ( 304,958 )     320,920       ( 376,113 )
Preferred Securities
    180,313       ( 15,874 )     248,658       ( 381,450 )     428,971       ( 397,324 )
Corporate Bonds
    24,233       ( 714 )     274,811       ( 24,479 )     299,044       ( 25,193 )
Government Agency Obligations
                695,308       ( 3,961 )     695,308       ( 3,961 )
    $ 1,225,369     $ ( 404,434 )   $ 1,450,719     $ ( 761,694 )   $ 2,676,088     $ (1,166,128 )

   
Less Than 12 Months
   
12 Months or Greater
   
Total
 
December 31, 2009
 
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
                                     
Equities
  $ 128,959     $ ( 27,142 )   $ 230,502     $ ( 101,405 )   $ 359,461     $ ( 128,547 )
Mutual Funds
    1,694       ( 321 )     131,870       ( 22,512 )     133,564       ( 22,833 )
Preferred Securities
                278,202       ( 95,753 )     278,202       ( 95,753 )
Corporate Bonds
    178,874       ( 3,176 )     124,395       ( 3,596 )     303,269       ( 6,772 )
Government Agency Obligations
    564,941       ( 20,096 )     161,466       ( 3,038 )     726,407       ( 23,134 )
                                                 
    $ 874,468     $ ( 50,735 )   $ 926,435     $ ( 226,304 )   $ 1,800,903     $ ( 277,039 )



 
- 15 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2010 and 2009
and December 31, 2009

Note 5 – INVESTMENTS - Continued

Equities, Mutual Funds, Corporate Bonds and Government Agency Obligations - The Company’s investments in equity securities, mutual funds, corporate bonds and government agency obligations consist of investments in common stock, preferred stock and debt securities of companies in various industries.  The Company evaluated the near-term prospects of the issuer in relation to the severity and duration of the impairment. Based on that evaluation and the Company’s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider any material investments to be other-than-temporarily impaired at March 31, 2010.

Preferred Securities - The Company’s investments in preferred securities consist of investments in preferred stock of companies in various industries.  The Company evaluated the continuing performance of the securities, the credit worthiness of the issuers as well as the near-term prospects of the security in relation to the severity and duration of the impairment. Based on that evaluation and the Company’s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider any material investments to be other-than-temporarily impaired at March 31, 2010.

Note 6 – INVENTORIES

Inventories consist of the following:

   
March 31,
   
December 31,
 
   
2010
   
2009
   
2009
 
Finished goods
  $ 1,287,500     $ 1,397,435     $ 1,101,885  
Production supplies
    1,571,096       1,661,817       1,367,457  
Raw materials
    1,011,229       582,496       827,634  
Total inventories
  $ 3,869,825     $ 3,641,748     $ 3,296,976  

Note 7 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following:
             
   
March 31,
   
December 31
 
   
2010
   
2009
   
2009
 
Land
  $ 1,178,160     $ 969,232     $ 1,178,160  
Buildings and improvements
    10,684,220       9,569,074       10,380,393  
Machinery and equipment
    12,677,396       9,605,436       12,525,241  
Vehicles
    961,245       964,956       961,245  
Office equipment
    276,427       184,609       255,616  
Construction in process
    207,830       2,630,334       81,608  
      25,985,278       23,923,641       25,382,263  
Less accumulated depreciation
    11,503,456       10,199,718       11,100,081  
Total property and equipment
  $ 14,481,822     $ 13,723,923     $ 14,282,182  

Depreciation expense during the three months ended March 31, 2010 and 2009 and for the year ended December 31, 2009 was $403,375, $216,774, and $1,134,404 respectively.
 
 
- 16 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2010 and 2009
and December 31, 2009

Note 8 ACCRUED EXPENSES

Accrued expenses consist of the following:
 
   
March 31,
   
December 31,
 
   
2010
   
2009
   
2009
 
Accrued payroll and payroll taxes
  $ 298,246     $ 181,384     $ 191,744  
Accrued property tax
    222,537       225,303       306,707  
Other
    116,480       80,031       115,893  
    $ 637,263     $ 486,718     $ 614,344  

Note 9 – NOTES PAYABLE

Notes payable consist of the following:

   
March 31,
   
December 31,
 
   
2010
   
2009
   
2009
 
Note payable to Amani Holding LLC, payable in quarterly installments of $262,500 plus interest at the floating prime rate per annum, secured by letter of credit.  Paid in full in 2009.
        $ 574,308        
                         
Note payable to Private Bank in monthly installments of $42,222, plus variable interest rate, currently at 2.756%, with a balloon payment of $5,066,667 due February 6, 2014.  Collateralized by substantially all assets of the Company.
    7,008,889       7,515,555       7,135,556  
                         
Line of credit with Private Bank at variable interest rate, currently at 2.781%, due on February 6, 2011.  Collateralized by substantially all assets of the Company.
    500,000       2,600,000       500,000  
                         
Line of credit with Morgan Stanley at variable interest rate, currently at 2.23%.  Collateralized by investments.
    2,484,522       1,933,527       2,468,151  
                         
Notes payable to Ilya Mandel & Michael Edelson, subordinated to Private Bank, payable in quarterly installments of $341,875, plus interest at the floating rate per annum (3.25% at March 31, 2010) due August 1, 2010, as amended and restated.  Collateralized by a mortgage on specific real estate and shares of the Company’s common stock.
    1,242,165       2,735,000       1,628,822  
Total notes payable
    11,235,576       15,358,000       11,732,529  
Less current maturities
    4,733,354       6,982,001       4,842,315  
Total long-term portion
  $ 6,502,222     $ 8,376,389     $ 6,890,214  


 
- 17 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2010 and 2009
and December 31, 2009

Note 9 – NOTES PAYABLE - Continued

Maturities of notes payables are as follows:

For the Period Ended March 31,
   
       
2011
  $ 4,733,354  
2012
    506,667  
2013
    506,667  
2014
    5,488,888  
Total
  $ 11,235,576  

Note 10 – PROVISION FOR INCOME TAXES

The provision for income taxes consists of the following:

         
For the
 
   
For the Three Months Ended
   
Year Ended
 
   
March 31,
   
December 31,
 
   
2010
   
2009
    2009  
Current:
                 
Federal
  $ 916,582     $ 610,611     $ 2,045,904  
State and local
    216,581       144,272       443,592  
Total current
    1,133,163       754,883       2,489,496  
Deferred
    (222,915 )     8,549       389,754  
Provision for income taxes
  $ 910,248     $ 763,432     $ 2,879,250  

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

         
For the
 
   
For the Three Months Ended
   
Year Ended
 
   
March 31,
   
December 31,
 
   
2010
   
2009
   
2009
 
Federal income tax expense computed at the statutory rate
  $ 910,838     $ 828,045     $ 2,872,644  
State and local tax expense, net
    128,589       116,900       405,550  
Permanent differences
    (129,179 )     (181,513 )     (178,160 )
Tax credits and other
                (220,784 )
Provision for income taxes
  $ 910,248     $ 763,432     $ 2,879,250  


 
- 18 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2010 and 2009
and December 31, 2009

Note 10 – PROVISION FOR INCOME TAXES - Continued
 
Amounts for deferred tax assets and liabilities are as follows:
 
   
March 31,
   
December 31,
 
   
2010
   
2009
   
2009
 
Non-current deferred tax assets (liabilities) arising from:
Temporary differences -
                 
Accumulated depreciation
  $ (2,069,955 )   $ (1,763,059 )   $ (2,129,680 )
Purchase accounting adjustments
    (1,585,334 )             (1,652,000 )
Capital loss carry-forwards
    337,016               337,016  
Total non-current net deferred tax liabilities
    (3,318,273 )     (1,763,059 )     (3,444,664 )
Current deferred tax assets arising from:
                       
Unrealized (gains) losses on investments
    (37,261 )     458,320       7,288  
Impairment of investments
    59,003       204,537