Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Lifeway Foods, Inc.Financial_Report.xls
EX-31.2 - 302 CERTIFICATION OF THE C.F.O. - Lifeway Foods, Inc.exh31-2_17319.htm
EX-32.2 - 906 CERTIFICATION OF THE C.F.O. - Lifeway Foods, Inc.exh32-2_17319.htm
EX-32.1 - 906 CERTIFICATION OF THE C.E.O. - Lifeway Foods, Inc.exh32-1_17319.htm
EX-31.1 - 302 CERTIFICATION OF THE C.E.O. - Lifeway Foods, Inc.exh31-1_17319.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, 2012
 
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) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceeding 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  x   No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions 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  May 8, 2012, the issuer had  16,379,417 shares of common stock, no par value, outstanding.
 


 
 
 
 
LIFEWAY FOODS, INC.
CONTENTS TO FORM 10-Q
 
 
     
Page(s)
PART I —
FINANCIAL INFORMATION
 
 
       
ITEM 1.
FINANCIAL STATEMENTS.
  3
       
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
   19
       
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  20
       
ITEM 4.
CONTROLS AND PROCEDURES.
  20
       
       
       
PART II —
OTHER INFORMATION
   
       
ITEM 1.
LEGAL PROCEEDINGS.
  21
       
   ITEM 1A.
RISK FACTORS.
  21
       
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  21
       
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.
  22
       
ITEM 4.
REMOVED AND RESERVED.
  22
       
ITEM 5.
OTHER INFORMATION.
  22
       
ITEM 6.
EXHIBITS.
  22
       
       
SIGNATURES
    23
       
EXHIBIT INDEX
    24
 
 
 
- 2 -

 
PART I – FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS.
 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
March 31, 2012 and 2011 (Unaudited) and December 31, 2011
 
   
(Unaudited)
       
   
March 31,
   
December 31,
 
   
2012
   
2011
   
2011
 
ASSETS
                 
                   
Current assets
                 
Cash and cash equivalents
  $ 1,156,539     $ 2,075,791     $ 1,115,150  
Investments
    1,723,836       1,314,382       1,695,044  
Certificates of deposits in financial institutions
    300,000       250,000       300,000  
Inventories
    5,205,457       4,752,054       4,954,475  
Accounts receivable, net of allowance for doubtful accounts and discounts
    8,484,371       8,346,560       7,950,276  
Prepaid expenses and other current assets
    39,880       126,919       79,630  
Other receivables
    155,937       74,879       224,204  
Deferred income taxes
    357,963       368,176       338,690  
Refundable income taxes
    ---       ---       41,316  
Total current assets
    17,423,983       17,308,761       16,698,785  
                         
Property and equipment, net
    15,031,364       15,129,655       15,198,822  
                         
Intangible assets
                       
Goodwill and other non amortizable brand assets
    14,068,091       14,068,091       14,068,091  
Other intangible assets, net of accumulated amortization of $3,276,645 and $2,500,066 at March 31, 2012 and 2011 and 3,087,940 at December 31, 2011, respectively
    5,029,355       5,805,934       5,218,060  
Total intangible assets
    19,097,446       19,874,025       19,286,151  
                         
Other Assets
                       
Long-term accounts receivable net of current portion
    276,050       ---       289,550  
    $ 51,828,843     $ 52,312,441     $ 51,473,308  
Total assets
                       
                         
LIABILITIES AND STOCKHOLDERS' EQUITY
                       
                         
Current liabilities
                       
Checks written in excess of bank balances
  $ 333,446     $ 1,067,073     $ 592,040  
Current maturities of notes payable
    789,933       2,364,774       1,540,716  
Accounts payable
    4,597,466       3,781,059       4,386,239  
Accrued expenses
    755,187       595,841       553,725  
Accrued income taxes
    279,402       430,246       ---  
Total current liabilities
    6,755,434       8,238,993       7,072,720  
                         
Notes payable
    5,363,750       5,995,558       5,539,836  
                         
Deferred income taxes
    3,394,957       3,332,473       3,503,595  
Total liabilities
    15,514,141       17,567,024       16,116,151  
                         
Stockholders' equity
                       
Common stock, no par value; 20,000,000 shares authorized; 17,273,776 shares issued; 16,390,417 shares outstanding at March 31, 2012; 17,273,776 shares issued; 16,443,809 shares outstanding at March 31, 2011; 17,273,776 shares issued; 16,409,317 shares outstanding at December 31, 2011
    6,509,267       6,509,267       6,509,267  
Paid-in-capital
    2,032,516       2,032,516       2,032,516  
Treasury stock, at cost
    ( 7,783,580 )     ( 7,271,836 )     ( 7,606,974 )
Retained earnings
    35,526,285       33,501,646       34,431,296  
Accumulated other comprehensive loss, net of taxes
    30,214       ( 26,176 )     ( 8,948 )
Total stockholders' equity
    36,314,702       34,745,417       35,357,157  
                         
Total liabilities and stockholders' equity
  $ 51,828,843     $ 52,312,441     $ 51,473,308  
 
See accompanying notes to financial statements
 
- 3 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the Years Three Months Ended March 31, 2012 and 2011 (Unaudited)
 
   
(Unaudited)
 
   
March 31,
 
   
2012
   
2011
 
                         
Sales
  $ 21,545,896           $ 19,047,266        
Less: discounts and allowances
    ( 2,148,699 )           ( 1,743,363 )      
Net sales
    19,397,197       19,397,197       17,303,903       17,303,903  
                                 
Cost of goods sold
            12,238,341               9,345,717  
Depreciation expense
            399,045               376,513  
                                 
Total cost of goods sold
            12,637,386               9,722,230  
                                 
Gross profit
            6,759,811               7,581,673  
                                 
Selling expenses
            2,721,973               2,282,470  
General and administrative
            1,976,603               1,837,622  
Amortization expense
            188,705               195,959  
                                 
Total operating expenses
            4,887,281               4,316,051  
                                 
Income from operations
            1,872,530               3,265,622  
                                 
Other income (expense):
                               
Interest and dividend income
            11,573               17,593  
Rental income
            3,000               ---  
Interest expense
            ( 50,186 )             (62,130 )
Gain (loss) on sale of investments, net
            17,985               ( 2,597 )
Loss on disposition of equipment
                            ---  
Other expense
                            ---  
Total other income (expense)
            ( 17,628 )             ( 47,134 )
                                 
Income before provision for
                               
   income taxes
            1,854,902               3,218,488  
                                 
Provision for income taxes
            759,913               1,292,717  
                                 
Net income
          $ 1,094,989             $ 1,925,771  
                                 
Basic and diluted earnings
                               
per common share
            0.07               0.12  
                                 
Weighted average number of
                               
  shares outstanding
            16,397,998               16,489,954  
                                 
COMPREHENSIVE INCOME
                               
                                 
Net income
          $ 1,094,989             $ 1,925,771  
                                 
Other comprehensive income
                               
    (loss), net of tax:
                               
    Unrealized gains on
                               
      investments (net of tax)
            29,000               15,451  
    Less reclassification adjustment
                               
      for (gains) losses included in
                               
      net income (net of taxes)
            10,162               1,467  
                                 
Comprehensive income
          $ 1,134,151             $ 1,942,689  
 
See accompanying notes to financial statements
 
- 4 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Three Months Ended March 31, 2012 and 2011 (Unaudited)
and for the Year Ended December 31, 2011
 
 
   
Common Stock,
No Par Value
20,000,000 Shares
Authorized
   
# of Shares
of
                           
Accumulated
Other
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, 2010
    17,273,776       16,536,657       737,119     $ 6,509,267     $ 2,032,516     $ (6,425,546 )   $ 31,575,875     $ (43,094 )   $ 33,649,018  
                                                                         
Redemption of stock
    ---       ( 127,340 )     127,340       ---       ---       ( 1,181,428 )     ---       ---       ( 1,181,428 )
                                                                         
Issuance of treasury stock for compensation
    ---       ---       ---       ---       ---       ---       ---       ---       ---  
                                                                         
Other comprehensive income (loss):
                                                                       
Unrealized gains on securities, net of taxes
    ---       ---       ---       ---       ---       ---       ---       34,146       34,146  
                                                                         
Net income for the year ended December 31, 2011
    ---       ---       ---       ---       ---       ---       2,855,421       ---       2,855,421  
                                                                         
Balances at December 31, 2011
    17,273,776       16,409,317       864,459     $ 6,509,267     $ 2,032,516     $ (7,606,974 )   $ 34,431,296     $ (8,948 )   $ 35,357,157  
                                                                         
Balances at January 1, 2011
    17,273,776       16,536,657       737,119       6,509,267       2,032,516       (6,425,546 )     31,575,875       (43,094 )     33,649,018  
                                                                         
Redemption of stock
    ---       (92,848 )     92,848       ---       ---       (846,290 )     ---       ---       ( 846,290 )
                                                                         
Issuance of treasury stock for compensation
    ---       ---       ---       ---       ---       ---       ---       ---       ---  
                                                                         
Other comprehensive income (loss):
                                                                       
Unrealized gains on securities, net of taxes
    ---       ---       ---       ---       ---       ---       ---       16,918       16,918  
                                                                         
Net income for the three months ended March 31, 2011
    ---       ---       ---       ---       ---       ---       1,925,771       ---       1,925,771  
                                                                         
Balances at March 31, 2011
    17,273,776       16,443,809       829,967     $ 6,509,267     $ 2,032,516     $ (7,271,836 )   $ 33,501,646     $ (26,176 )   $ 34,745,417  
                                                                         
Balances at January 1, 2012
    17,273,776       16,409,317       864,459       6,509,267       2,032,516       (7,606,974 )     34,431,296       (8,948 )   $ 35,357,157  
                                                                         
Redemption of stock
    ---       (18,900 )     18,900       ---       ---       (176,606 )     ---       ---       (176,606 )
                                                                         
Other comprehensive income (loss):
                                                                       
Unrealized gains on securities, net of taxes
    ---       ---       ---       ---       ---       ---       ---       39,162       39,162  
                                                                         
Net income for the three months ended March 31, 2012
    ---       ---       ---       ---       ---       ---       1,094,989       ---       1,094,989  
                                                                         
Balances at March 31, 2012
    17,273,776       16,390,417       883,359     $ 6,509,267     $ 2,032,516     $ (7,783,580 )   $ 35,526,285     $ 30,214     $ 36,314,702  
 
See accompanying notes to financial statements
 
- 5 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2012 and 2011 (Unaudited)
 
 
   
March 31,
 
   
2012
   
2011
 
             
Cash flows from operating activities:
           
Net income
  $ 1,094,989     $ 1,925,771  
Adjustments to reconcile net income to net
               
cash flows from operating activities, net of acquisition:
               
Depreciation and amortization
    587,750       572,472  
Loss (gain) on sale of investments, net
    ( 17,985 )     2,597  
Loss on disposition of equipment
            ---  
Impairment of investments
            ---  
Deferred income taxes
    ( 185,805 )     ( 119,129 )
Treasury stock issued for compensation
            ---  
Bad Debt Expense
    6,384       20,000  
(Increase) decrease in operating assets:
               
Accounts receivable
    ( 526,979 )     ( 1,573,284 )
Other receivables
    68,267       29,801  
Inventories
    ( 250,982 )     ( 766,680 )
Refundable income taxes
    41,316       906,748  
Prepaid expenses and other current assets
    39,750       31,396  
Increase (decrease) in operating liabilities:
               
Accounts payable
    211,227       ( 402,422 )
Accrued expenses
    201,462       86,382  
Income taxes payable
    279402       430,246  
Net cash provided by operating activities
    1,548,796       1,143,898  
                 
Cash flows from investing activities:
               
Purchases of investments
    ( 318,123 )     ( 445,049 )
Proceeds from sale of investments
    404,028       234,388  
Investments in certificates of deposits
            ---  
Proceeds from redemption of certificates of deposit
            ---  
Purchases of property and equipment
    ( 231,243 )     ( 353,455 )
Net cash (used in) provided by investing activities
    (145,338 )     ( 564,116 )
                 
Cash flows from financing activities:
               
Proceeds of note payable
            ---  
Checks written in excess of bank balances
    ( 258,594 )     ( 274,137 )
Purchases of treasury stock
    ( 176,606 )     ( 846,290 )
Repayment of notes payable
    ( 926,869 )     ( 613,503 )
Net cash used in financing activities
    (1,362,069 )     (1,733,930 )
                 
Net (decrease) increase in cash and cash equivalents
    41,389       (1,154,148 )
                 
Cash and cash equivalents at the beginning of the period
    1,115,150       3,229,939  
                 
Cash and cash equivalents at the end of the period
  $ 1,156,539     $ 2,075,791  

See accompanying notes to financial statements
 
- 6 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2012 and 2011
and December 31, 2011
 


Note 1 – NATURE OF BUSINESS

Lifeway Foods, Inc. (the “Company” or “Lifeway”) 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 a vegetable-based seasoning under the name “Golden Zesta.” The Company currently distributes its products throughout the Chicago Metropolitan area and various cities on the East Coast through local food stores.

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, Helios Nutrition, Ltd., Pride of Main Street, L.L.C., Starfruit, L.L.C., Fresh Made, Inc. and Starfruit Franchisor, L.L.C. In 2010, the Company acquired the assets of First Juice, Inc. (“First Juice”) and consolidated the operations into the operations of the Company. All significant intercompany accounts and transactions have been eliminated. The financial statements include the results of operations from the acquisition of the assets of First Juice from October 14, 2010 through the end of the period.

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. Discounts and allowances are reported as a reduction of gross sales unless the allowance is attributable to an identifiable benefit separable from the purchase of the product, the value of which can be reasonably estimated, which would be charged to the appropriate expense account.

Customer Concentration
Sales are predominately to companies in the retail food industry, located within the United States of America. Two major customers accounted for approximately 31 percent and 29 percent of gross sales for the three months ended March 31, 2012 and 2011, respectively. These customers accounted for approximately 30 percent, 27 percent and 20 percent of accounts receivable as of March 31, 2012, March 31, 2011 and December 31, 2011, respectively.
 
 
 
- 7 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2012 and 2011
and December 31, 2011
 


Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

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.

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. Balances expected to be paid beyond one year are classified as long-term.

Accounts receivable are recorded at invoice amounts, and reduced to their estimated net realizable value by recognition of an allowance for doubtful accounts and discounts. The Company’s estimate of the allowances for doubtful accounts and discounts are based upon historical experience, its evaluation of the current status and contract terms 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 is 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 is 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
 
 
 
- 8 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2012 and 2011
and December 31, 2011
 

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

Intangible assets acquired in business combinations
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 identifiable 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 and 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 per 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 are the result of temporary differences that arise 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 and discounts for financial statement purposes.

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 2009 and 2010 tax years and 2011 when filed. 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.
 
 
 
- 9 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2012 and 2011
and December 31, 2011
 

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

During the year ended December 31, 2010, the IRS completed a review of the Company’s 2007 and 2008 federal tax return filings, resulting in a liability of approximately $220,000 being recognized and paid during 2010. 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 and promotional costs
The Company expenses advertising costs as incurred. For the three months ended March 31, 2012 and 2011 total advertising expenses were $755,666 and $829,345, respectively.

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, 2012 and 2011, diluted and basic earnings per share were the same, as the effect of dilutive securities options outstanding was not significant.

Reclassification
Certain amounts in the 2011 quarter financial statements have been reclassified to conform with the current quarter presentation which have no effect on net income or stockholder's equity.

 
 
- 10 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2012 and 2011
and December 31, 2011


Note 3 – INTANGIBLE ASSETS

Intangible assets, and the related accumulated amortization, consist of the following:

   
March 31, 2012
   
March 31, 2011
   
December 31, 2011
 
   
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
    4,504,200       1,666,438       4,504,200       1,166,160       4,504,200       1,546,671  
Lease acquisition
    87,200       87,200       87,200       81,750       87,200       87,200  
Customer relationship
    985,000       465,135       985,000       383,056       985,000       444,618  
Trade names
    2,248,000       766,068       2,248,000       621,100       2,248,000       728,601  
Formula
    438,000       248,200       438,000       204,400       438,000       237,250  
    $ 8,306,000     $ 3,276,645     $ 8,306,000     $ 2,500,066     $ 8,306,000     $ 3,087,940  

Amortization expense is expected to be approximately the following for the 12 months ending March 31:

2013
 
$
743,954
 
2014
   
711,367
 
2015
   
711,367
 
2016
   
711,367
 
2017
   
682,167
 
Thereafter
   
1,469,133
 
   
$
5,029,355
 

Amortization expense during the three months ended March 31, 2012 and 2011 was $188,705 and 195,959, respectively.

Note 4 – INVESTMENTS

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

March 31, 2012
 
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
                         
Equities
 
$
525,657
   
$
77,348
   
$
(3,519)
   
$
599,486
 
Mutual Funds
   
56,840
     
959
     
(105)
     
57,694
 
Preferred Securities
   
189,452
     
10,950
     
(5,152)
     
195,250
 
Corporate Bonds
   
870,671
     
11,312
     
(10,577)
     
871,406
 
                                 
Total
 
$
1,642,620
   
$
100,569
   
$
(19,353)
   
$
1,723,836
 


 
 
- 11 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2012 and 2011
and December 31, 2011
 

Note 4 – INVESTMENTSContinued

March 31, 2011
 
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
                         
Equities
 
$
261,472
   
$
6,227
   
$
(37,440)
   
$
230,259
 
Mutual Funds
   
103,346
     
1,902
     
(798)
     
104,450
 
Preferred Securities
   
203,514
     
---
     
(12,984)
     
190,530
 
Corporate Bonds
   
792,379
     
3,941
     
(7,177)
     
789,143
 
Total
 
$
1,360,711
   
$
12,070
   
$
(58,399)
   
$
1,314,382
 
 
 
December 31, 2011
 
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
                         
Equities
 
$
682,569
   
$
55,244
   
$
(23,211)
   
$
714,602
 
Mutual Funds
   
64,563
     
3,275
     
(713)
     
67,125
 
Preferred Securities
   
64,452
     
---
     
(17,702)
     
46,750
 
Corporate Bonds
   
899,298
     
1,019
     
(33,750)
     
866,567
 
Total
 
$
1,710,882
   
$
59,538
   
$
(75,376)
   
$
1,695,044
 

Proceeds from the sale of investments were $400,268 and $234,388 for the three months ended March 31, 2012 and 2011, respectively.

Gross gains of $22,349 and $15,652 and gross losses of $4,364 and $18,249 were realized on these sales during the three months ended March 31, 2012 and 2011 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, 2012 and 2011 December 31, 2011:

   
Less Than 12 Months
   
12 Months or Greater
   
Total
 
March 31, 2012
 
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
                                     
Equities
 
$
20,346
   
$
(1,535)
   
$
3,184
   
$
(1,984)
   
$
23,530
   
$
(3,519)
 
Mutual Funds
   
---
     
---
     
3,073
     
(105)
     
3,073
     
(105)
 
Preferred Securities
   
---
     
---
     
59,300
     
(5,152)
     
59,300
     
(5,152)
 
Corporate Bonds
   
262,923
     
(10,577)
     
---
     
---
     
262,923
     
(10,577)
 
   
$
283,269
   
$
(12,112)
   
$
65,557
   
$
(7,241)
   
$
348,826
   
$
(19,353)
 
 
 
   
Less Than 12 Months
   
12 Months or Greater
   
Total
 
March 31, 2011
 
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
                                     
Equities
 
$
163,063
   
$
(7,801)
   
$
25,270
   
$
(29,639)
   
$
188,333
   
$
(37,440)
 
Mutual Funds
   
20,124
     
(680)
     
5,824
     
(118)
     
25,948
     
(798)
 
Preferred Securities
   
---
     
---
     
190,530
     
(12,984)
     
190,530
     
(12,984)
 
Corporate Bonds
   
409,750
     
(7,177)
     
---
     
---
     
409,750
     
(7,177)
 
   
$
592,937
   
$
(15,658)
   
$
221,624
   
$
(42,741)
   
$
814,561
   
$
(58,399)
 
 
 
 
- 12 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2012 and 2011
and December 31, 2011
 

Note 4 – INVESTMENTSContinued

   
Less Than 12 Months
   
12 Months or Greater
   
Total
 
December 31, 2011
 
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
                                     
Equities
 
$
176,966
   
$
(23,211)
     
     
   
$
176,966
   
$
(23,211)
 
Mutual Funds
   
     
     
10,585
     
(713)
     
10,585
     
(713)
 
Preferred Securities
   
     
     
46,750
     
(17,702)
     
46,750
     
(17,702)
 
Corporate Bonds
   
626,292
     
(24,000)
     
90,250
     
(9,750)
     
716,542
     
(33,750)
 
   
$
803,258
   
$
(47,211)
   
$
147,585
   
$
(28,165)
   
$
950,843
   
$
(75,376)
 

Equities, Mutual Funds, Preferred Securities, and Corporate Bonds - The Company's investments in equity securities, mutual funds, preferred securities, and corporate bonds consist of investments in common stock, preferred stock and debt securities of companies in various industries. As of March 31, 2012, there were six equity securities, two mutual fund securities, one preferred security, and four corporate bond securities that had unrealized losses. 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 did not consider any material investments to be other-than-temporarily impaired at March 31, 2012.


Note 5 – INVENTORIES

Inventories consist of the following:
   
March 31,
   
December 31,
 
   
2012
   
2011
   
2011
 
Finished goods
  $ 2,091,004     $ 1,959,323     $ 1,976,050  
Production supplies
    2,082,194       1,637,602       2,042,611  
Raw materials
    1,032,259       1,155,129       935,814  
Total inventories
  $ 5,205,457     $ 4,752,054     $ 4,954,475  

 
Note 6 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following:
 
   
March 31,
   
December 31,
 
   
2012
   
2011
   
2011
 
Land
  $ 1,178,160     $ 1,178,160     $ 1,178,160  
Buildings and improvements
    11,656,233       11,367,274       11,633,077  
Machinery and equipment
    14,777,420       14,006,251       14,697,024  
Vehicles
    1,347,228       1,073,745       1,334,628  
Office equipment
    404,905       374,564       383,099  
Construction in process
    111,039       ---       17,410  
      29,474,985       27,999,994       29,243,398  
Less accumulated depreciation
    14,443,621       12,870,339       14,044,576  
Total property and equipment
  $ 15,031,364     $ 15,129,655     $ 15,198,822  
 
 
 
- 13 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2012 and 2011
and December 31, 2011
 

Note 6 – PROPERTY AND EQUIPMENT - Continued

Depreciation expense during the three months ended March 31, 2012 and 2011 was $399,045 and $376,513, respectively.
 

Note 7 ACCRUED EXPENSES

Accrued expenses consist of the following:
 
   
March 31,
   
December 31,
 
   
2012
   
2011
   
2011
 
Accrued payroll and payroll taxes
  $ 490,137     $ 350,531     $ 209,395  
Accrued property tax
    250,342       203,933       323,885  
Other
    14,708       71,377       20,445  
    $ 755,187     $ 595,841     $ 553,725  

 
Note 8 – NOTES PAYABLE

Notes payable consist of the following:
   
March 31,
   
December
 
   
2012
   
2011
   
2011
 
                   
Note payable to Private Bank in monthly installments of $42,222, plus variable interest rate, currently at 2.7963%, with a balloon payment of $5,066,667 due February 6, 2014. Collateralized by substantially all assets of the Company.
 
$
5,745,556
   
$
6,502,222
   
$
5,914,445
 
                         
Line of credit with Private Bank at variable interest rate, currently at 3.25%. The agreement has been extended with terms allowing borrowings up to $2.0 million, maturing on May 31, 2012. Collateralized by substantially all assets of the Company.
   
250,000
     
---
     
1,000,000
 
                         
Line of credit with Morgan Stanley for borrowings up to $2.8 million at variable interest rate, currently at 3.00% due on demand. Collateralized by investments, cash and CD’s.
   
---
     
1,858,110
     
---
 
                         
Notes payable to Ford Credit Corp. payable in monthly installments of $1,778.23 at 5.99%, due July 2015, secured by transportation equipment.
   
64,200
     
---
     
68,509
 
                         
Note payable to Fletcher Jones of Chicago, Ltd LLC in monthly installments of $1,768.57 at 6.653%, due May 24, 2017, secured by transportation equipment.
   
93,927
     
---
     
97,598
 
                         
Total notes payable
   
6,153,683
     
8,360,332
     
7,080,552
 
Less current maturities
   
789,933
     
2,364,774
     
1,540,716
 
Total long-term portion
 
$
5,363,750
   
$
5,995,558
   
$
5,539,836
 
 
 
 
- 14 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2012 and 2011
and December 31, 2011
 

Note 8 – NOTES PAYABLE – Continued

In accordance with the Private Bank agreements referenced above, the Company is subject to minimum fixed charged ratio and tangible net worth thresholds. At March 31, 2012, the Company was in compliance with these covenants.

Maturities of notes payables are as follows:

For the Period Ended March 31,
   
       
2013
 
$
789,933
 
2014
   
5,274,365
 
2015
   
37,815
 
2016
   
25,826
 
2017
   
20,103
 
Thereafter
   
5,641
 
Total
 
$
6,153,683
 

 
Note 9 – COMMITMENTS AND CONTINGENCIES

The Company leases four stores for its Starfruit subsidiary. Total expense for these leases was approximately $58,264, $58,039 and $240,723 for three months ended March 31, 2012, 2011, respectively. The Company is also responsible for additional rent equal to real estate taxes and other operating expenses. Future annual minimum base rental payments for the leases as of March 31, 2012 are approximately as follows:

   
$
---
 
2013
   
182,812
 
2014
   
100,969
 
2015
   
44,468
 
2016
   
45,802
 
2017     48,590  
Thereafter
   
95,062
 
Total
 
$
517,703
 

 
Note 10 – PROVISION FOR INCOME TAXES

The provision for income taxes consists of the following:
 
   
For the Three Months Ended
   
   
March 31,
   
   
2012
   
2011
   
Current:
             
Federal
  $ 633,372     $ 1,005,605    
State and local
    312,346       406,241    
Total current
    945,718       1,411,846    
Deferred
    (185,805 )     (119,129 )  
Provision for income taxes
  $ 759,913     $ 1,292,717    
 
 
 
- 15 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2012 and 2011
and December 31, 2011
 

Note 10 – PROVISION FOR INCOME TAXES - Continued

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

   
For the Three Months Ended
March 31,
 
   
2012
   
2011
 
   
Amount
   
Percentage
   
Amount
   
Percentage
 
    Federal income tax expense computed at the statutory rate
 
$
630,667
     
34.0%
   
$
1,094,286
     
34.0%
 
State and local tax expense, net
   
215,169
     
11.6%
     
305,756
     
9.5%
 
Permanent differences
   
(52,493)
     
(2.8%)
     
(58,415)
     
(1.8%)
 
Change in tax estimate
   
(33,430)
     
(1.8%)
     
(48,910)
     
(1.5%)
 
Provision for income taxes
 
$
759,913
     
41.0%