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EX-21 - SUBSIDIARIES OF LIFEWAY FOODS, INC. - Lifeway Foods, Inc.exh21_17782.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF EDWARD P. SMOLYANSKY - Lifeway Foods, Inc.exh31-2_17782.htm
EX-32.2 - SECTION 1350 CERTIFICATION OF EDWARD P. SMOLYANSKY - Lifeway Foods, Inc.exh32-2_17782.htm
EX-32.1 - SECTION 1350 CERTIFICATION OF JULIE SMOLYANSKY - Lifeway Foods, Inc.exh32-1_17782.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF JULIE SMOLYANSKY - Lifeway Foods, Inc.exh31-1_17782.htm
EX-10.22 - ELEVENTH MODIFICATION TO LOAN AND SECURITY AGREEMENT - Lifeway Foods, Inc.exh10-22_17782.htm
EX-10.15 - NINTH MODIFICATION TO LOAN AND SECURITY AGREEMENT - Lifeway Foods, Inc.exh10-15_17782.htm
EX-10.16 - TENTH MODIFICATION TO LOAN AND SECURITY AGREEMENT - Lifeway Foods, Inc.exh10-16_17782.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-K
 

R
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the fiscal year ended December 31, 2014
   
£
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.
(Name of registrant as specified in its charter)

Illinois
36-3442829
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification No.)
 
 
6431 West Oakton St., Morton Grove, Illinois 60053
(Address of principal executive offices) (Zip Code)
 
 
(847) 967-1010
(Registrant’s telephone number, including area code)
 
 
Securities registered under Section 12(b) of the Exchange Act:
 
Title of Each Class
Name of each exchange on which registered
Common Stock, No Par Value
Nasdaq Global Market
 
 
Securities registered under Section 12(g) of the Exchange Act:
None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o   No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o   No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o    No þ

 
 

 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 þ

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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 ¨
Accelerated filer þ
Non-accelerated filer o
Smaller reporting company o
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes o     No R

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the stock was last sold as of June 30, 2015 ($19.19 per share as quoted on the Nasdaq Global Market) was $91,167,353.

As of July 28, 2015, 16,346,017 shares of the registrant’s common stock, no par value, were outstanding.
 
 
DOCUMENTS INCORPORATED BY REFERENCE:
 
None.
 
 
 


 
 
 
LIFEWAY FOODS, INC.

Table of Contents
 

 
 
PART I
   
       
Item 1.
Business
  2
       
Item 1A.
Risk Factors
  8
       
Item 1B.
Unresolved Staff Comments
  16
       
Item 2.
Properties
  16
       
Item 3.
Legal Proceedings
  17
       
Item 4.
Mine Safety Disclosures
  17
       
     
PART II
   
       
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  18
       
Item 6.
Selected Financial Data
  19
       
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  20
       
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
  27
       
Item 8.
Financial Statements and Supplementary Data
  27
       
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
  28
       
Item 9A.
Controls and Procedures
  28
       
Item 9B.
Other Information
  31
       
     
PART III
   
       
Item 10.
Directors, Executive Officers and Corporate Governance
  32
       
Item 11.
Executive Compensation
  37
       
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  45
       
Item 13.
Certain Relationships and Related Transactions and Director Independence
  46
       
Item 14.
Principal Accountant Fees and Services
  46
       
       
PART IV
     
       
Item 15.
Exhibits, Financial Statement Schedules
  48
       
 
Signatures
  52
       
 
Index of Exhibits
  53
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- i -

 
FORWARD LOOKING STATEMENTS

In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, readers of this document and any document incorporated by reference herein, are advised that this document and documents incorporated by reference into this document contain both statements of historical facts and forward looking statements. Forward looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those indicated by the forward looking statements. Examples of forward looking statements include, but are not limited to, (i) projections of revenues, income or loss, earnings or losses per share, capital expenditures, dividends, capital structure and other financial items, (ii) statements of Lifeway Foods, Inc.’s (“Lifeway” or the “Company”) plans and objectives, including the introduction of new products, or estimates or predictions of actions by customers, suppliers, competitors or regulatory authorities, (iii) statements of future economic performance, and (iv) statements of assumptions underlying other statements and statements about Lifeway or its business.

This document and any documents incorporated by reference herein also identify important factors which could cause actual results to differ materially from those indicated by forward looking statements. These risks and uncertainties include

●         
price competition;
 
●         
the decisions of customers or consumers;
 
●         
the actions of competitors;
 
●         
changes in the pricing of commodities;
 
●         
the effects of government regulation;
 
●         
possible delays in the introduction of new products;
 
●         
customer acceptance of products and services; and
 
●         
the other risks and uncertainties that are set forth in Item 1, “Business”, Item 1A "Risk Factors" and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
 

These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors could also have material adverse effects on future results. Except as otherwise required to be disclosed in periodic reports required to be filed by public companies with the Securities and Exchange Commission (“SEC”) pursuant to the SEC's rules, we have no duty to update these statements, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.







 
 
- 1 -

 
PART I


ITEM 1.          BUSINESS.

OVERVIEW

Lifeway Foods, Inc. (the “Company” or “Lifeway”), an Illinois corporation, commenced operations in February 1986, and was incorporated under the laws of the State of Illinois on May 19, 1986. The Company’s principal business activity is the manufacturing of probiotic, cultured, functional dairy health food products. Lifeway’s primary product is kefir, a dairy beverage similar to but distinct from yogurt, in several flavors and in several packages. In addition to kefir, Lifeway manufactures “Lifeway Farmer Cheese,” a line of various farmer cheeses. Lifeway distributes its products throughout the United States and in London, England. The Company manufactures all of its products distributed in the United States at Company-owned facilities. In the Chicago metropolitan area, Lifeway distributes its products on its own trucks and via distributors. The Company directly distributes its products in the Philadelphia and Tri State metropolitan areas using its own trucks. The Company distributes its products throughout the remainder of the United States via distributors. The Company’s products distributed in London are manufactured and shipped to stores by a third party co-packer. Products sold by the Company to distributors in the United States may be resold by such distributors within or outside of the United States, including in Mexico, Costa Rica and the Caribbean. The Company’s products are also manufactured and distributed in Canada by a third party co-packer.

SUBSIDIARY ENTITIES

On August 3, 2006, the Company acquired all of the issued and outstanding stock of Helios Nutrition, Ltd. (“Helios”). Pride of Main Street Dairy, L.L.C., a Minnesota limited liability company, is 100% owned by Helios.

Starfruit, L.L.C. and Starfruit Franchisor, L.L.C. are both wholly-owned subsidiaries formed on March 26, 2007 and July 15, 2008, respectively, in connection with the Company’s Starfruit cafe activities.

On February 6, 2009, the Company acquired all of the issued and outstanding stock of Fresh Made, Inc., a Pennsylvania corporation (“Fresh Made”).

On October 14, 2010, Lifeway First Juice, Inc., an Illinois corporation and a wholly-owned subsidiary of the Company (“Lifeway First Juice”) acquired substantially all of the assets of First Juice, Inc., a Delaware corporation (“First Juice”). Lifeway First Juice was dissolved on February 10, 2012 and First Juice was dissolved on December 29, 2011.

On July 2, 2013, the Company, through its wholly-owned subsidiary Lifeway Wisconsin, Inc., an Illinois corporation (“Lifeway Wisconsin”) acquired certain assets of Golden Guernsey Dairy Limited Liability Company, a Wisconsin limited liability company (“Golden Guernsey”), including land, a building and equipment used in the milk separation process.

SEGMENTS

The Company has two separate operating segments, the sale of fermented dairy products and three retail locations in Illinois that sell the Company’s fermented dairy products.  The Company has determined reportable segments based on how the Company’s chief operating decision maker manages the business and in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Financial Officer and the board of directors that makes strategic decisions.  Substantially all of the consolidated revenues of the Company relate to the sale of fermented dairy products which are produced using the same processes and materials and are sold to consumer retail food sellers through direct delivery and distributors in the United States, delivery by a third-party co-packer in London and Canada, and through delivery by U.S. distributors in Mexico, Costa Rica and the Caribbean. The Company had less than $1 million in revenues attributable to its retail locations during the year ended December 31, 2014, 2013 or 2012.  The Company’s annual revenues attributable to its three retail locations are considered not to be material and accordingly the Company has not presented financial information separately for this segment. Substantially all of the consolidated revenues and assets of the Company are within the Unites States.
 
 
 
 

 
 
- 2 -

 
PRODUCTS

Lifeway’s primary product is kefir, which, like the better-known product of yogurt, is a fermented dairy product. Kefir has a slightly effervescent quality, with a taste similar to yogurt and a consistency similar to buttermilk. It is a product distinct from yogurt because it incorporates the unique microorganisms of kefir as the cultures to ferment the milk. Lifeway’s Kefir is intended for use as a breakfast meal or a snack, or as a base for lower-calorie dressings, dips, soups or sauces. Kefir contains a unique mixture of several live microorganisms and nutrients such as proteins, minerals and vitamins. Kefir is a good source of calcium, protein and B Vitamins. In addition, because the fermentation process does not produce a highly sour-tasting product, the end product has fewer calories than some similar products in the dairy category. Lifeway currently sells (1) drinkable kefir in bottles, (2) ProBugs, drinkable kefir in pouches marketed to children, and (3) frozen kefir. In addition to kefir, Lifeway produces cheese based on a cultured soft cheese.

Sales of products by category were as follows for the years ended December 31:
 
   
2014
   
2013
   
2012
 
Drinkable Kefir other than ProBugs
 
$
110,297,098
   
$
90,441,363
   
$
73,003,926
 
Lifeway Farmer Cheese
   
10,266,319
     
9,388,067
     
9,777,033
 
ProBugs
   
7,867,980
     
7,126,630
     
4,628,990
 
Frozen Kefir
   
1,784,319
     
2,010,034
     
2,344,058
 
Total sales
 
$
130,215,716
   
$
108,966,094
   
$
89,754,007
 


Lifeway intends to continue to develop new products based on kefir and Farmer Cheese. There is no assurance that such products or any other new products can be developed successfully or marketed profitably.

DISTRIBUTION

With its seventeen Company-owned trucks, Lifeway distributes its products directly and extensively in the State of Illinois, primarily in the Chicago metropolitan area. Lifeway also directly distributes its products in the Philadelphia and Tri State metropolitan area.

In addition to the Chicago, Philadelphia and Tri State metropolitan areas, Lifeway’s products are distributed to stores throughout the United States, in London, England and in Canada. Substantially all of Lifeway’s products are distributed within the United States. Lifeway has verbal distribution arrangements with various distributors throughout the United States. Lifeway believes these verbal distribution arrangements allow management the necessary latitude to expand into new areas and markets and establish new relationships with distributors on an ongoing basis. Products sold by the Company to distributors in the United States may be resold by such distributors within or outside of the United States. Certain distributors resell the Company’s products in Mexico, Costa Rica and the Caribbean. The Company’s products distributed in London and Canada are manufactured and shipped to stores by a third party co-packer. Lifeway has not offered any exclusive territories to any distributors.

Distributors are provided Lifeway products at wholesale prices for distribution to their retail accounts. Lifeway believes that the price at which its products are sold to its distributors is competitive with the prices generally paid by distributors for similar products in the markets served. In all areas served, distributors currently deliver the products directly to the refrigerated cases of dairy sections of their retail customers. Each distributor carries a line of Lifeway’s products on its trucks, checks the retail stores for space allocated to Lifeway’s products, determines inventory requirements of the store and places Lifeway products directly into the retailers’ dairy cases. Lifeway believes this method of distribution best serves the needs of each retail store, and is the best available means to ensure consistency and quality of product handling, quality control, flavor selection and favorable retail display. The Company expects customers, either distributors who go into third party retail stores to sell the product they have purchased from us, or the direct retail customer that may service their own stores, as general good business practice to rotate the perishable products, make or obtain frequent delivery of products, replace damaged, old or substandard packages and have deliveries made directly to the refrigerated case. It is to the benefit of the distributor or retailer, as well as the Company, not to have spoiled, out dated, or substandard product on the shelf. Due to the perishable nature of the product, the Company’s distributors and retailers have no right to return any product to the Company.
 

 
 
- 3 -

 
MARKETING

Lifeway continues to promote the verifiable nutritional profile, purity and good taste of its kefir and kefir-based products. Lifeway primarily advertises its products through local radio stations, which advertisements are directed to both users and non-users of cultured milk products of all kinds. In addition, through newspaper and magazine advertising, Lifeway provides educational information on its products and promotes the common perception that the products may be of particular health benefit, including promoting digestion, and continues to educate the public on the possible health benefits which could be derived from the use of kefir and kefir-based products.

In addition to local radio stations, newspapers and magazines, Lifeway promotes further exposure of its products through the internet (via our website, social media and blogs), catalog advertising and in-store demonstrations, and participation in various trade shows. Lifeway also sponsors several different sporting events in the Chicago metropolitan area as an additional marketing tool.

COMPETITION

Although Lifeway faces a small amount of direct competition for kefir products, Lifeway’s kefir-based products compete with all other yogurt and other dairy products. Many producers of yogurt and other dairy products are well-established and have significantly greater financial resources than Lifeway to promote their products.

SUPPLIERS

Lifeway purchases its raw materials, such as milk, sugar and fruit from unaffiliated suppliers, and is not limited or contractually bound to any supplier. Lifeway has ready access to multiple suppliers for all of its raw materials and packaging requirements. Prior to making any purchase, Lifeway determines which supplier can offer the lowest price for the highest quality of product. The raw and packaging materials purchased by Lifeway are considered commodity items and are widely available on the open market. Lifeway owns and operates the means of production of all of its products except that the Company has a co-packer that produces products for distribution in London, England and in Canada.

MAJOR CUSTOMERS

The Company’s sales are predominately to companies in the retail food industry located within the United States of America. Two major customers collectively accounted for approximately 28% of gross sales for the year ended December 31, 2014. These customers accounted for approximately 23% of accounts receivable as of December 31, 2014. In 2014, one distributor, United Natural Foods, Inc., represented approximately 21% of the Company’s total sales and one retail customer represented approximately 7% of the Company’s total sales.

TRANSACTIONS WITH GROUPE DANONE SA

On October 1, 1999, Lifeway and certain members of the Smolyansky family sold shares of restricted common stock to Danone. Later in 1999, Danone purchased additional shares of common stock from certain individuals, including shares purchased in transactions with certain Company affiliates, including Lifeway’s founder Michael Smolyansky, Val Nikolenko, former Vice President of Production, and Pol Sikar, a director, and his affiliates. As a result of these transactions, Danone became the beneficial owner of approximately 20% of the outstanding common stock of Lifeway. In addition  Lifeway and Danone are parties to a Stockholders’ Agreement dated October 1, 1999, as amended through extensions of certain provisions pursuant to which the parties agreed, among other things, that they would not compete with each other with respect to certain kefir products. Pursuant to the Stockholders’ Agreement, Lifeway also granted certain limited rights to Danone, which include a right to nominate one director, anti-dilutive rights relating to future offerings and limited registration rights. The Stockholders’ Agreement also provides that Danone may not own more than 20% of the outstanding common stock of Lifeway as a result of direct or indirect acquisition of shares during the standstill period. Danone’s interest as of December 31, 2014 was approximately 21.1% due to reductions in Lifeway’s shares outstanding, primarily due to share repurchases by Lifeway. The terms of the non-compete obligation and the standstill period each expired on December 31, 2010. The remaining provisions of the Stockholders’ Agreement are in full force and effect.
 
 
 
- 4 -

 
PATENTS, TRADEMARKS, LICENSES, ROYALTY AGREEMENTS

All trademark registrations have been granted by the United States Patent and Trademark Office (“USPTO”), unless otherwise noted below. Each trademark registration may be renewed upon expiration. Lifeway intends to make all timely filings as required for all trademarks listed.

Mark/Reg. No.
Goods/Services
Date of
Registration
Expiration of
Registration
ProBug Design 1,
Reg. No. 3266378
dairy-based beverages; dairy-based food beverages; kefir; soy- based food beverage used as milk substitute
July 17, 2007
July 17, 2017
ProBug Design 2,
Reg. No. 3263130
dairy-based beverages; dairy-based food beverages; kefir; soy- based food beverage used as milk substitute
July 10, 2007
July 10, 2017
Penelope ProBug Design,
Reg. No. 3408792
dairy-based beverages; dairy-based food beverages; kefir; soy- based food beverage used as milk substitute
April 8, 2008
April 8, 2018
BA3APHBIII (a Stylized
presentation of “bazarny” in
Cyrillic characters), Reg. No.
3590660
cultured milk products, excluding ice cream, ice milk and frozen yogurt; cheeses and cottage cheese
March 17, 2009
March 17, 2019
BAMBINO,
Reg. No. 2770522
cheeses, cottage cheeses and other dairy products, excluding ice cream, ice milk, and frozen yogurt
October 7, 2003
October 7, 2023
BAZARNY,
Reg. No. 3597883
cultured milk products, excluding ice cream, ice milk and frozen yogurt; cheeses and cottage cheese
March 31, 2009
March 31, 2019
BIO KEFIR,
Reg. No. 3886709
yogurt, cheeses, cottage cheeses and other milk products, excluding ice cream, ice milk and frozen yogurt
December 7, 2010
December 7, 2020
GOO-BERRY PIE,
Reg. No. 3405134
dairy-based beverages; dairy-based food beverages; kefir
April 1, 2008
April 1, 2018
HELIOS NUTRITION,
Reg. No. 2283716
health foods, functional foods and medical foods, namely, dairy products excluding ice cream, ice milk and frozen yogurt
October 5, 1999
October 5, 2019
KOROVKA,
Reg. No. 2504027
dairy-based spread
November 6, 2001
November 6, 2021
KPECTBRHCKNN (a
Stylized presentation of
“krestyanskiy” in Cyrillic
characters-means “peasant”),
Reg. No. 2187363
cheeses, cottage cheeses and other milk products excluding ice cream, ice milk and frozen yogurt
September 8, 1998
September 8, 2018
 
 
 
 
- 5 -

 
 
KWASHENKA,
Reg. No. 2135974
kefir, yogurt, cheeses, cottage cheeses and other milk products, excluding ice cream, ice milk and frozen yogurt
February 10, 1998
February 10, 2018
LA FRUTA,
Reg. No. 2937061
cultured milk products, excluding ice cream, ice milk and frozen yogurt
March 29, 2005
September 29, 2015
LIFEWAY,
Reg. No. 1571136
cheese and kefir
December 12, 1989
December 12, 2019
ORANGE CREAMY CRAWLER,
Reg. No. 3263128
dairy-based beverages; dairy-based food beverages; kefir; soy- based food beverage used as milk substitute
July 10, 2007
July 10, 2017
PHYTOBOOST,
Reg. No. 3982487
dairy-based beverages; dairy-based food beverages; kefir; soy-based food beverage used as a milk substitute
June 21, 2011
June 21, 2021
PLAYGROUP PACK,
Reg. No. 3634999
fruit juices
June 9, 2009
June 9, 2019
PRIDE OF MAIN STREET, MN
Reg. No. 12947
dairy product
November 9, 1987
November 9, 2017
PRO2O,
Reg. No. 4226923
dairy-based beverages; dairy-based food beverages; kefir; soy-based food beverage used as a milk substitute beverages, namely, water and fruit and vegetable juices and fruit juices flavored with tea
October 16, 2012
October 16, 2022
 
 
 
 
- 6 -

 
 
 
PROBUGS,
Reg. No. 3263129
dairy-based beverages; dairy-based food beverages; kefir; soy- based food beverage used as milk substitute
July 10, 2007
July 10, 2017
STARFRUIT,
Reg. No. 3513252
franchise services, namely, offering technical and business management assistance in the establishment and operation of restaurants
October 7, 2008
October 7, 2018
STARFRUIT,
Reg. No. 3454746
restaurant services
June 24, 2008
June 24, 2018
STARFRUIT (Stylized),
Reg. No. 3879939
kefir
November 23, 2010
November 23, 2020
SUBLIME SLIME LIME,
Reg. No. 3263134
dairy-based beverages; dairy-based food beverages; kefir; soy- based food beverage used as milk substitute
July 10, 2007
July 10, 2017
SWEET KISS,
Reg. No. 2135975
cheeses, cottage cheeses and other milk products, excluding ice cream, ice milk and frozen yogurt
February 10, 1998
February 10, 2018


Lifeway also claims common law rights to, the following unregistered trademarks: “Elita,” “Healthy Foods Today for a Better Life Tomorrow,” “Milkshake Smoothie,” “White Cheese,” “Drink It to Be Beautiful Inside and Out,” “Golden Zesta” and “Pride of Main Street.”

REGULATION

Lifeway is subject to regulation by federal, state and local governmental authorities regarding the distribution and sale of food products. Although Lifeway believes that it currently has all material government permits, licenses, qualifications and approvals for its operations, there can be no assurance that Lifeway will be able to maintain its existing licenses and permits or to obtain any future licenses, permits, qualifications or approvals which may be required for the operation of Lifeway’s business.

Lifeway believes that it is currently in compliance with all applicable environmental laws and that the cost of such compliance was not material to the financial position of Lifeway.

RESEARCH AND DEVELOPMENT

Lifeway continues its program of new product development, centered around the nutritional and “low calorie” features of its proprietary kefir formulas.

Lifeway conducts primarily all of its research internally, but at times will employ the services of an outside testing facility. During 2014, 2013 and 2012, the amount Lifeway expended for research and new product development was not material to the financial position of Lifeway and no amount was customer supported.

 
- 7 -

 
SEASONALITY

The Company’s business is not seasonal.

EMPLOYEES

Lifeway currently employs approximately 360 employees, all of whom are full-time employees and approximately 320 of whom are engaged in the manufacturing of the Company’s products. None of Lifeway’s employees are covered by collective bargaining agreements. The Company only has distributor relationships with third party distributors. No distributors are considered to be employees. Company-owned vehicles are used by Company employees for local same day deliveries only and revenue is recognized on the date of delivery to the end retail customers. Drivers of those vehicles are employees of the Company and all payroll, withholdings, and income taxes are accounted for in the same manner.

AVAILABLE INFORMATION

The Company maintains a corporate website for investors at www.lifeway.net and it makes available, free of charge, through this website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports that the Company files with or furnishes to the Securities and Exchange Commission (the “SEC”), as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. Information on the Company’s website is not part of this report.

 
ITEM 1A.       RISK FACTORS.

In evaluating and understanding us and our business, you should carefully consider the risks described below, in conjunction with all of the other information included in this Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II, Item 7 and “Quantitative and Qualitative Disclosures About Market Risk” contained in Part II, Item 7A. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may become important factors that adversely affect our business. If any of the events or circumstances described in the following risk factors actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected.
 
Our product categories face a high level of competition, which could negatively impact our sales and results of operations.
 
We face significant competition in each of our product categories. Competition in our product categories is based on product innovation, product quality, price, brand recognition and loyalty, effectiveness of marketing, promotional activity, and our ability to identify and satisfy consumer tastes and preferences. We believe that our brands have benefited in many cases from being the first to introduce products in their categories, and their success has attracted competition from other food and beverage companies that produce branded products, as well as from private label competitors. Some of our competitors, such as Groupe Danone, General Mills, Inc., Kraft Foods Group, Inc., Nestle S.A., Chiquita Brands International, Inc. and Dole Food Company, Inc. have substantial financial and marketing resources. These competitors and others may be able to introduce innovative products more quickly or market their products more successfully than we can, which could cause our growth rate in certain categories to be slower than we have forecasted and could cause us to lose sales.
 
We also compete, particularly in our premium dairy and organic greens and produce categories, with producers of non-organic products, which usually have lower production costs. As a result, non-organic producers may be able to offer conventional products to customers at lower costs than organic products. This could cause us to lower our prices, resulting in lower profitability or, in the alternative, cause us to lose market share if we fail to lower prices. Furthermore, private label competitors are generally able to sell their products at lower prices because private label products typically have lower marketing costs than their branded counterparts. If our products fail to compete successfully with other branded or private label offerings in the industry, demand for our products and our sales volumes could be negatively impacted.
 
Additionally, due to high levels of competition in our product categories, certain of our key retailers may demand price concessions on our products or may become more resistant to price increases for our products. Increased price competition and resistance to price increases have had, and may continue to have, a negative effect on our results of operations.
 
 
 
- 8 -

 
We may not be able to successfully implement our growth strategy for our brands on a timely basis or at all.
 
We believe that our future success depends, in part, on our ability to implement our growth strategy of leveraging our existing brands and products to drive increased sales. Our ability to implement this strategy depends, among other things, on our ability to:
 
●   
enter into distribution and other strategic arrangements with third-party retailers and other potential distributors of our products; 
 
●   
compete successfully in the product categories in which we choose to operate; 
 
●   
introduce new and appealing products and innovate successfully on our existing products; 
 
●   
develop and maintain consumer interest in our brands; 
 
●   
increase our brand recognition and loyalty; and 
 
●   
enter into strategic arrangements with third-party growers and other providers to supply our necessary raw materials.
 
We may not be able to implement this growth strategy successfully, and our sales and income growth rates may not be sustainable over time. Our sales and results of operations will be negatively affected if we fail to implement our growth strategy or if we invest resources in a growth strategy that ultimately proves unsuccessful.
 
If we fail to anticipate and respond to changes in consumer preferences, demand for our products could decline.
 
Consumer tastes and preferences are difficult to predict and evolve over time. Demand for our products depends on our ability to identify and offer products that appeal to these shifting preferences. Factors that may affect consumer tastes and preferences include:
 
●   
dietary trends and increased attention to nutritional values, such as the sugar, fat, protein, fiber or calorie content of different foods and beverages;
 
●   
concerns regarding the health effects of specific ingredients and nutrients, such as sugar, other sweeteners, dairy, soybeans, nuts, oils, vitamins, fiber and minerals;
 
●   
concerns regarding the public health consequences associated with obesity, particularly among young people; and
 
●   
increasing awareness of the environmental and social effects of product production. If consumer demand for our products declines, our sales volumes and our business could be negatively affected.
 
We are subject to the risk of product contamination and product liability claims, which could harm our reputation, force us to recall products and incur substantial costs.
 
The sale of food products for human consumption involves the risk of injury to consumers. Such injuries may result from tampering by unauthorized third parties, misbranding, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, storage, handling or transportation phases. We also may be subject to liability if our products or operations violate applicable laws or regulations, including environmental, health, and safety requirements, or in the event our products cause injury, illness, or death.
 
In addition, our product advertising could make us the target of claims relating to false or deceptive advertising under U.S. federal and state laws, including the consumer protection statutes of some states, or laws of other jurisdictions in which we operate. Lifeway is from time to time engaged in such litigation matters none of which presently is expected to have a material adverse effect on its business results or operations.
 
 
- 9 -

 
A significant product liability, consumer fraud, or other legal judgment against us or a widespread product recall would negatively impact our profitability. Moreover, claims or liabilities of this sort might not be covered by insurance or by any rights of indemnity or contribution that we may have against others. Even if a product liability, consumer fraud, or other claim is found to be without merit or is otherwise unsuccessful, the negative publicity surrounding such assertions regarding our products or processes could materially and adversely affect our reputation and brand image, particularly in categories that are promoted as having strong health and wellness credentials. Any loss of consumer confidence in our product ingredients or in the safety and quality of our products would be difficult and costly to overcome.
 
The loss of any of our largest customers could negatively impact our sales and results of operations.
 
Two of our customers together accounted for 28% of our net sales and 23% of accounts receivables in the fiscal year ended December 31, 2014. We do not generally enter into written agreements with our customers, and where such agreements exist, they are generally terminable at will by the customer. In addition, our customers sometimes award contracts based on competitive bidding, which could result in lower profits for contracts we win and the loss of business for contracts we lose. The loss of any large customer for an extended period of time could negatively affect our sales and results of operations.
 
We may not be able to successfully complete strategic acquisitions, establish joint ventures, or integrate brands that we acquire.
 
We have grown and intend to continue to grow our business in part through the acquisition of new brands and the establishment of joint ventures in the United States, in Europe, and globally. We cannot be certain that we will successfully be able to:
 
●   
identify suitable acquisition candidates or joint venture partners and accurately assess their value, growth potential, strengths, weaknesses, contingent and other liabilities, and potential profitability;
 
●   
secure regulatory clearance for our acquisitions and joint ventures;
 
●   
negotiate acquisitions and joint ventures on terms acceptable to us; or
 
●   
integrate any acquisitions that we complete.
 
Acquired companies or brands may not achieve the level of sales or profitability that justify our investment in them, or an acquired company may have unidentified liabilities for which we, as a successor owner, may be responsible. These transactions typically involve a number of risks and present financial and other challenges, including the existence of unknown disputes, liabilities, or contingencies and changes in the industry, location, or regulatory or political environment in which these investments are located, that may arise after entering into such arrangements.
 
The success of any acquisitions we complete will depend on our ability to effectively integrate the acquired brands or products into our existing operations. We may experience difficulty entering new categories or geographies, integrating new products into our product mix, integrating an acquired brand’s distribution channels and sales force, achieving anticipated cost savings, or retaining key personnel and customers of the acquired business. Integrating an acquired brand into our existing operations requires management resources and may divert management’s attention from our day-to-day operations. If we are not successful in integrating the operations of acquired brands, or in executing strategies and business plans related to our joint ventures, our business could be negatively affected.
 
We may have to pay cash, incur debt, or issue equity, equity-linked, or debt securities to pay for any such acquisition, any of which could adversely affect our financial results.
 
Our continued success depends on our ability to innovate successfully and to innovate on a cost-effective basis.
 
A key element of our growth strategy is to introduce new and appealing products and to successfully innovate on our existing products. Success in product development is affected by our ability to anticipate consumer preferences, and to utilize our management’s ability to launch new or improved products successfully and on a cost-effective basis. Furthermore, the development and introduction of new products requires substantial marketing expenditures, which we may not be able to finance or which we may be unable to recover if the new products do not achieve commercial success and gain widespread market acceptance. If we are unsuccessful in our product innovation efforts and demand for our existing products declines, our business could be negatively affected.
 
 
- 10 -

 
Reduced availability of raw materials and other inputs, as well as increased costs for our raw materials and other inputs, could adversely affect us.
 
Our business depends heavily on raw materials, such as conventional and organic raw milk, used in the production of our products. Our raw materials are generally sourced from third-party suppliers, and we are not assured of continued supply, pricing, or exclusive access to raw materials from any of these suppliers. In addition, a substantial portion of our raw materials are agricultural products, which are vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, frost, earthquakes, and pestilence. Adverse weather conditions and natural disasters also can lower dairy and crop yields and reduce supplies of these ingredients or increase their prices. Other events that adversely affect our third-party suppliers and that are out of our control could also impair our ability to obtain the raw materials and other inputs that we need in the quantities and at the prices that we desire. Such events include problems with our suppliers’ businesses, finances, labor relations, costs, production, insurance, and reputation. Over the past several years, we have experienced increased costs as a result of weather conditions and other events outside our and our suppliers’ control and this may continue given recent weather conditions, which may negatively affect our business.
 
The organic ingredients (including milk) for our products is less plentiful and available from fewer suppliers than their conventional counterparts. Competition with other manufacturers in the procurement of organic product ingredients may increase in the future if consumer demand for organic products increases. In addition, the dairy industry continues to experience periodic imbalances between supply and demand for organic raw milk. Industry regulation and the costs of organic farming compared to costs of conventional farming can impact the supply of organic raw milk in the market. Oversupply levels of organic raw milk can increase competitive pressure on our products and pricing, while supply shortages can cause product shortages and higher costs to us. Cost increases in raw materials and other inputs could cause our profits to decrease significantly compared to prior periods, as we may be unable to increase our prices to offset the increased cost of these raw materials and other inputs. If we are unable to obtain raw materials and other inputs for our products or offset any increased costs for such raw materials and inputs, our business could be negatively affected.
 
Failure to maintain sufficient internal production capacity may result in our inability to meet customer demand and/or increase our operating costs and capital expenditures.
 
The success of our business depends, in part, on maintaining a strong production platform and we rely primarily on internal production resources to fulfill our manufacturing needs. Certain of our manufacturing plants are operating at high rates of utilization, and we may need to expand our production facilities or increase our reliance on third parties to provide manufacturing and supply services, commonly referred to as “co-packing” agreements, for a number of our products. A failure by any future co-packers to comply with food safety, environmental, or other laws and regulations may disrupt our supply of products. In addition, we have experienced, and expect to continue to experience, increased distribution and warehousing costs due to capacity constraints resulting from our growth. If we need to enter into co-packing, warehousing or distribution agreements in the future, we can provide no assurance that we would be able to find acceptable third party providers or enter into agreements on satisfactory terms or at all. Our inability to maintain sufficient internal capacity or establish satisfactory co-packing, warehousing and distribution arrangements could limit our ability to operate our business or implement our strategic growth plan, and could negatively affect our sales volumes and results of operations. In addition, we may need to expand our internal capacity, which would increase our operating costs and could require significant capital expenditures. If we cannot maintain sufficient production, warehousing and distribution capacity, either internally or through third party agreements, we may be unable to meet customer demand and/or our manufacturing, distribution and warehousing costs may increase, which could negatively affect our business.
 
An economic downturn could negatively affect our sales and results of operations.
 
The branded food and beverage industry is sensitive to changes in international, national, and local economic conditions.  The most recent economic downturn has had an adverse effect on consumer spending patterns. Consumers may shift purchases to lower-priced or private label products or forego certain purchases altogether. They may also reduce the number of organic and premium products that they purchase because organic and premium products generally have higher retail prices than their conventional counterparts. Lower consumer demand resulting from an economic downturn could decrease our sales volumes and negatively affect our results of operations.
 
 
 
 
 
 
- 11 -

 
Disruption of our supply or distribution chains could adversely affect our business.
 
Damage or disruption to our manufacturing or distribution capabilities due to weather, natural disaster, fire, environmental incident, terrorism, pandemic, strikes, the financial or operational instability of key suppliers, distributors, warehousing, and transportation providers, or other reasons could impair our ability to manufacture or distribute our products. In addition, most of our products are processed in a single facility, and damage or disruption to this facility could impair our ability to process and sell those products. If we are unable or it is not financially feasible to mitigate the likelihood or potential impact of such events, our business and results of operations could be negatively affected and additional resources could be required to restore our supply chain.
 
Our earnings are sensitive to fluctuations in market prices and demand for our products.
 
Excess supply can cause significant price competition in our businesses. Growing conditions in various parts of the world, particularly weather conditions such as windstorms, floods, droughts and freezes, as well as diseases and pests, are primary factors affecting market prices because of their influence on the supply and quality of product.
 
Some of our products are highly perishable and generally must be refrigerated and brought to market and sold soon after production. The selling price received for each type of product depends on all of these factors, including the availability and quality of the products in the market, and the availability and quality of competing types of products.
 
In addition, general public perceptions regarding the quality, safety or health risks associated with particular food products could reduce demand and prices for some of our products. To the extent that consumer preferences evolve away from products that we produce for health or other reasons, and we are unable to modify our products or to develop products that satisfy new consumer preferences, there will be a decreased demand for our products. However, even if market prices are unfavorable, produce items which are ready to be, or have been, harvested must be brought to market promptly. A decrease in the selling price received for our products due to the factors described above could have a material adverse effect on our business, results of operations and financial condition.
 
Our substantial debt and financial obligations could adversely affect our financial condition and ability to operate our business, and we may incur additional debt.
 
As of December 31, 2014, we had outstanding borrowings of approximately $9 million substantially all of which consists of term loan borrowings from The Private Bank. We also had additional borrowing capacity of approximately $5 million under our line of credit from The Private Bank, of which none was outstanding as of December 31, 2014.
 
Our loan agreements contain certain restrictions and requirements that among other things:
 
●   
require us to maintain a minimum fixed charged ratio and a tangible net worth thresholds;
 
●   
limit our ability to obtain additional financing in the future for working capital, capital expenditures and acquisitions, to fund growth or for general corporate purposes;
 
●   
limit our future ability to refinance our indebtedness on terms acceptable to us or at all;
 
●   
limit our flexibility in planning for or reacting to changes in our business and market conditions or in funding our strategic growth plan; and
 
●   
impose on us financial and operational restrictions.
 
Our debt level and the terms of our financing arrangements could adversely affect our financial condition and limit our ability to successfully implement our growth strategy.
 
Our ability to meet our debt service obligations will depend on our future performance, which will be affected by the other risk factors described in this Annual Report on Form 10-K. If we do not generate enough cash flow to pay our debt service obligations, we may be required to refinance all or part of our existing debt, sell our assets, borrow more money or raise equity. There is no guarantee that we will be able to take any of these actions on a timely basis, on terms satisfactory to us, or at all.
 
 
- 12 -

 
Our notes issued to The Private Bank bear interest at variable rates. If market interest rates increase, it will increase our debt service requirements, which could adversely affect our cash flow.
 
Our loan agreements also contain provisions that restrict our ability to:
 
●   
borrow money or guarantee debt;
 
●   
create liens;
 
●   
make specified types of investments and acquisitions;
 
●   
pay dividends on or redeem or repurchase stock;
 
●   
enter into new lines of business;
 
●   
enter into transactions with affiliates; and
 
●   
sell assets or merge with other companies.
 
These restrictions on the operation of our business could harm us by, among other things, limiting our ability to take advantage of financing, merger and acquisition opportunities, and other corporate opportunities. Various risks, uncertainties, and events beyond our control could affect our ability to comply with these covenants. A default would permit lenders to accelerate the maturity of the debt under the credit agreement and to foreclose upon the collateral securing the debt.
 
We may need additional financing in the future, and we may not be able to obtain that financing.
 
From time to time, we may need additional financing to support our business and pursue our growth strategy, including strategic acquisitions. Our ability to obtain additional financing, if and when required, will depend on investor demand, our operating performance, the condition of the capital markets, and other factors.  We cannot assure you that additional financing will be available to us on favorable terms when required, or at all. If we raise additional funds through the issuance of equity, equity-linked, or debt securities, those securities may have rights, preferences, or privileges senior to those of our common stock, and, in the case of equity and equity-linked securities, our existing stockholders may experience dilution.
 
Our results of operations will fluctuate from quarter to quarter, which makes them difficult to predict.
 
Our quarterly financial results have fluctuated in the past and will fluctuate in the future. Our financial results in any given quarter can be influenced by numerous factors, many of which we are unable to predict or are outside of our control, including:
 
●   
product quality issues or negative publicity about our products or ingredients;
 
●   
investments that we make to acquire new brands and to launch products;
 
●   
changes in consumer preferences and discretionary spending;
 
●   
availability of raw materials and fluctuations in their prices; and
 
●   
variations in general economic conditions.
 
As a result of these factors, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year.
 
 
 
 
- 13 -

 
Our international operations subject us to business risks that could cause our revenue and profitability to decline.
 
We plan to expand distribution worldwide. Risks associated with our operations as we expand outside of the United States may include, among other things:
 
●   
legal and regulatory requirements in multiple jurisdictions that differ from those in the United States and change from time to time, such as tax, labor, and trade laws, as well as laws that affect our ability to manufacture, market, or sell our products;
 
●   
foreign currency exposures;
 
●   
political and economic instability, such as the recent debt crisis in Europe;
 
●   
trade protection measures and price controls; and
 
●   
diminished protection of intellectual property in some countries.
 
If one or more of these business risks occur, our business and results of operations could be negatively affected.
 
Loss of our key management or other personnel, or an inability to attract such management and other personnel, could negatively impact our business.
 
We depend on the skills, working relationships, and continued services of key personnel, including our experienced senior management team. We also depend on our ability to attract and retain qualified personnel to operate and expand our business. If we lose one or more members of our senior management team, or if we fail to attract talented new employees, our business and results of operations could be negatively affected.
 
Our workforce could become unionized in the future, which could materially and adversely affect the stability of our production and materially reduce our profitability.
 
Although none of our employees are currently represented by a labor union, our employees have the right at any time under the National Labor Relations Act to form or affiliate with a union and certain employees at our Wisconsin facility have undertaken the process of asking for a vote on forming a union. If our employees choose to form or affiliate with a union and the terms of a union collective bargaining agreement are significantly different from our current compensation and job assignment arrangements with our employees, these arrangements could materially and adversely affect the stability of our operations and materially reduce our profitability.
 
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products and brands.
 
We consider our intellectual property rights, particularly our trademarks, but also our trade secrets, copyrights, and licenses, to be a significant and valuable aspect of our business. We attempt to protect our intellectual property rights through a combination of trademark, copyright, and trade secret laws, as well as licensing agreements, third-party confidentiality, nondisclosure, and assignment agreements, and by policing third-party misuses of our intellectual property. Our failure to obtain or maintain adequate protection of our intellectual property rights, or any change in law or other changes that serve to lessen or remove the current legal protections of our intellectual property, may diminish our competitiveness and could materially harm our business.
 
We also face the risk of claims that we have infringed third parties’ intellectual property rights. Any claims of intellectual property infringement, even those without merit, could be expensive and time consuming to defend, cause us to cease making, licensing, or using products that incorporate the challenged intellectual property, require us to redesign or rebrand our products or packaging, divert management’s attention and resources, or require us to enter into royalty or licensing agreements to obtain the right to use a third party’s intellectual property. Any royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all. Additionally, a successful claim of infringement against us could result in our being required to pay significant damages, enter into costly license or royalty agreements, or stop the sale of certain products, any of which could have a negative effect on our results of operations.
 
 
- 14 -

 
Litigation or legal proceedings could expose us to significant liabilities and have a negative impact on our reputation.
 
We are party to various litigation claims and legal proceedings in the ordinary course of our business. In the opinion of management, the resolution of current litigation claims and legal proceedings will not have a material adverse effect on the Company’s consolidated statements of financial condition. We evaluate these litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we establish reserves or disclose the relevant litigation claims or legal proceedings, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a significant amount of management judgment. Actual outcomes or losses may differ materially from our current assessments and estimates. If actual outcomes or losses differ materially from our current assessments and estimates or additional litigation or legal proceedings are initiated, we could be exposed to significant liabilities.
 
Additionally, a significant product liability, consumer fraud, or other legal judgment against us or a widespread product recall would negatively impact our profitability. Claims or liabilities of this sort might not be covered by insurance or by any rights of indemnity or contribution that we may have against others. Even if a product liability, consumer fraud, or other claim is found to be without merit or is otherwise unsuccessful, the negative publicity surrounding such assertions regarding our products or processes could materially and adversely affect our reputation and brand image, particularly in categories that are promoted as having strong health and wellness credentials. Any loss of consumer confidence in our product ingredients or in the safety and quality of our products would be difficult and costly to overcome.
 
Our business is subject to various environmental and health and safety laws and regulations, which may increase our compliance costs or subject us to liabilities.
 
Our business operations are subject to numerous requirements in the United States relating to the protection of the environment and health and safety matters, including the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and the National Organic Standards of the U.S. Department of Agriculture, as well as similar state and local statutes and regulations in the United States and in each of the countries in which we do business in Europe. These laws and regulations govern, among other things, air emissions and the discharge of wastewater and other pollutants, the use of refrigerants, the handling and disposal of hazardous materials, and the cleanup of contamination in the environment. We could incur significant costs, including fines, penalties and other sanctions, cleanup costs, and third-party claims for property damage or personal injury as a result of the failure to comply with, or liabilities under, environmental, health, and safety requirements. New legislation, as well as current federal and other state regulatory initiatives relating to these environmental matters, could require us to replace equipment, install additional pollution controls, purchase various emission allowances, or curtail operations. These costs could negatively affect our results of operations and financial condition.
 
Violations of laws or regulations related to the food industry, as well as new laws or regulations or changes to existing laws or regulations related to the food industry, could adversely affect our business.
 
The food production and marketing industry is subject to a variety of federal, state, local, and foreign laws and regulations, including food safety requirements related to the ingredients, manufacture, processing, storage, marketing, advertising, labeling, and distribution of our products, as well as those related to worker health and workplace safety. Our activities, both in and outside of the United States, are subject to extensive regulation. We are regulated by, among other federal and state authorities, the U.S. FDA, the U.S. Federal Trade Commission (“FTC”), and the U.S. Departments of Agriculture, Commerce, and Labor, as well as by similar authorities abroad within the regulatory framework of the European Union and its members. Governmental regulations also affect taxes and levies, healthcare costs, energy usage, immigration, and other labor issues, all of which may have a direct or indirect effect on our business or those of our customers or suppliers. In addition, the marketing and advertising of our products could make us the target of claims relating to alleged false or deceptive advertising under federal, state, and foreign laws and regulations, and we may be subject to initiatives that limit or prohibit the marketing and advertising of our products to children. We are also subject to federal laws and regulations relating to our organic products and production. For example, as required by the National Organic Program (“NOP”), we rely on third parties to certify certain of our products and production locations as organic. Because the Organic Foods Production Act of 1990, which created the NOP, was so recently adopted, many regulations and informal positions taken by the NOP are subject to continued review and scrutiny. Changes in these laws or regulations or the introduction of new laws or regulations could increase our compliance costs, increase other costs of doing business for us, our customers, or our suppliers, or restrict our actions, which could adversely affect our results of operations. In some cases, increased regulatory scrutiny could interrupt distribution of our products, as could be the case in the United States as the FDA enacts the Food Safety Modernization Act of 2011, or force changes in our production processes and our products. Further, if we are found to be in violation of applicable laws and regulations in these areas, we could be subject to civil remedies, including fines, injunctions, or recalls, as well as potential criminal sanctions, any of which could have a material adverse effect on our business.
 
 
- 15 -

 
Three of our directors and executive officers control a majority of our common stock and their interests may not align with the interests of our other shareholders.
 
Ludmila Smolyansky, the chairman of our board, Julie Smolyansky, our chief executive officer, president and director and Edward Smolyansky, our chief financial and accounting officer, chief operating officer, treasurer and secretary (together, the “Smolyansky Family”) own approximately 49.6% of our issued and outstanding common stock. This significant concentration of share ownership may adversely affect the trading price of our common stock because investors often perceive a disadvantage in owning shares in a company with one or several controlling shareholders. Furthermore, our directors and officers, as a group, which own in excess of 49.8% of our issued and outstanding common stock have the ability to significantly influence or control the outcome of all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. This concentration of ownership may have the effect of delaying or preventing a change in control of our company which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our common stock. In addition, without the consent of the Smolyansky Family, we could be prevented from entering into transactions that could be beneficial to us. The Smolyansky Family may cause us to take actions that are opposed by other shareholders as their interests may differ from those of other shareholders.

We have identified material weaknesses in our internal control over financial reporting. Our failure to establish and maintain effective internal control over financial reporting could result in material misstatements in our financial statements, our failure to meet our reporting obligations and cause investors to lose confidence in our reported financial information, which in turn could cause the trading price of our securities to decline.

We have identified material weaknesses in our internal control over financial reporting. A description of the material weaknesses can be found in Item 9A of this report. As a result of such weaknesses, our management concluded that our disclosure controls and procedures and internal control over financial reporting were not effective as of December 31, 2014. These material weaknesses have impeded the Company’s ability to timely file annual and quarterly reports with the Securities and Exchange Commission, including this Annual Report on Form 10-K for the fiscal year ended December 31, 2014 as well as the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2015. For further information regarding this matter, please refer to Item 9A. Controls and Procedures.

Unless and until these material weaknesses have been remediated, or should new material weaknesses arise or be discovered in the future material misstatements could occur and go undetected in the Company’s interim or annual consolidated financial statements and we may be required to restate our financial statements.  In addition, we may experience delays in satisfying our reporting obligations or to comply with SEC rules and regulations, which could result in investigations and sanctions by regulatory authorities. Any of these results could adversely affect our business and the value of our common stock.

 
ITEM 1B.       UNRESOLVED STAFF COMMENTS.

None.


ITEM 2.          PROPERTIES.

On May 16, 1988, Lifeway purchased an approximately 26,000 square foot parcel of real property, including an approximately 8,500 square foot one-story brick building in good condition, located at 7625 N. Austin Avenue, Skokie, Illinois. Lifeway uses this facility for manufacturing and storage and has no plans to improve or renovate this property. Lifeway is the only occupant of this property and presently holds fee simple title subject to a mortgage which secures the property as collateral for certain loans to Lifeway from The Private Bank & Trust as discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation (the “Loans”). The Loans are secured by all of the assets of Lifeway, including a first mortgage on Lifeway’s real property located in Skokie, Illinois, Niles, Illinois and Morton Grove, Illinois. A portion of the proceeds of the Loans was used to pay off previously existing mortgage loans. The value of this property may be subject to real estate market forces that typically affect industrial real estate in the area immediately surrounding the property.
 
 
 
 

 
 
- 16 -

 
On October 16, 1996, Lifeway purchased a 110,000 square foot commercially-zoned parcel of real property, including an approximately 50,000 square foot one-story brick building in good condition, located at 6431 Oakton Avenue, Morton Grove, Illinois. This property is used as Lifeway’s corporate headquarters and main manufacturing facility. This property has been improved every year since the time of purchase by the addition of custom-built refrigerated storage space and the addition of various machinery and equipment used to manufacture, package and store Lifeway’s products. Lifeway is the only occupant of this property and presently holds fee simple title subject to a mortgage which secures the property as collateral for the Loans discussed above. The value of this property may be subject to real estate market forces that typically affect industrial real estate in the area immediately surrounding the property.

In June 2005, the Company purchased a 100,000 square foot distribution and warehousing facility that is equipped with 40,000 square feet of refrigeration. The facility, located at 6101 Gross Point Road in Niles, Illinois, approximately 50,000 square foot building, less than a mile away. The additional space at the Company’s main plant is being used to expand production capacity for the Company’s kefir and other probiotic products. Lifeway is the only occupant of this property and presently holds fee simple title subject to a mortgage which secures the property as collateral for the Loans discussed above. The value of this property may be subject to real estate market forces that typically affect industrial real estate in the area immediately surrounding the property.

Included in the purchase of Pride of Main Street Dairy on August 3, 2006, Lifeway acquired an approximately 35,000 square foot commercially-zoned parcel of real estate located at 214 Main Street S. Sauk Centre, Minnesota, including a 16,000 square foot two-story brick building used for production, and a 5,600 square foot storage facility. This property is used as the main headquarters and main production facility for Pride of Main Street Dairy. The building was built in the 1920’s with an addition in 1990. The facility is being used to produce all of the Pride of Main Street Dairy products, and approximately 70% of the Helios Nutrition Organic Kefir, with the remaining 30% being produced in Lifeway’s main production facility in Morton Grove, Illinois. Lifeway is the only occupant of this property and presently holds fee simple title subject to negative mortgage pledge as part of the collateral package for the Loans discussed above. The value of this property may be subject to real estate market forces that typically affect industrial real estate in the area immediately surrounding the property.

On February 6, 2009, in connection with the Company’s acquisition of Fresh Made, Inc., Lifeway also acquired 1.135 acres of land in Philadelphia. This facility is used to store raw materials and finished goods.  Lifeway is the only occupant of this property and presently holds fee simple title subject to a negative mortgage pledge as part of the collateral package for the Loans discussed above. The value of this property may be subject to real estate market forces that typically affect industrial real estate in the area immediately surrounding the property.

On July 2, 2013 the Company, through its wholly-owned subsidiary Lifeway Wisconsin, consummated the purchase of certain assets of Golden Guernsey’s dairy manufacturing, bottling and distribution plant, including land, a 170,000 square foot facility in Waukesha, Wisconsin and certain equipment used in the milk separation process. The property has been improved since the time of purchase by the addition of high-tech and high-speed machinery and equipment used in the manufacture and packaging of product. The facility is used to manufacture, package and store Lifeway products. Production and packaging at the facility commenced on June, 2015.  Lifeway is the only occupant of this property and presently holds fee simple title subject to negative mortgage pledge as part of the collateral package for the Loans discussed above.

For financial statement and tax purposes, Lifeway depreciates its buildings and improvements on a straight line basis over 31 and 39 years.  Management believes that Lifeway has adequate insurance coverage for all it's properties.


ITEM 3.          LEGAL PROCEEDINGS.

Lifeway is not party to any material pending legal proceedings. Lifeway is from time to time engaged in litigation matters arising in the ordinary course of business none of which presently is expected to have a material adverse effect on its business results or operations.


ITEM 4.          MINE SAFETY DISCLOSURES.

Not applicable.

 
- 17 -

 
PART II

ITEM 5.         MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

MARKET INFORMATION

Lifeway’s Common Stock, no par value, the only class of common equity of Lifeway, is traded on The Nasdaq Global Market under the symbol “LWAY.” Trading commenced on March 29, 1988.

The high and low sales prices for Lifeway’s Common Stock for the quarterly periods within the two most recent fiscal years, as reported by The Nasdaq Global Market, is set forth in the following table:
 
 
Low
High
First Qtr. 2013
$   8.39
$ 14.00
Second Qtr. 2013
$ 10.65
$ 18.38
Third Qtr. 2013
$ 12.50
$ 19.99
Fourth Qtr. 2013
$ 12.85
$ 17.20
     
First Qtr. 2014
 $  13.35 
$ 15.99
Second Qtr. 2014
    $  12.59    
    $ 15.50    
Third Qtr. 2014
$  12.34
    $ 14.78    
Fourth Qtr. 2014
     $  15.00     
 $ 20.33 


As of July 28, 2015, there were approximately 67 holders of record of Lifeway’s Common Stock. The Company has no information regarding beneficial owners whose shares are held in street name.

DIVIDENDS

Lifeway declared a cash dividend of $0.08 per share during the fiscal year ended December 31, 2013 and a cash dividend of $0.07 per share during the fiscal year ended December 31, 2012.  We do not currently intend to pay regular annual distributions to our common shareholders. Future distributions will be declared and paid at the discretion of our Board of Directors, and will depend upon cash generated by operating activities, our financial condition, capital requirements, and such other factors as our Board of Directors deem relevant.

SALES OF UNREGISTERED SECURITIES

None.

PURCHASES OF THE COMPANY’S SECURITIES

None.

EQUITY COMPENSATION PLAN INFORMATION

Equity Compensation Plan Information is included in Part III, Item 11 – Executive Compensation.

PERFORMANCE GRAPH

The following  graph compares the Company’s cumulative total stockholder return (Common Stock price appreciation plus dividends, on a reinvested basis) over the last five fiscal years with the Russell 2000 Index and the Company’s Peer Group, including, Dean Foods Co., Jamba, Inc. and Tofutti Brands Inc.  The table below assumes an investment of $100 on December 31, 2010 in our common stock, the Russell 2000 Index and the Peer Group. Our stock price performance shown in the table below is not indicative of future stock price performance.
 
 
 

 
 
- 18 -

 


 
2010
2011
2012
2013
2014
Russell 2000
26.81%
-4.18%
14.01%
41.37%
6%
Lifeway
-19.61%
0.94%
-15.18%
82.51%
24.95%
Peer Group
7.26%
0.28%
28.49%
72.24%
33.62%


 
ITEM 6.         SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes thereto that are included in this report.

   
2010
   
2011
   
2012
   
2013
   
2014
 
Net Sales
  $ 58,499,893     $ 69,970,409     $ 81,351,265     $ 97,524,142     $ 118,959,613  
Income from Operations
    6,274,632       5,076,491       8,844,711       8,031,312       4,235,479  
EPS
    0.22       0.17       0.34       0.31       0.12  
Assets
    52,058,731       51,473,308       53,506,626       63,673,801       63,424,438  
Long Term Debt
    6,122,225       5,539,836       4,955,945       8,999,012       8,124,515  
Dividends (per share)
    N/A       N/A       0.07       0.08       N/A  

 

 
 
- 19 -

 
ITEM 7.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion of the financial condition and results of operations for the twelve-months ended December 31, 2014, 2013 and 2012 should be read in conjunction with the audited consolidated financial statements and the notes to those statements that are included elsewhere in this report on Form 10-K. In addition to historical information, the following discussion contains certain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as “may”, “will”, “could”, “expect”, “anticipate”, “intend”, “believe”, “estimate”, “plan”, “predict”, and similar terms or terminology, or the negative of such terms or other comparable terminology. Although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bounds of our knowledge of our business, our actual results could differ materially from those discussed in these statements. Factors that could contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section in Part I, Item 1A. We undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future.

Results of Operation

Comparison of Year Ended December 31, 2014 to Year Ended December 31, 2013

Total consolidated net sales increased by $21,435,471 (approximately 22%) to $118,959,613 during the year ended December 31, 2014 from $97,524,142 during the year ended December 31, 2013, primarily as a result of a $21,249,622 (approximately 20%) increase in total consolidated gross sales to $130,215,716 during the year ended December 31, 2014 from $108,966,094 during the year ended December 31, 2013, offset by a decrease in discounts and allowances in fiscal year 2014 as compared to fiscal year 2013. The increase in total consolidated gross sales resulted primarily from an increase in volume of products sold. The increase included $18,062,178 from an increase in volume of products sold and $3,187,443 from increases in prices of products sold.

Total cost of goods sold, increased by $20,195,525 (approximately 29%) to $90,096,774 during the year ended December 31, 2014 from $69,901,249 during the year ended December 31, 2013. This increase is a result of increases in cost of goods sold, excluding depreciation expense, and depreciation expense.

The following table summarizes our cost of goods sold, excluding depreciation expense:

   
Fiscal Year Ended
December 31,
 
   
2014
   
2013
 
Purchases
 
$
59,405,884
   
$
47,144,509
 
Testing
   
51,331
     
37,363
 
Supplies
   
1,413,622
     
780,016
 
Salaries
   
9,408,860
     
7,936,107
 
Contract work
   
169,170
     
67,837
 
Freight
   
12,359,418
     
9,267,530
 
Delivery expense
   
388,182
     
292,736
 
Outside services
   
44,986
     
20,760
 
Uniform
   
52,743
     
24,515
 
Sales and use tax
   
5,834
     
29,384
 
Vendor payment discounts
   
     
(111)
 
Labor and overhead
   
4,260,807
     
2,674,028
 
     Cost of goods sold (excluding depreciation expense)
 
$
87,560,837
   
$
68,274,674
 
 

 
 
- 20 -

 
Cost of goods sold, excluding depreciation expense, increased by $19,286,163 (approximately 28%) to $87,560,837 during the year ended December 31, 2014 from $68,274,674 during the year ended December 31, 2013. This increase is primarily a result of increases in purchases, supplies, salaries, freight and labor and overhead.

Purchases increased by $12,261,375 (approximately 26%) to $59,405,884 during the year ended December 31, 2014 from $47,144,509 during the year ended December 31, 2013 primarily as a result of the increase in volume of goods produced. The increase in purchases included approximately $9,196,031 from an increase in volume of purchases and approximately $3,065,344 from increases in prices of products purchased.

Supplies increased $633,606 (approximately 81%) to $1,413,622 during the year ended December 31, 2014 from $780,016 during the year ended December 31, 2013. The increase is primarily a result of increased purchases related to the Company’s Wisconsin facility purchased in July, 2013.

Salaries increased $1,472,753 (approximately 19%) to $9,408,860 during the year ended December 31, 2014 from $7,936,107 during the year ended December 31, 2013. The increase was a result of additional employees hired in connection with the purchase of the Wisconsin facility in July 2013.

Freight increased $3,091,888 (approximately 33%) to $12,359,418 during the year ended December 31, 2014 from $9,267,530 during the year ended December 31, 2013. The increase was primarily as a result of an increase in the volume of our products sold and shipped.

Labor and overhead increased $1,586,779 (approximately 59%) to $4,260,807 during the year ended December 31, 2014 from $2,674,028 during the year ended December 31, 2013. The increase was primarily as a result of increased costs related to the Company’s Wisconsin facility purchased in July 2013.

Depreciation expense increased by $909,362 (approximately 56%) to $2,535,937 during the year ended December 31, 2014 from $1,626,575 during the year ended December 31, 2013. The increase is partially attributable to an increase in depreciation expense of $470,000 during 2014 related to an adjustment to the useful lives of the Starfruit leasehold improvements and the depreciation expense of $320,000 associated with assets placed in service at the Lifeway Wisconsin location since July 2013.

Total operating expenses increased by $5,035,779 (approximately 26%) to $24,627,360 during the year ended December 31, 2014 from $19,591,581 during the year ended December 31, 2013. Total operating expenses as a percentage of net sales were approximately 21% during the year ended December 31, 2014, compared to approximately 20% during the year ended December 31, 2013.  The increase was primarily attributable to an increase in general and administrative expenses and selling expenses.
 
The following table summarizes our selling expenses:
 
   
Fiscal Year Ended
December 31,
 
   
2014
   
2013
 
Salesperson commissions
 
$
2,258,829
   
$
1,989,409
 
Advertising
   
3,875,384
     
2,438,560
 
Salaries
   
6,253,960
     
4,950,481
 
Promotions payable
   
402,341
     
247,062
 
Travel
   
1,743,016
     
1,633,090
 
Freight out
   
508
     
210
 
Sponsorship
   
     
69
 
Contract work
   
     
37,500
 
      Selling expense   $
14,534,038
    $
11,296,381
 
 
 
Selling expenses increased by $3,237,657 (approximately 29%) to $14,534,038 during the year ended December 31, 2014 from $11,296,381 during the year ended December 31, 2013.  This increase resulted primarily from increases in advertising and salaries.
 
- 21 -

 
Advertising increased $1,436,824 (approximately 59%) to $3,875,384 during the year ended December 31, 2014 from $2,438,560 during the year ended December 31, 2013. The increase was a result of  a greater volume of advertisements purchased.

Salaries increased $1,303,479 (approximately 26%) to $6,253,960 during the year ended December 31, 2014 from $4,950,481 during the year ended December 31, 2013. The increase was a result of additional employees hired in connection with the purchase of the Wisconsin facility in July 2013.
 
The following table summarizes our general and administrative expenses.
 
   
Fiscal Year Ended
December 31,
 
   
2014
   
2013
 
Employee expenses
  $ 3,254,218     $ 2,405,416  
Rent
    297,724       347,164  
Equipment lease
    7,795       4,673  
Auto expense
    93,395       70,259  
Office supplies
    325,141       301,820  
Professional fees
    3,085,750       2,525,418  
Permits and licenses
    34,910       9,118  
Telephone expense
    99,307       71,933  
Facilities
    1,515,007       1,370,125  
Tax
    94,409       62,554  
Miscellaneous
    569,989       413,917  
     General and administrative expense
  $ 9,377,645     $ 7,582,397  

 
General and administrative expenses increased $1,795,248 (approximately 24%) to $9,377,645 during the year ended December 31, 2014 from $7,582,397 during the year ended December 31, 2013.  The increase is primarily a result of an increases in employee expenses and professional fees.

Employee expenses increased $848,802 (approximately 35%) to $3,254,218 during the year ended December 31, 2014 from $2,405,416 during the year ended December 31, 2013. The increase is primarily a result of additional employees hired to staff the Wisconsin facility purchased in July 2013.

Professional fees increased $560,332 (approximately 22%) to $3,085,750 during the year ended December 31, 2014 from $2,525,418 during the year ended December 31, 2013. The Company became an accelerated filer as of December 31, 2013. As a result of becoming an accelerated filer, the Company was required to make certain limited additional disclosure on an accelerated timeline for the filing of its Form 10-K for the fiscal year ended December 31, 2013, filed April 2, 2014. Thereafter all of the Company’s filings with the SEC were subject to full disclosure required by accelerated filers. The increase in professional fees resulted from the increased disclosure requirements as a result of the Company becoming an accelerated filer and from responding to comments from the SEC.

Total operating income decreased by $3,795,833 (approximately 47%) to $4,235,479 during the year ended December 31, 2014, from $8,031,312 during the year ended December 31, 2013.

Provision for income taxes was $2,242,226 or a 53% effective tax rate, for the year ended December 31, 2014 compared with $2,866,875 or a 36% effective tax rate, during the year ended December 31, 2013. Income taxes are discussed in Note 10 of the Notes to Consolidated Financial Statements.

Total net income was $1,956,404 or $0.12 per share for the year ended December 31, 2014 compared to $4,990,298 or $0.31 per share in the year ended December 31, 2013.

 
- 22 -

 
Comparison of Year Ended December 31, 2013 to Year Ended December 31, 2012

Total consolidated net sales increased by $16,172,877 (approximately 20%) to $97,524,142 during the year ended December 31, 2013 from $81,351,265 during the year ended December 31, 2012, primarily as a result of a $19,212,087 (approximately 21%) increase in total consolidated gross sales to $108,966,094 during the year ended December 31, 2013 from $89,754,007 during the year ended December 31, 2012, offset by an increase in discounts and allowances in fiscal year 2013 as compared to fiscal year 2012. The increase in total consolidated gross sales resulted primarily from an increase in volume of products sold.

The following table summarizes our cost of goods sold, excluding depreciation expense:

   
Fiscal Year Ended
December 31,
 
   
2013
   
2012
 
Purchases
 
$
47,144,509
   
$
37,858,216
 
Testing
   
37,363
     
71,424
 
Supplies
   
780,016
     
626,920
 
Salaries
   
7,936,107
     
5,923,561
 
Contract work
   
67,837
     
4,200
 
Freight
   
9,267,530
     
5,330,508
 
Delivery expense
   
292,736
     
1,104,421
 
Outside services
   
20,760
     
126,505
 
Uniform
   
24,515
     
479
 
Sales and use tax
   
29,384
     
287
 
Vendor payment discounts
   
(111)
     
(554)
 
Labor and overhead
   
2,674,028
     
2,052,224
 
     Cost of goods sold (excluding depreciation expense)
  $
68,274,674
    $
53,098,191
 

 
Cost of goods sold, excluding depreciation expense, increased by $15,176,483 (approximately 29%) to $68,274,674 during the year ended December 31, 2013 from $53,098,191 during the year ended December 31, 2012. This increase is primarily a result of increases in purchases, salaries, freight and labor and overhead partially offset by decreases in delivery expense and outside services.

Purchases increased by $9,286,293 (approximately 25%) to $47,144,509 during the year ended December 31, 2013 from $37,858,216 during the year ended December 31, 2012 primarily as a result of the increase in volume of goods produced. The increase in purchases included approximately $7,950,225 from an increase in volume of purchases and $1,336,067 from increases in prices of products purchased.

Salaries increased $2,012,546 (approximately 34%) to $7,936,107 during year ended December 31, 2013 from $5,923,561 during the year ended December 31, 2012 primarily as a result of additional salaries of employees hired at the Wisconsin facility purchased in July 2013.

Freight increased $3,937,022 (approximately 74%) to $9,267,530 during the year ended December 31, 2013 from $5,330,508 during the year ended December 31, 2012 primarily as a result of an increase in the volume of our products sold and shipped.

Labor and overhead increased $621,804 (approximately 30%) to $2,674,028 during the year ended December 31, 2013 from $2,052,224 during the year ended December 31, 2012 primarily as a result of additional costs incurred in connection with the Wisconsin facility purchased July 2013.

Total operating expenses increased by $1,812,812 (approximately 10%) to $19,591,581 during the year ended December 31, 2013 from $17,778,769 during the year ended December 31, 2012. Total operating expenses as a percentage of net sales were approximately 20% during the year ended December 31, 2013, compared to approximately 22% during the year ended December 31, 2012.  The increase in total operating expenses was primarily attributable to an increase in general and administrative expenses and selling expenses.
 
 
- 23 -

 
The following table summarizes our selling expenses:
 
   
Fiscal Year Ended
December 31,
 
   
2013
   
2012
 
Salesperson commissions
 
$
1,989,409
   
$
1,293,267
 
Advertising
   
2,438,560
     
2,417,516
 
Salaries
   
4,950,481
     
5,384,946
 
Promotions payable
   
247,062
     
262,282
 
Travel
   
1,633,090
     
1,288,933
 
Freight out
   
210
     
250
 
Sponsorship
   
69
     
 
Contract work
 
 
37,500
     
56,786
 
     Selling expense
 
$
11,296,381
   
$
10,703,980
 


Selling expenses increased by $592,401 (approximately 5%) to $11,296,381 during the year ended December 31, 2013 from $10,703,980 during the year ended December 31, 2012. This increase resulted primarily from increases in salesperson commissions and travel offset by a decrease in salaries.

Salesperson commissions increased $696,142 (approximately 54%) to $1,989,409 during the year ended December 31, 2013 from $1,293,267 during the year ended December 31, 2012 primarily as a result of an increase in volume of products sold, as well as a shift towards outsourcing sales person functions to third party companies.

Travel increased $344,157 (approximately 27%) to $1,633,090 during the year ended December 31, 2013 from $1,288,933 during the year ended December 31, 2012 primarily as a result of the Company’s preparation for sales in the UK and Canada, as well as travel related to the July 2013 Golden Guernsey Wisconsin acquisition.

Salaries decreased $434,465 (approximately 8%) to $4,950,481 during the year ended December 31, 2013 from $5,384,946 during the year ended December 31, 2012 primarily as a result of a shift towards outsourcing sales person functions to third party companies from internal employment.

The following table summarizes our general and administrative expenses.

   
Fiscal Year Ended
December 31,
 
   
2013
   
2012
 
Employee expenses
 
$
2,405,416
   
$
2,990,393
 
Rent
   
347,164
     
379,348
 
Equipment lease
   
4,673
     
17,890
 
Auto expense
   
70,259
     
31,578
 
Office supplies
   
301,820
     
199,958
 
Professional fees
   
2,525,418
     
1,786,960
 
Permits and licenses
   
9,118
     
155,443
 
Telephone expense
   
71,933
     
69,344
 
Facilities
   
1,370,125
     
458,774
 
Taxes
   
62,554
     
61,936
 
Miscellaneous
   
413,917
     
168,348
 
     General and administrative expense
  $
7,582,397
    $
6,319,972
 

 
 
- 24 -

 
General and administrative expenses increased $1,262,425 (approximately 20%) to $7,582,397 during the year ended December 31, 2013 from $6,319,972 during the year ended December 31, 2012. The increase is primarily a result of an increases in professional fees and miscellaneous expenses, partially offset by a decrease in employee expenses.

Employee expenses decreased $584,977 (approximately 20%) to $2,405,416 during the year ended December 31, 2013 from $2,990,393 during the year ended December 31, 2012. The decrease is primarily a result of lower travel costs.

Professional fees increased $738,458 (approximately 41%) to $2,525,418 during the year ended December 31, 2013 from $1,786,960 during the year ended December 31, 2012. The increase is primarily a result of the Company’s preparation for becoming an accelerated filer on December 31, 2013 and complying with the limited additional disclosure requirements and accelerated timeline for its filing of the Form 10-K for the fiscal year ended December 31, 2013.

Total operating income decreased by $813,399 (approximately 9%) to $8,031,312 during the year ended December 31, 2013, from $8,844,711 during the year ended December 31, 2012.

Provision for income taxes was $2,866,875 or a 36% effective tax rate, for the year ended December 31, 2013 compared with $3,205,076  or a 36% effective tax rate, during the year ended December 31, 2012. Income taxes are discussed in Note 10 of the Notes to Consolidated Financial Statements.

Total net income was $4,990,298 or $0.31 per share for the year ended December 31, 2013 compared to $5,619,798 or $0.34 per share in the year ended December 31, 2012.

Liquidity and Capital Resources

Sources and Uses of Cash

Net cash provided by operating activities was $5,092,177 during the twelve-months ended December 31, 2014 compared to net cash provided by operating activities of $5,841,128 in the same period in 2013. This decrease is primarily attributable to lower net income in 2014.

Net cash used in investing activities was $4,261,327 during the twelve-months ended December 31, 2014 compared to net cash used in investing activities of $7,862,973 in the same period in 2013. This decrease reflects lower levels of purchases of property and equipment in 2014 compared to 2013. During 2013 the Company purchased certain assets of Golden Guernsey in Wisconsin as discussed further below.

The Company had a net decrease of cash and cash equivalents of $46,364 during the twelve month period ended December 31, 2014 compared to a net increase in cash and cash equivalents of $1,020,382 during the same period in 2013. The Company had cash and cash equivalents of $3,260,244 as of December 31, 2014 compared to cash and cash equivalents of $3,306,608 as of December 31, 2013.

Net cash provided by operating activities was $5,841,128 during the twelve-months ended December 31, 2013 compared to net cash provided by operating activities of $6,627,684 in the same period in 2012. This decrease is primarily attributable to the decrease in refundable income taxes of $930,119 in 2013.

Net cash used in investing activities was $7,862,973 during the twelve-months ended December 31, 2013 compared to net cash used in investing activities of $1,555,914 in the same period in 2012. This increase is primarily due to an increase in purchases of property and equipment of $7,051,169 compared to 2012 resulting from the Company’s purchase of certain assets of Golden Guernsey in Wisconsin in July 2013.

The Company had a net increase of cash and cash equivalents of $1,020,382 during the twelve month period ended December 31, 2013 compared to a net increase in cash and cash equivalents of $1,171,079 during the same period in 2012. The Company had cash and cash equivalents of $3,306,608 as of December 31, 2013 compared to cash and cash equivalents of $2,286,226 as of December 31, 2012.

In July 2013, Lifeway purchased certain assets of Golden Guernsey to allow the Company to purchase raw, instead of processed, milk and to process that raw milk on its own. The Company also intends to increase its kefir production capability by adding production capability at Golden Guernsey which will allow the Company to increase the amount of product it can produce and sell as demand increases. The Company anticipates that processing its own milk will allow the Company to purchase its major ingredient, milk, at approximately 5% less than if the Company was purchasing processed milk. The Company has not yet begun production of kefir at Golden Guernsey.

Assets and Liabilities

Total assets were $63,424,438 as of December 31, 2014, which is a decrease of $249,363 when compared to December 31, 2013.

Total current liabilities were $8,525,116 as of December 31, 2014, which is a decrease of $357,125 when compared to December 31, 2013. This is primarily due to a $1,136,424 decrease in accounts payable partially offset by a $782,016 increase in accrued expenses.

 
 
- 25 -

 
Notes payable decreased by $877,214 as of December 31, 2014, when compared to December 31, 2013. The balance of the notes payable as of December 31, 2014 was $8,996,800.

Total stockholder’s equity was $44,699,712 as of December 31, 2014, which is an increase of $1,750,590 when compared to December 31, 2013. This is primarily due to 2014 net income of $1,956,404 when compared to December 31, 2013.
 
We previously held significant portions of our assets in investment securities. All of our marketable securities are classified as available-for-sale on our balance sheet. These securities are stated at market value as of the end of the applicable period. Gains and losses on the portfolio are determined by the specific identification method.

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

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing arrangements.

Contractual Obligations

   
Payments due by period
 
Contractual obligations
 
Total
   
Less than 1 year
   
1-3 years
   
3-5 years
   
More than 5 years
 
Long-Term Debt Obligations
  $ 8,996,800     $ 872,285     $ 4,874,526     $ 3,249,989        
Operating Lease Obligations
  $ 314,979     $ 70,539     $ 195,246     $ 49,194        
Total
  $ 9,311,779     $ 942,824     $ 5,069,772     $ 3,299,183        

Critical Accounting Policies

The preparation of financial statements in accordance with US GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. US GAAP provides the framework from which to make these estimates, judgments and assumptions. We believe our estimates, judgments and assumptions are reasonable; however, future results could differ from those estimates.  Management regularly assesses its accounting policies 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.

Goodwill valuation.  Goodwill is not subject to amortization but rather is tested for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred.  Our estimates of fair value for goodwill impairment testing are determined based on the market capitalization of the company.   As of December 31, 2014 we had $14.1 million of goodwill and the market capitalization of the Company exceeded its carrying value by more than 100%.

Sales discounts & allowances. From time to time, we grant certain sales discounts to customers which are classified as a reduction in sales.  The measurement and recognition of discounts and allowances involves the use of judgment and our estimates are made based on historical experience and other factors.  As of December 31, 2014 we had $0.9 million of accrued discounts and allowances.

Income taxes.  We pay income taxes based on tax statutes, regulations and case law of the various jurisdictions in which we operate.  At any one time, multiple tax years are subject to audit by the various taxing authorities.  Income taxes are accounted for under the asset and liability method.  Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

We recognize an income tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The income tax benefit recognized in our financial statements from such a position is measured based on the largest estimated benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.


 
- 26 -

 
ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We do not undertake any specific actions to diminish our exposure to interest rate risk and we are not a party to any interest rate risk management transactions.  We do not purchase or hold any derivative financial instruments.  Our foreign sales are not material.  Accordingly, our currency rate risk is not currently material.

As of December 31, 2014, we had an outstanding balance under our bank term loans of approximately $8.997 million, and we have the option to borrow an additional $5 million from our line of credit.  The term loans bear interest at variable rates.  Based on the outstanding amount under such loans at December 31, 2014 of approximately $8.997 million (which remains outstanding as of the time of this filing) a 1.0 percent increase in interest rates would result in additional annualized interest expense of approximately $90,000.  For a detailed discussion of our loans, including a discussion of the applicable interest rate, please refer to Note 8, Notes Payable under Part II, Item 8 in this Annual Report on Form 10-K.
 

ITEM  8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The annotated consolidated financial statements of the Company that constitute Item 8 of this report commence on the pages that follow this page.









 
 
 
 
 
 
 
 
 
 

 
 
- 27 -

 
 
 
LIFEWAY FOODS, INC.
INDEX TO FINANCIAL STATEMENTS
 
 
 
 
 

 
Reports of Independent Registered Public Accounting Firms
F-2
Consolidated Statements of Financial Condition for the Years Ended December 31, 2014 and 2013
F-5
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012 F-6
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2014, 2013 and 2012
F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012
F-8
Notes to Consolidated Financial Statements December 31, 2014, 2013 and 2012
F-9
 
 
 
 
 
 
 
 
 
 
 
 
 
F-1

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 
 

 
The Board of Directors and Stockholders of
Lifeway Foods, Inc. and Subsidiaries
Morton Grove, Illinois

 
We have audited the accompanying consolidated statement of financial condition of Lifeway Foods, Inc. and Subsidiaries (the “Company”) as of December 31, 2014 and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended. In connection with our audit of the financial statements, we have also audited the financial statement schedule of valuation and qualifying accounts (Item 15). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lifeway Foods, Inc. and Subsidiaries at December 31, 2014, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relationship to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Lifeway Foods, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established in the 1992 Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 13, 2015 expressed an adverse opinion thereon.

 

 

/s/ Crowe Horwath LLP


Oak Brook, Illinois
August 13, 2015
 
 

 
 
 
 
 
 
 
 
 
 
 
F-2

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

 

To the Shareholders
Lifeway Foods, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of Lifeway Foods, Inc. and Subsidiaries (the Company) as of December 31, 2013 and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for the years ended December 31, 2013 and 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lifeway Foods, Inc. and Subsidiaries at December 31, 2013, and the consolidated results of its operations and its cash flows for the years ended December 31, 2013 and 2012 in conformity with U.S. generally accepted accounting principles.


 
/s/ Plante & Moran, PLLC
 
Chicago, Illinois
April 2, 2014


 
 
 
 
 
 
F-3

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 


To the Shareholders
Lifeway Foods, Inc. and Subsidiaries
 

We have audited Lifeway Foods, Inc. and Subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992. Management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we are considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statement for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified material weaknesses in controls including an inadequate process for the capitalization and depreciation of property and equipment, inadequate internal controls over expenses involving senior management and others, inadequate controls over the accounting for income taxes, inadequate design of controls over the financial statement process including journal entries and account reconciliations, and inadequate design and existence of entity level controls over financial reporting whether manual or IT related, including ineffective oversight by the Company’s audit committee related to accounting matters, implementation of COSO Framework and monitoring of remediation efforts of prior year identified material weaknesses. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2014 financial statements, and this report does not affect our report dated August 13, 2015 on those financial statements. Additionally, we have discussed with management and the audit committee certain observations regarding the effectiveness of operating controls. These observations have been across different areas and in the aggregate they do not rise to the level of a material weakness. However, we believe these observations may be an indication of improvements that can be made in the control environment. Based on our observations, the board of directors, audit committee and senior management should reinforce their expectations at the various levels of the company regarding the importance of internal controls and expected level of conduct.

In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, Lifeway Foods, Inc. and Subsidiaries has not maintained effective internal control over financial reporting as of December 31, 2014, based on criteria established in the 1992 Internal Control-Integrated Framework issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition of Lifeway Foods, Inc. and Subsidiaries (the Company) as of December 31, 2014, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended, and our report dated August 13, 2015 expressed an unqualified opinion thereon.
 
 
/s/ Crowe Horwath LLP


Oak Brook, Illinois
August 13, 2015
 
 
 
 
 
F-4

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 2014 and 2013
 
 

   
December 31,
 
   
2014
   
2013
 
ASSETS
           
             
Current assets
           
Cash and cash equivalents
  $ 3,260,244     $ 3,306,608  
Investments
    2,779,140       2,516,380  
Certificates of deposits in financial institutions
    149,965       15,373  
Inventories
    5,814,219       6,899,008  
Accounts receivable, net of allowance for doubtful accounts and discounts of $1,050,000 in 2014 and 2013
    10,213,541       10,444,839  
Prepaid expenses and other current assets
    251,922       128,323  
Other receivables
    134,338       103,272  
Deferred income taxes
    408,340       322,071  
Refundable income taxes
    1,140,796       1,014,947  
Total current assets
    24,152,505       24,750,821  
                 
Property and equipment, net
    21,892,395       20,824,448  
                 
Intangible assets
               
Goodwill
    14,068,091       14,068,091  
Other intangible assets, net of accumulated amortization of $5,184,036 and $4,468,359 in 2014 and 2013, respectively
    3,059,764       3,750,441  
Total intangible assets
    17,127,855       17,818,532  
                 
Other Assets
               
Long-term accounts receivable, net of current portion
    251,683       280,000  
Total assets
  $ 63,424,438     $ 63,673,801  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities
               
Current maturities of notes payable
  $ 872,285     $ 875,002  
Accounts payable
    5,586,755       6,723,179  
Accrued expenses
    2,066,076       1,284,060  
Total current liabilities
    8,525,116       8,882,241  
                 
Notes payable
    8,124,515       8,999,012  
                 
Deferred income taxes
    2,075,095       2,843,426  
Total liabilities
    18,724,726       20,724,679  
                 
Stockholders' equity
               
Common stock, no par value; 40,000,000 shares authorized;
               
17,273,776 shares issued; 16,346,017 shares outstanding
               
at 2014 and 2013
    6,509,267       6,509,267  
Paid-in-capital
    2,032,516       2,032,516  
Treasury stock, at cost
    (8,187,682 )     (8,187,682 )
Retained earnings
    44,543,618       42,587,214  
Accumulated other comprehensive income (loss), net of taxes
    (198,007 )     7,807  
Total stockholders' equity
    44,699,712       42,949,122  
                 
Total liabilities and stockholders' equity
  $ 63,424,438     $ 63,673,801  
 
 
 
See accompanying notes to financial statements
 
 
F-5

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
December 31, 2014, 2013 and 2012
 
 
   
Years Ended
 
   
December 31,
 
   
2014
   
2013
   
2012
 
Sales
  $ 130,215,716           $ 108,966,094           $ 89,754,007        
Less: discounts and allowances
    (11,256,103 )           (11,441,952 )           (8,402,742 )      
Net sales
    118,959,613       118,959,613       97,524,142       97,524,142       81,351,265       81,351,265  
                                                 
Cost of goods sold
            87,560,837               68,274,674               53,098,191  
Depreciation expense
            2,535,937               1,626,575               1,629,594  
                                                 
Total cost of goods sold
            90,096,774               69,901,249               54,727,785  
                                                 
Gross profit
            28,862,839               27,622,893               26,623,480  
                                                 
Selling expenses
            14,534,038               11,296,381               10,703,980  
General and administrative
            9,377,645               7,582,397               6,319,972  
Amortization expense
            715,677               712,803               754,817  
                                                 
Total operating expenses
            24,627,360               19,591,581               17,778,769  
                                                 
Income from operations
            4,235,479               8,031,312               8,844,711  
                                                 
Other income (expense):
                                               
Interest and dividend income
            122,018               116,380               85,383  
Rental income
            4,300               11,727               12,285  
Interest expense
            (276,895 )             ( 203,365 )             (177,622 )
Gain on sale of investments, net reclassified from OCI
            98,953               195,500               71,286  
Gain (Loss) on sale of equipment
            6,592               (304,958 )             (11,169 )
Other Income (Expense)
            8,192               10,577                
Total other income (expense)
            (36,840 )             (174,139 )             (19,837 )
                                                 
Income before provision for income taxes
            4,198,630               7,857,173               8,824,874  
                                                 
Provision for income taxes
            2,242,226               2,866,875               3,205,076  
                                                 
Net income
          $ 1,956,404             $ 4,990,298             $ 5,619,798  
                                                 
Basic and diluted earnings per common share
          $ 0.12             $ 0.31             $ 0.34  
                                                 
Weighted average number of shares outstanding
            16,346,017               16,346,017               16,373,224  
                                                 
COMPREHENSIVE INCOME
                                               
                                                 
Net income
          $ 1,956,404             $ 4,990,298             $ 5,619,798  
                                                 
Other comprehensive income (loss), net of tax:
                                               
Unrealized gains (losses) on investments (net of tax), $93,540, $49,793 and $79,159 for 2014, 2013 and 2012, respectively
            (145,571 )             64,674               102,816  
Less reclassification adjustment for (gains) losses included in net income (net of taxes), $38,711, $85,042 and $31,009 for 2014, 2013 and 2012, respectively
            (60,243 )             (110,458 )             (40,277 )
                                                 
Comprehensive income
          $ 1,750,590             $ 4,944,514             $ 5,682,337  
 
 
 
See accompanying notes to financial statements
 
 
F-6

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended December 31, 2014, 2013 and 2012
 
 

   
Common Stock, No Par Value
40,000,000 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 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
          (63,300 )     63,300                   (580,708 )                 (580,708 )
                                                                         
Other comprehensive income (loss):
                                                                       
                                                                         
Unrealized gains on securities, net of taxes
                                              62,539       62,539  
                                                                         
Net income for the year ended December 31, 2012
                                        5,619,798             5,619,798  
                                                                         
Dividends ($.07) per share
                                        (1,146,317 )           (1,146,317 )
                                                                         
Balances at December 31, 2012
    17,273,776       16,346,017       927,759     $ 6,509,267     $ 2,032,516     $ (8,187,682 )   $ 38,904,777     $ 53,591     $ 39,312,469  
                                                                         
Other comprehensive income (loss):
                                                                       
                                                                         
Unrealized losses on securities, net of taxes
                                              (45,784 )     (45,784 )
                                                                         
Net income for the year ended December 31, 2013
                                        4,990,298             4,990,298  
                                                                         
Dividends ($.08) per share
                                        (1,307,861 )           (1,307,861 )
                                                                         
Balances at December 31, 2013
    17,273,776       16,346,017       927,759     $ 6,509,267     $ 2,032,516     $ (8,187,682 )   $ 42,587,214     $ 7,807     $ 42,949,122  
                                                                         
Other comprehensive income (loss):
                                                                       
                                                                         
Unrealized losses on securities, net of taxes
          --