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EX-32.1 - 906 CERTIFICATION OF THE C.E.O. - Lifeway Foods, Inc.exh32-1_17868.htm
EX-31.2 - 302 CERTIFICATION OF THE C.F.O. - Lifeway Foods, Inc.exh31-2_17868.htm
EX-31.1 - 302 CERTIFICATION OF THE C.E.O. - Lifeway Foods, Inc.exh31-1_17868.htm
EX-32.2 - 906 CERTIFICATION OF THE C.F.O. - Lifeway Foods, Inc.exh32-2_17868.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 

 
(Mark One)  
   
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended:  September 30, 2015
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
Commission File Number: 000-17363
 

 
LIFEWAY FOODS, INC.
(Exact Name of Registrant as Specified in its Charter)
 

 
Illinois
36-3442829
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
 
 6431 West Oakton, Morton Grove, IL 60053
(Address of Principal Executive Offices, Zip Code)
 
(847) 967-1010
(Registrant’s Telephone Number, Including Area Code)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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  x   No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x    No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer x
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 Exchange Act).   Yes  o   No  x
 
As of October 27, 2015, 16,304,410  shares of the registrant’s common stock, no par value, were outstanding.
 


 
 
 
 
LIFEWAY FOODS, INC.
 
Table of Contents
 
 
PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements.
 3
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
16
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
22
Item 4.
Controls and Procedures.
22
 
 
PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings.
24
Item 1 A.
Risk Factors.
24
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
24
Item 3.
Defaults Upon Senior Securities.
24
Item 4.
Mine Safety Disclosure.
24
Item 5.
Other Information.
24
Item 6.
Exhibits.
24
 
Signatures.
25
 
Index of Exhibits.
26
 
 
 
 
 
- 2 -

 
ITEM 1.  FINANCIAL STATEMENTS.

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, 2015 and December 31, 2014

   
September 30,
   
December 31,
 
   
2015
   
2014
 
   
(Unaudited)
       
ASSETS
           
             
Current assets
           
Cash and cash equivalents
 
$
5,010,669
   
$
3,260,244
 
Investments, at fair value
   
2,512,537
     
2,779,140
 
Certificates of deposits in financial institutions
   
534,678
     
149,965
 
Inventories
   
6,931,773
     
5,814,219
 
Accounts receivable, net of allowance for doubtful accounts and discounts of $1,100,000 and $1,050,000 at September 30, 2015 and  December 31, 2014, respectively
   
10,753,485
     
10,213,541
 
Prepaid expenses and other current assets
   
53,966
     
251,922
 
Other receivables
   
37,850
     
134,338
 
Deferred income taxes
   
612,159
     
408,340
 
Refundable income taxes
   
129,426
     
1,140,796
 
Total current assets
   
26,576,273
     
24,152,505
 
                 
Property and equipment, net
   
21,602,426
     
21,892,395
 
                 
Intangible assets
               
Goodwill
   
14,068,091
     
14,068,091
 
Other intangible assets, net
   
2,523,006
     
3,059,764
 
Total intangible assets
   
16,591,097
     
17,127,855
 
                 
Other Assets
               
Long-term accounts receivable, net of current portion
   
294,767
     
251,683
 
Total assets
 
$
65,064,563
   
$
63,424,438
 
                 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Current liabilities
               
Current maturities of notes payable
 
$
840,000
   
$
872,285
 
Accounts payable
   
5,190,593
     
5,586,755
 
Accrued expenses
   
3,104,452
     
2,066,076
 
Accrued income taxes
   
448,891
     
 
Total current liabilities
   
9,583,936
     
8,525,116
 
                 
Notes payable
   
7,329,328
     
8,124,515
 
                 
Deferred income taxes
   
1,806,539
     
2,075,095
 
Total liabilities
   
18,719,803
     
18,724,726
 
                 
Stockholders’ equity
               
Common stock, no par value; 40,000,000 shares authorized;
               
17,273,776 shares issued; 16,346,017 shares outstanding
               
at September 30, 2015 and December 31, 2014
   
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
   
46,189,101
     
44,543,618
 
Accumulated other comprehensive loss, net of taxes
   
(198,442)
     
(198,007
)
Total stockholders’ equity
   
46,344,760
     
44,699,712
 
                 
Total liabilities and stockholders’ equity
 
$
65,064,563
   
$
63,424,438
 

 
 
See accompanying notes to consolidated financial statements
 
 
- 3 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the Three Months and Nine Months Ended September 30, 2015 and 2014
(Unaudited)
 
   
Three Months Ended September 30,
     
Nine Months Ended September 30,
 
   
2015
   
2014
     
2015
     
2014
 
Gross sales
 
$
33,519,071
   
$
32,704,435
   
$
102,913,996
   
$
97,359,630
 
Less: discounts and promotional allowances
   
(3,920,406)
     
(2,594,213
)
   
(13,872,019
)
   
(8,552,286
)
Net sales
   
29,598,665
     
30,110,222
     
89,041,977
     
88,807,344
 
                                 
Cost of goods sold
   
19,929,639
     
21,697,954
     
62,778,735
     
64,812,489
 
Depreciation expense
   
613,830
     
610,966
     
1,808,988
     
2,022,204
 
                                 
Total cost of goods sold
   
20,543,469
     
22,308,920
     
64,587,723
     
66,834,693
 
                                 
Gross profit
   
9,055,196
     
7,801,302
     
24,454,254
     
21,972,651
 
                                 
Selling expenses
   
2,706,375
     
2,804,127
     
9,486,177
     
9,977,636
 
General and administrative
   
4,117,811
     
2,627,566
     
10,919,862
     
7,115,393
 
Amortization expense
   
178,919
     
178,919
     
536,758
     
536,758
 
                                 
Total operating expenses
   
7,003,105
     
5,610,612
     
20,942,797
     
17,629,787
 
                                 
Income from operations
   
2,052,091
     
2,190,690
     
3,511,457
     
4,342,864
 
                                 
Other income (expense):
                               
Interest and dividend income
   
25,259
     
22,739
     
86,477
     
86,664
 
Rental income
   
1,800
     
1,201
     
5,400
     
2,900
 
Interest expense
   
(55,698
)
   
(62,084
)
   
(179,468
)
   
(194,377
)
(Loss)/Gain on sale of investments, net
                               
reclassified from OCI
   
839
     
(22,940)
     
(21,098
)
   
39,190
 
Gain on sale of property and equipment
   
200
     
85,077
     
243,283
     
8,592
 
Other income (expense), net
   
(205,000
)
   
     
(303,796
)
   
1,674
 
Total other income (expense)
   
(232,600
)
   
23,993
     
(169,202
)
   
(55,357
)
                                 
Income before provision for
                               
   income taxes
   
1,819,491
     
2,214,683
     
3,342,255
     
4,287,507
 
                                 
Provision for income taxes
   
926,639
     
1,201,005
     
1,696,772
     
2,307,234
 
                                 
Net income
 
$
892,852
   
$
1,013,678
   
$
1,645,483
   
$
1,980,273
 
                                 
Basic and diluted earnings
                               
   per common share
 
$
0.05
   
$
0.06
   
$
0.10
   
$
0.12
 
                                 
Weighted average number of
                               
common shares outstanding
   
16,346,017
     
16,346,017
     
16,346,017
     
16,346,017
 
                                 
COMPREHENSIVE INCOME
                               
                                 
Net income
 
$
892,852
   
$
1,013,678
   
$
1,645,483
   
$
1,980,273
 
                                 
Other comprehensive income
                               
(loss), net of tax:
                               
Unrealized gains (losses) on
                               
  investments (net of tax)
   
(183,170
)
   
(93,679
)
   
(247,645
)
   
(22,524
)
Less reclassification adjustment
                               
  for (gains) losses and other than
  temporary impairments included in
                               
  net income (net of taxes)
   
124,395
     
13,702
     
247,210
     
(23,408
)
                                 
Comprehensive income
 
$
834,047
   
$
933,701
   
$
1,645,048
   
$
1,934,341
 
 
 
See accompanying notes to consolidated financial statements
 
 
- 4 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
For the Nine Months Ended September 30, 2015 and 2014
(Unaudited)
 
 

                                 
Accumulated
       
                                 
Other
       
   
Common Stock
               
Comprehensive
       
   
Issued
   
In treasury
   
Paid In
   
Retained
   
Income (Loss),
       
   
Shares
   
$
   
Shares
   
$
   
Capital
   
Earnings
   
Net of Tax
   
Total Equity
 
                                                             
     
 
Balances at December 31, 2013
   
17,273,776
   
$
6,509,267
     
(927,759
)
 
$
(8,187,682
)
 
$
2,032,516
   
$
42,587,214
   
$
7,807
   
$
42,949,122
 
                                             
 
 
Other comprehensive loss
   
     
     
     
     
     
     
(45,932
)
   
(45,932)
 
                                                             
     
 
Net income for the nine  months ended September 30, 2014
   
     
     
     
     
     
 1,980,273
     
     
    1,980,273
 
                                                                 
Balances at September 30, 2014
   
17,273,776
   
$
6,509,267
     
(927,759
)
 
$
(8,187,682
)
 
$
2,032,516
   
$
44,567,487
   
$
(38,125
)
 
$
44,883,463
 
                                                             
     
 
                                                                 
Balances at December 31, 2014
   
17,273,776
   
$
6,509,267
     
(927,759
)
 
$
(8,187,682
)
 
$
2,032,516
   
$
44,543,618
   
$
(198,007
)
 
$
44,699,712
 
                                                                 
Other comprehensive loss
   
     
     
     
     
     
     
(435
)
   
(435)
 
                                                                 
Net income for the nine months ended September 30, 2015
   
     
     
     
     
     
1,645,483
     
     
1,645,483
 
                                                                 
Balances at September 30, 2015
   
17,273,776
   
$
6,509,267
     
(927,759
)
 
$
(8,187,682
)
 
$
2,032,516
   
$
46,189,101
   
$
(198,442
)
 
$
46,344,760
 

 
 
 
 
 
 

 
See accompanying notes to consolidated financial statements
 
 
- 5 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2015 and 2014
(Unaudited)

 
   
September 30,
 
   
2015
   
2014
 
Cash flows from operating activities:
           
Net income
 
$
1,645,483
   
$
1,980,273
 
Adjustments to reconcile net income to net
               
cash flows from operating activities:
               
Depreciation and amortization
   
2,345,746
     
2,558,962
 
Loss (gain) on sale of investments, net
   
21,098
     
(39,190
)
Impairment of investments
   
384,500
     
 
Deferred income taxes
   
(472,375
)
   
(783,607
)
Bad debt expense
   
250
     
76,049
 
Gain on sale of property and equipment
   
(243,083
)
   
(8,592
)
(Increase) decrease in operating assets:
               
Accounts receivable
   
(540,194
)
   
(1,548,110
)
Other receivables
   
53,674
     
76,552
 
Inventories
   
(1,117,554
)
   
(235,849
)
Refundable income taxes
   
1,011,370
     
972,522
 
Prepaid expenses and other current assets
   
197,956
     
73,379
 
Increase (decrease) in operating liabilities:
               
Accounts payable
   
(396,162
)
   
595,333
 
Accrued expenses
   
1,038,376
     
(40,184
)
Accrued income taxes
   
448,891
     
 
Net cash provided by operating activities
   
4,377,976
     
3,677,538
 
                 
Cash flows from investing activities:
               
Purchases of investments
   
(1,369,285
)
   
(2,319,742
)
Proceeds from sale of investments
   
1,229,855
     
1,736,946
 
Redemption of certificates of deposits
   
249,965
     
15,000
 
Investments in certificates of deposits
   
(634,678
)
   
 
Purchases of property and equipment
   
(1,618,716
)
   
(3,052,303
)
Proceeds from sale of property and equipment
   
342,780
     
89,076
 
Net cash used in investing activities
   
(1,800,079
)
   
(3,531,023
)
                 
Cash flows from financing activities:
               
Repayment of notes payable
   
(827,472
)
   
(657,694
)
Net cash used in financing activities
   
(827,472
)
   
(657,694
)
                 
Net (decrease) increase in cash and cash equivalents
   
1,750,425
     
(511,179
)
                 
Cash and cash equivalents at the beginning of the period
   
3,260,244
     
3,306,608
 
                 
Cash and cash equivalents at the end of the period
 
$
5,010,669
   
$
2,795,429
 
 
Supplemental cash flow information
 
Cash paid for income taxes
 
$
1,120,000
   
$
2,131,658
 
Cash paid for interest
 
$
177,521
   
$
195,275
 
 
 

 
See accompanying notes to consolidated financial statements
 
 
- 6 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2015 and December 31, 2014
(Unaudited)
 
 
Note 1 – Nature of business

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 retailers 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.

 
Note 2 – Basis of Presentation and Significant Accounting Policies

Corrections of prior period financial statements
As reported in the Company’s fiscal 2014 annual report on Form 10-K, the Company recorded out-of-period adjustments during fiscal 2014 to correct the accounting for certain errors related primarily to the provision for income taxes and an understatement of depreciation expense arising from assigning incorrect useful lives.  The Company has revised its previously reported fiscal 2014 interim consolidated financial statements to correct for these matters. The adjustments decreased previously reported net income by approximately $12,000 and $800,000 for the three-month and nine-month periods ended September 30, 2014. The adjustments had no impact on previously reported net income for the year ended December 31, 2014.

There was no impact to quarterly cash flows in 2014 as the decrease in net income was offset by the increase in the non-cash reconciling items for depreciation expense and refundable income taxes. The Company does not believe that these adjustments are material to the results of operations, financial position or cash flows for any of its previously filed interim consolidated financial statements.  Accordingly, the September 30, 2014 interim consolidated financial statements included herein have been revised to reflect the adjustments discussed above.

The net-of-tax effect of these adjustments decreases the Company’s previously reported 2014 earnings per common and diluted share by $0.02 for the quarter ended March 31, 2014 and $0.03 for the quarter ended June 30, 2014, and increases the Company’s 2014 earnings per common and diluted share by $0.05 for the quarter ended December 31, 2014. The Company’s previously reported earnings per common and diluted share for the quarter ended September 30, 2014 are unchanged.

Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information, and do not include all of the information and disclosures required for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation, have been included.  For further information, refer to the consolidated financial statements and disclosures included in the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Helios Nutrition, Ltd., Pride of Main Street, L.L.C., Starfruit, L.L.C., Fresh Made, Inc. and Starfruit Franchisor,
 
 
 
 
- 7 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2015 and December 31, 2014
(Unaudited)

Note 2 – Basis of Presentation and Significant Accounting Policies – Continued

L.L.C. and Lifeway Wisconsin, Inc. Lifeway Wisconsin, Inc. was created to facilitate the operation of a production facility in Wisconsin. All significant intercompany accounts and transactions have been eliminated.

Use of estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing the consolidated financial statements include the reserve for promotional allowances, the fair value of investment securities, the valuation of goodwill and intangible assets, and deferred taxes.

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

The Company routinely offers sales allowances and discounts to our customers and consumers. These programs include rebates, in-store display and demo allowances, allowances for non-salable product, coupons and other trade promotional activities. These allowances are considered reductions in the price of our products and thus are recorded as reductions to gross sales. Some of these incentives are recorded by estimating incentive costs based on our historical experience and expected levels of performance of the trade promotion. We maintain a reserve for the estimated allowances incurred but unpaid. Differences between estimated and actual allowances are normally insignificant and are recognized in earnings in the period such differences are determined. Product returns have historically not been material.

Bulk cream is a by-product of the Company’s fluid milk manufacturing process. The Company does not use bulk cream in any of its end products, but rather disposes of it through sales to other companies. Bulk cream by-product sales are included in gross sales.

Advertising and promotional costs
The Company expenses advertising costs as incurred. For the nine months ended September 30, 2015 and 2014 total advertising expenses were $4,033,240 and $2,462,313, respectively. For the three months ended September 30, 2015 and 2014 total advertising expenses were $1,291,405 and $637,281, respectively.

Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific requirements. ASU 2014-09 establishes a five-step revenue recognition process in which an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. In August 2015 the FASB delayed the effective date for implementation of ASU 2014-09. Under the delayed effective date, the Company is required to adopt the new standard not later than January 1, 2018. Management is currently evaluating the impact the adoption of ASU 2014-09 will have on the Company’s consolidated financial position, results of operations or cash flows and the method of retrospective application, either full or modified.
 

 
 
- 8 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2015 and December 31, 2014
(Unaudited)

 
Note 2 – Basis of Presentation and Significant Accounting Policies – Continued

In July 2015, the FASB issued new accounting guidance for measuring inventory.  The core principal of the guidance is that an entity should measure inventory at the lower of cost and net realizable value.  Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  This guidance does not apply to inventory that is being measured using the Last-In, First-Out (LIFO) or the retail inventory method.  The guidance is effective for financial statements issued for annual and interim periods beginning after December 15, 2016 on a prospective basis.  Early adoption is permitted. Management is currently evaluating the impact this will have on the consolidated financial statements.

 
Note 3 – Intangible Assets

Intangible assets, net consists of the following:

   
As of
 
   
September 30, 2015
   
December 31, 2014
 
Recipes
 
$
43,600
   
$
43,600
 
Customer lists and other customer related intangibles
   
4,529,200
     
4,529,200
 
Customer relationship
   
985,000
     
985,000
 
Trade names
   
2,248,000
     
2,248,000
 
Formula
   
438,000
     
438,000
 
     Subtotal
   
8,243,800
     
8,243,800
 
Accumulated amortization
   
(5,720,794
)
   
(5,184,036
)
Intangible assets, net
 
$
2,523,006
   
$
3,059,764
 

 
 
Note 4 – Investments

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

September 30, 2015
 
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
Common stocks & ETF’s
 
$
1,041,953
   
$
12,102
   
$
(175,470
)
 
$
878,585
 
Mutual Funds
   
77,109
     
     
(10,243
)    
66,866
 
Preferred Securities
   
97,405
     
515
     
     
97,920
 
Corporate Bonds
   
1,621,586
     
24
     
(152,444
)
   
1,469,166
 
Total
 
$
2,838,053
   
$
12,641
   
$
(338,157
)
 
$
2,512,537
 


December 31, 2014
 
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
Common stocks & ETF’s
 
$
530,328
   
$
19,608
   
$
(64,046
)
 
$
485,890
 
Mutual Funds
   
445,337
     
     
(10,624
)
   
434,713
 
Preferred Securities
   
180,120
     
195
     
(2,075
)
   
178,240
 
Corporate Bonds
   
1,948,596
     
1,880
     
(270,179
)
   
1,680,297
 
Total
 
$
3,104,381
   
$
21,683
   
$
(346,924
)
 
$
2,779,140
 

 
 
Proceeds from the sale of investments were $1,229,855 and $1,736,946 for the nine months ended September 30, 2015 and 2014, respectively.  Proceeds from the sale of investments were $96,208 and $317,584 for the three months ended September 30, 2015 and 2014, respectively.
 
 
- 9 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2015 and December 31, 2014
(Unaudited)
 
 
Note 4 – Investments - Continued

Gross gains of $13,852 and $83,810 and gross losses of $34,950 and $44,620 were realized on these sales during the nine months ended September 30, 2015 and 2014, respectively. Gross gains of $840 and $2,988 and gross losses of $2 and $25,928 were realized on these sales during the three months ended September 30, 2015 and 2014, respectively.
 
The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2015 and December 31, 2014:
 
   
Less Than 12 Months
   
12 Months or Greater
   
Total
 
September 30, 2015
 
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
Common stocks & ETF’s
 
$
456,047
   
$
(104,176
)
 
$
276,028
   
$
(71,293
)
 
$
732,075
   
$
(175,470
)
Mutual Funds
   
62,744
     
(7,326
)
   
4,122
     
(2,918
)
   
66,866
     
(10,243
)
Preferred Securities
   
     
     
     
     
     
 
Corporate Bonds
   
552,809
     
(76,352
)
   
906,304
     
(76,092
)
   
1,459,113
     
(152,444
)
   
$
1,071,600
   
$
(187,854
)
 
$
1,186,454
   
$
(150,303
)
 
$
2,258,054
   
$
(338,157
)
 
 
 
   
Less Than 12 Months
   
12 Months or Greater
   
Total
 
December 31, 2014
 
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
Common stocks & ETF’s
 
$
162,268
   
$
(49,053
)
 
$
141,417
   
$
(14,993
)
 
$
303,685
   
$
(64,046
)
Mutual Funds
   
434,713
     
(10,624
)
   
     
     
434,713
     
(10,624
)
Preferred Securities
   
80,640
     
(2,075
)
   
     
     
80,640
     
(2,075
)
Corporate Bonds
   
1,056,140
     
(194,641
)
   
497,277
     
(75,538
)
   
1,553,417
     
(270,179
)
   
$
1,733,761
   
$
(256,393
)
 
$
638,694
   
$
(90,531
)
 
$
2,372,455
   
$
(346,924
)

 
 
The Company’s investments in equity securities, mutual funds, preferred securities, and corporate bonds consist of investments in common stock, preferred stock, structured notes and other debt securities of companies in various industries. The Company recorded other-than-temporary impairment losses of approximately $180,000 during the first quarter of 2015 and $205,000 during third quarter of 2015 with respect to certain structured notes. The impairment losses are included in “other income (expense), net” in the accompanying consolidated statements of income and comprehensive income.  The structured notes allow the issuer to settle at an amount less than par in certain circumstances. In reaching a conclusion to record these other-than-temporary impairment losses, the Company evaluated the near-term prospects of the issuers and determined it was probable the issuers would have the ability to settle the bonds for an amount less than par value at maturity.


 
- 10 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2015 and December 31, 2014
(Unaudited)
 

Note 5 – Inventories

Inventories consist of the following:

   
September 30,
2015
   
December 31,
2014
 
Finished goods
 
$
1,966,744
   
$
2,373,476
 
Production supplies
   
2,754,577
     
2,069,742
 
Raw materials
   
2,210,452
     
1,371,001
 
Total inventories
 
$
6,931,773
   
$
5,814,219
 

 
Note 6 – Property and Equipment

Property and equipment consist of the following:

   
September 30,
2015
   
December 31,
2014
 
Land
 
$
1,756,673
   
$
1,856,370
 
Buildings and improvements
   
16,419,430
     
15,125,803
 
Machinery and equipment
   
22,794,894
     
20,434,910
 
Vehicles
   
1,310,527
     
1,244,560
 
Office equipment
   
709,188
     
465,801
 
Construction in process
   
64,505
     
2,408,754
 
     
43,055,217
     
41,536,198
 
Less accumulated depreciation
   
21,452,791
     
19,643,803
 
Total property and equipment
 
$
21,602,426
   
$
21,892,395
 

 
Note 7 – Accrued Expenses

Accrued expenses consist of the following:

   
September 30,
2015
   
December 31,
2014
 
Accrued payroll and payroll taxes
 
$
945,883
   
$
891,763
 
Accrued property tax
   
305,659
     
331,278
 
Other
   
1,852,910
     
843,035
 
   
$
3,104,452
   
$
2,066,076
 


 
- 11 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2015 and December 31, 2014
(Unaudited)
 
 
Note 8 – Notes Payable

Notes payable consist of the following:

   
September 30,
2015
   
December 31,
2014
 
             
Note payable to Private Bank in monthly installments of $42,222, plus variable interest rate (currently 2.67%) with a balloon payment for the remaining balance. Collateralized by substantially all assets of the Company. Maturity date - May 31, 2018.
 
$
3,972,223
   
$
4,352,222
 
                 
Note payable to Private Bank in monthly installments of $27,778, plus variable interest rate (currently 2.67%) with a balloon payment for the remaining balance, maturing on May 31, 2019, collateralized by substantially all assets of the Company.
   
4,197,105
     
4,583,333
 
                 
Notes payable to Ford Credit Corp. payable in monthly installments of $1,778 at 5.99%, paid in March 2015.
   
     
12,198
 
                 
Note payable to Fletcher Jones of Chicago, Ltd LLC in monthly installments of $1,769 at 6.653%, paid in March 2015.
   
     
49,047
 
Total notes payable
   
8,169,328
     
8,996,800
 
Less current maturities
   
840,000
     
872,285
 
Total long-term portion
 
$
7,329,328
   
$
8,124,515
 


In accordance with the Private Bank agreements referenced above, the Company is subject to minimum fixed charged ratio and tangible net worth thresholds. The Company was in compliance with these financial covenants at September 30, 2015.  Further, the Company is required to deliver its annual and quarterly consolidated financial statements and related SEC filings within specified timeframes.

In addition, as of September 30, 2015 the Company had a $5 million revolving credit facility with The Private Bank. Borrowings under the facility were subject to interest at the prime rate or LIBOR plus 2.5%. At September 30, 2015 there were no borrowings under the facility. The facility expires on July 31, 2016.

Maturities of notes payables are as follows:

For the 12 Months Ended September 30,
   
2016
 
$
840,000
 
2017
   
840,000
 
2018
   
3,292,231
 
2019
   
3,197,097
 
Total
 
$
8,169,328
 


 
- 12 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2015 and December 31, 2014
(Unaudited)
 
 
Note 9 – Commitments and contingencies

Lease obligations -The Company leases three stores for its Starfruit subsidiary. Total rent expense for these leases was $92,852 and $108,426 for the nine months ended September 30, 2015 and 2014, respectively. The Company is also responsible for additional rent equal to real estate taxes and other operating expenses. Future annual minimum base rental payments under these leases as of September 30, 2015 are approximately $70,000 for each of the next three years and are not significant thereafter.

Litigation -The Company is a party to lawsuits in the normal course of business. In the opinion of management, the resolution of these lawsuits will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

 
Note 10 – Income taxes

The effective tax rate for the three and nine months ended September 30, 2015 was 50.9% and 50.8% respectively, compared to 54.2% and 53.8%, respectively, for the three and nine months ended September 30, 2014.   The difference between the statutory and effective tax rate reflects certain operating expenses that are not fully deductible for federal income tax purposes.

 
Note 11 – Fair Value Measurements

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820 are described as follows:

Level 1. Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

Level 2. Inputs to the valuation methodology include the following:

 
Quoted prices for similar assets or liabilities in active markets;
 
Quoted prices for identical or similar assets or liabilities in inactive markets;
 
Inputs other than quoted prices that are observable for the asset or liability;
 
Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.

Level 3. Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

The following is a description of the valuation methodologies used for assets measured at fair value on a recurring basis. There have been no changes in the methodologies used as of September 30, 2015 and December 31, 2014.

The majority of the Company’s fair value measurements for investments are classified within Level 1 or Level 2 of the fair value hierarchy. The Company’s Level 1 fair value measurements, which include mutual funds and common stock, is based on quoted market prices in active markets for identical securities. The Company’s Level 2 fair value
 
 
 
 
- 13 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2015 and December 31, 2014
(Unaudited)
 
 
Note 11 – Fair Value Measurements - Continued

measurements, which include corporate bonds, is based on quoted prices in inactive markets for identical or similar assets.  The Company’s level 3 fair value measurements is based on the estimated proceeds expected to be received at maturity of the corporate bonds.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

The following table sets forth by level, within the fair value hierarchy, the Company’s financial assets measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:


   
Assets and Liabilities at Fair Value as of September 30, 2015
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
                                 
Mutual Funds
 
$
66,866
   
$
   
$
   
$
66,866
 
Common Stocks& ETF’s
   
878,586
     
     
     
878,586
 
Preferred Securities
   
     
97,920
     
     
97,920
 
Corporate Bonds
   
     
1,204,102
     
265,063
     
1,469,165
 
                                 
 
 
   
Assets and Liabilities at Fair Value as of December 31, 2014
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
                                 
Mutual Funds
 
$
434,713
   
$
   
$
   
$
434,713
 
Common Stocks& ETF’s
   
485,890
     
     
     
485,890
 
Preferred Securities
   
     
178,240
     
     
178,240
 
Corporate Bonds
   
     
1,680,297
     
     
1,680,297
 
                                 

 
The Company’s financial assets and liabilities which are not carried at fair value on a recurring basis include cash and cash equivalents, certificates of deposit, accounts receivable, other receivables, accounts payable and notes payable for which carrying value approximates fair value.

 
 
 
 
 
- 14 -

 
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2015 and December 31, 2014
(Unaudited)
 
 
Note 12 – Share repurchase program

On September 24, 2015, the Company’s Board of Directors authorized a stock repurchase program under which the Company may repurchase up to $3,500,000 of the Company’s common stock not to exceed an aggregate of 250,000 shares, in the open market or in privately negotiated transactions, in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The extent to which the Company repurchases its shares and the timing of such repurchases will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by management. The repurchase program may be suspended or discontinued at any time.  There were no share repurchases during the nine months ended September 30, 2015.

 
Note 13 – Segments, Products and Customers

The Company manufactures probiotic, cultured, functional dairy health food products. The Company’s primary product is kefir, a dairy beverage similar to but distinct from yogurt, in several flavors and in several packages. In addition to the drinkable products, Lifeway manufactures “Lifeway Farmer Cheese,” a line of various farmer cheeses.

Net sales of products by category for the three and nine months ended September 30 were as follows:

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
                                 
Drinkable Kefir other than ProBugs
  $ 25,901,949     $ 26,142,269     $ 76,723,238     $ 76,793,828  
Pro Bugs
    1,702,481       1,898,439       5,999,457       5,582,374  
Lifeway Farmer Cheese
    1,660,377       1,565,652       5,124,754       4,933,441  
Frozen Kefir
    333,858       503,862       1,194,528       1,497,701  
Net Sales
  $ 29,598,665     $ 30,110,222     $ 89,041,977     $ 88,807,344  
                                 
 
 
The Company has two 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.

The Company has less than $1 million in revenues attributable to its retail locations during the three and nine months ended September 30, 2015 and 2014. The annual revenues attributable to the three retail locations are not material and accordingly the Company has not presented financial information separately for this operating segment. Substantially all of the consolidated revenues and assets of the Company are within the United States.

Significant Customers -Sales are predominately to companies in the retail food industry, located within the United States. Two major customers accounted for approximately 27% and 28% of gross sales for the nine months ended September 30, 2015 and 2014, respectively and 25% and 29% of gross sales for the three months ended September 30, 2015 and 2014, respectively.



 
- 15 -

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

The following discussion of the financial condition and results of operations of Lifeway Foods, Inc. as of and for the three and nine months ended September 30, 2015 should be read in conjunction with the unaudited consolidated financial statements and the notes to those statements that are included elsewhere in this report on Form 10-Q and the audited financial statements and Management’s Discussion and Analysis contained in our Form 10-K for the year ended December 31, 2014 (the “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 bound 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 of the Form 10-K. 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.

Comparison of the three month period ended September 30, 2015 to the three month period ended September 30, 2014

Results of Operations

Net sales

The following table summarizes our net sales:

   
Three months ended
September 30,
   
Change
 
   
2015
   
2014
   
$
     
%
 
Gross Sales
 
$
33,519,071
   
$
32,704,435
   
$
814,636
     
2.5%
 
Less: Discounts & promotional allowances
   
(3,920,406
)
   
(2,594,213
)
   
(1,326,193
)
   
51.1%
 
                                 
Net Sales
 
$
29,598,665
   
$
30,110,222
   
$
(511,557
)
   
-1.7%
 
Discounts & promotional allowances %
to gross sales
   
11.7%
     
7.9%
                 

 
Net sales declined by $511,557 or 1.7% to $29,598,665. The decrease in net sales reflects a 2.5% increase in gross sales reflecting higher volumes of drinkable Kefir offset by significantly higher discounts and promotional allowances given to customers.
 
 
 
 
 
 
 
- 16 -

 
Cost of goods sold

The following table summarizes our cost of goods sold:

   
Three months ended
September30,
   
Change
 
   
2015
   
2014
   
$
     
%
 
Purchases, net
 
$
12,412,786
   
$
14,514,267
   
$
(2,101,481
)
   
-14.5%
 
Testing
   
29,333
     
7,841
     
21,492
     
274.1%
 
Supplies
   
497,564
     
330,409
     
167,155
     
50.6%
 
Salaries production
   
2,850,876
     
2,350,648
     
500,228
     
21.3%
 
Contract work
   
35,498
     
31,565
     
3,933
     
12.5%
 
Freight
   
2,869,114
     
3,203,229
     
(334,115
)
   
-10.4%
 
Delivery expense
   
96,560
     
131,495
     
(34,935
)
   
-26.6%
 
Labor and overhead
   
1,137,908
     
1.128,500
     
9,408
     
0.8%
 
Cost of Goods Sold, excluding depreciation
   
19,929,639
     
21,697,954
     
(1,768,315
)
   
-8.1%
 
Depreciation expense
   
613,830
     
610,966
     
2,864
     
0.5%
 
Cost of Goods Sold
 
$
20,543,469
   
$
22,308,920
   
$
(1,765,451
)
   
-7.9%
 
                                 
Gross Profit % to net sales
   
30.6%
     
25.9%
                 

Gross profit as a percent of net sales increased to 30.6% during the three-month period ended September 30, 2015 from 25.9% during the same three-month period in 2014.  The increase in the gross profit percent reflects lower input costs, primarily lower milk prices, partially offset by the elevated level of promotional allowances and discounts given to customers.


Selling Expenses

The following table summarizes our selling expenses:

   
Three months ended
September 30,
   
Change
 
   
2015
   
2014
   
$
     
%
 
Salesperson commissions
 
$
528,559
   
$
358,626
   
$
169,933
     
47.4%
 
Advertising
   
1,291,405
     
637,281
     
654,124
     
102.6%
 
Salaries
   
829,964
     
1,362,969
     
(533,005
)
   
-39.1%
 
Promotions payable
   
47,837
     
44,053
     
3,784
     
8.6%
 
Travel
   
8,610
     
401,198
     
(392,588
)
   
-97.9%
 
Selling expense
 
$
2,706,375
   
$
2,804,127
   
$
(97,752
)
   
-3.5%
 
% to net sales
   
9.1%
     
9.3%
                 

Selling expenses decreased by $97,752 or 3.5% to $2,706,375 during the three-month period ended September 30, 2015 from $2,804,127 during the same period in 2014 reflecting an increase in advertising programs offset by lower salaries and travel related costs.  The lower salaries reflects the reassignment of Company personnel in 2015 from principally selling responsibilities to broader general management responsibilities. Selling expenses as a percentage of sales were 9.1% for the three-month period ended September 30, 2015 compared to 9.3% for the same period in 2014.


 
- 17 -

 
General and administrative expenses

The following table summarizes our general and administrative expenses:

   
Three months ended
September 30,
   
Change
 
   
2015
   
2014
   
$
     
%
 
Salaries
 
$
2,093,638
   
$
968,616
   
$
1,125,022
     
116.1%
 
Rent
   
66,635
     
75,713
     
(9,078
)
   
-12.0%
 
Equipment lease
   
2,026
     
2,576
     
(550
)
   
-21.4%
 
Auto expense
   
30,092
     
25,430
     
4,662
     
18.3%
 
Office supplies
   
30,123
     
100,577
     
(70,454
)
   
-70.0%
 
Professional fees
   
1,516,506
     
1,009,070
     
507,436
     
50.3%
 
Permits and licenses
   
     
21,905
     
(21,905
)
   
-100.0%
 
Telephone expense
   
33,169
     
21,001
     
12,168
     
57.9%
 
Facilities
   
130,745
     
320,029
     
(189,284
)
   
-59.1%
 
Tax
   
20,749
     
21,948
     
(1,199
)
   
-5.5%
 
Miscellaneous
   
194,128
     
60,701
     
133,427
     
219.8%
 
General & administrative expense
 
$
4,117,811
   
$
2,627,566
   
$
1,490,245
     
56.7%
 
 
% to net sales
   
13.9%
     
8.7%
                 

 
General and administrative expenses increased $1,490,245 or 56.7% to $4,117,811 during the three-month period ended September 30, 2015 from $2,627,566 during the same period in 2014.  The increase is primarily a result of increases in salaries and professional fees.  Salaries increased $1,125,022 or116.1 % to $2,093,638 during the three-month period ended September 30, 2015 from $968,616 during the same period in 2014.  The increase reflects the reassignment of Company personnel in 2015 from principally selling responsibilities to broader general management responsibilities and an increase in headcount, primarily in finance.  Professional fees, which consists primarily of legal and accounting fees increased by $507,436 or 50.3% to $1,516,506 in the three-month period ended September 30, 2015 from $1,009,070 during the same period in 2014.  The higher professional fees are primarily due to costs associated the company’s delayed SEC filings.

Income from operations and net income

The company reported income from operations of $2,052,091 during the third quarter of 2015, compared to $2,190,690 during the same period in 2014.  Provision for income taxes was $926,639, or a 50.9% effective rate for the third quarter of 2015 compared to a provision for income taxes of $ 1,201,005 or a 54.2% effective tax rate, during the same period in 2014.  Income taxes are discussed in Note 10 to the Notes to the Consolidated Financial Statements.

Net income was $892,852 or $0.05 per basic and diluted common share for the three-month period ended September 30, 2015 compared to $1,013,678 or $0.06 per basic and diluted common share in the same period in 2014.


 
- 18 -

 
Comparison of nine month period ended September 30, 2015 to the nine month period ended September 30, 2014

Results of Operations

Net sales

The following table summarizes our net sales:

   
Nine months ended
September 30,
   
Change
 
   
2015
   
2014
   
$
     
%
 
Gross Sales
 
$
102,913,996
   
$
97,359,630
   
$
5,554,366
     
5.7%
 
Less: Discounts & promotional allowances
   
(13,872,019
)
   
(8,552,286
)
   
(5,319,733
)
   
 
62.2%
 
                                 
Net Sales
 
$
89,041,977
   
$
88,807,344
   
$
234,633
     
0.3%
 
Discounts &promotional allowances % to gross sales
   
13.5%
     
8.8%
                 

 
Net sales increased by $234,633 or 0.3% to $89,041,977 during the nine-month period ended September 30, 2015 from $88,807,344 during the same period in 2014.  The 0.3% increase reflects a $5,554,366 or 5.7% increase in gross sales reflecting higher volumes of drinkable Kefir, higher volumes of ProBugs and the commencement of cream sales in the second quarter of 2014 offset by significantly higher discounts and promotional allowances and lower volumes of frozen Kefir in 2015.


Cost of goods sold

The following table summarizes our cost of goods sold:

   
Nine months ended
September 30,
   
Change
 
   
2015
   
2014
   
$
     
%
 
Purchases, net
 
$
38,109,683
   
$
44,703,124
   
$
(6,593,441
)
   
-14.7%
 
Testing
   
82,210
     
29,299
     
52,911
     
180.6%
 
Supplies
   
1,687,467
     
990,254
     
697,213
     
70.4%
 
Salaries production
   
8,679,120
     
6,719,070
     
1,960,050
     
29.2%
 
Contract work
   
106,496
     
153,224
     
(46,728
)
   
-30.5%
 
Freight
   
9,597,724
     
8,999,827
     
597,897
     
6.6%
 
Delivery expense
   
339,381
     
292,948
     
46,433
     
15.9%
 
Outside services
   
4,176,654
     
2,924,743
     
1,251,911
     
42.8%
 
Cost of Goods Sold, excluding
depreciation
   
62,778,735
     
64,812,489
     
(2,033,754
)
   
-3.1%
 
Depreciation expense
   
1,808,988
     
2,022,204
     
(213,216
)
   
-10.5%
 
Cost of Goods Sold
 
$
64,587,723
   
$
66,834,693
   
$
(2,246,970
)
   
-3.4%
 
                                 
Gross Profit % to net sales
   
27.5%
     
24.7%
                 
                                 

 
Gross profit as a percent of net sales increased to 27.5% during the nine-month period ended September 30, 2015 from 24.7% during the same nine-month period in 2014.  The increase in the gross profit percent reflects lower input costs, primarily lower milk prices, partially offset by the elevated level of promotional allowances and discounts given to customers.   In April, 2014 the Company began processing raw milk and producing Kefir related packaging in its Waukesha, Wisconsin facility, contributing to increased labor and overhead, production salaries and supplies in the nine month period ended September 30, 2015 compared to the same period in 2014.

 
- 19 -

 
Depreciation expense decreased by $213,216 or about 10.5% to $1,808,988 during the nine-month period ended September 30, 2015 from $2,022,204 during the same period in 2014.  The decrease reflects a $400,000 correction of depreciation expense related to periods prior to 2014 recognized in the first quarter of 2014 partially offset by increased depreciation expense associated with assets placed in service at the Lifeway Wisconsin location in 2015.

Selling Expenses

The following table summarizes our selling expenses:

   
Nine months ended
September 30,
   
Change
 
   
2015
   
2014
   
$
     
%
 
Salesperson commissions
 
$
1,872,777
   
$
1,692,421
   
$
180,356
     
10.7%
 
Advertising
   
4,033,240
     
2,462,313
     
1,570,927
     
63.8%
 
Salaries
   
3,210,988
     
4,301,159
     
(1,090,171
)
   
-25.3%
 
Promotions payable
   
138,567
     
248,486
     
(109,919
)
   
-44.2%
 
Travel
   
230,605
     
1,273,257
     
(1,042,652
)
   
-81.9%
 
Selling expense
 
$
9,486,177