form10q_16885.htm

Send us Feedback

Lifeway Foods (LWAY)

	SUMMARY

	BULLS

	BEARS

	TOPICS

	DATA CENTRAL

	STOCK CHART

	SEC FILINGS

	BALANCE

	INCOME

	CASH FLOW

Lifeway Foods 10-Q 2010

Documents found in this filing:

form10q_16885.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: June 30, 2010

o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 000-17363

LIFEWAY FOODS, INC.

(Exact Name of Registrant as Specified in its Charter)

Illinois	36-3442829
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

6431 West Oakton, Morton Grove, IL 60053>

(Address of Principal Executive Offices, Zip Code)

(847-967-1010)

(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of June 30, 2010, the issuer had 16,657,478 shares of common stock, no par value, outstanding.

LIFEWAY FOODS, INC.

CONTENTS TO FORM 10-Q

PART I —	FINANCIAL INFORMATION	Page(s)

ITEM 1.	FINANCIAL STATEMENTS.	3

	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.	8

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	21

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	24

ITEM 4T.	CONTROLS AND PROCEDURES.	24



PART II —	OTHER INFORMATION	24

ITEM 1.	LEGAL PROCEEDINGS.	24

ITEM 1A.	RISK FACTORS.	24

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	24

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.	25

ITEM 4.	REMOVED AND RESERVED.	25

ITEM 5.	OTHER INFORMATION.	25

ITEM 6.	EXHIBITS.	26



SIGNATURES		27

EXHIBIT INDEX		28

- 2 -

LIFEWAY FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 AND 2009

AND DECEMBER 31, 2009

- 3 -

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

June 30, 2010 and 2009 (Unaudited) and December 31, 2009

	(Unaudited)
	June 30,						December 31,
	2010			2009			2009
ASSETS

Current assets
Cash and cash equivalents	$	858,490		$	582,766		$	630,407
Investments		3,411,804			4,659,161			4,392,125
Certificates of deposits in financial institutions		550,000			—			652,005
Inventories		4,154,719			3,817,195			3,296,976
Accounts receivable, net of allowance for doubtful accounts and discounts		7,780,512			6,064,801			5,999,738
Prepaid expenses and other current assets		70,130			55,669			40,697
Other receivables		142,389			65,730			49,758
Deferred income taxes		389,249			638,372			251,456
Refundable income taxes		—			778,125			1,308,978
Total current assets		17,357,293			16,661,819			16,622,140

Property and equipment, net		14,890,327			13,793,929			14,282,182

Intangible assets
Goodwill and other non amortizable brand asset		13,806,091			13,806,091			13,806,091
Other intangible assets, net of accumulated amortization of $1,949,729 and $1,260,809 at June 30, 2010 and 2009 and $1,598,208 at December 31, 2009		5,907,909			6,596,829			6,259,430
Total intangible assets		19,714,000			20,402,920			20,065,521

Other assets		500,000			500,000			500,000

Total assets	$	52,461,620		$	51,358,668		$	51,469,843

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Checks written in excess of bank balances	$	847,374		$	—		$	342,976
Current maturities of notes payable		4,431,873			6,219,788			4,842,315
Accounts payable		2,259,236			2,024,313			2,764,000
Accrued expenses		531,553			617,662			614,344
Accrued income tax		604,323			—			—
Total current liabilities		8,674,359			8,861,763			8,563,635

Notes payable		6,397,780			7,907,847			6,890,214

Deferred income taxes		3,262,795			3,593,740			3,444,664
Total liabilities		18,334,934			20,363,350			18,898,513

Stockholders' equity
Common stock, no par value; 20,000,000 shares authorized; 17,273,776 shares issued;16,657,478 shares outstanding at June 30, 2010; 17,273,776 shares issued: 16,812,955 shares outstanding at June 30, 2009; 17,273,776 shares issued; 16,778,555 shares outstanding at December 31, 2009		6,509,267			6,509,267			6,509,267
Paid-in-capital		2,018,727			1,912,845			1,965,786
Treasury stock, at cost		( 5,256,054	)		( 3,353,490	)		( 3,846,773	)
Retained earnings		30,906,602			26,463,077			27,953,409
Accumulated other comprehensive loss, net of taxes		( 51,856	)		( 536,381	)		( 10,359	)
Total stockholders' equity		34,126,686			30,995,318			32,571,330

Total liabilities and stockholders' equity	$	52,461,620		$	51,358,668		$	51,469,843

- 4 -

LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income

For the Three and Six Months Ended June 30, 2010 and 2009 (Unaudited)

and for the Year Ended December 31, 2009

	(Unaudited)						(Unaudited)
	Three Months Ended						Six Months Ended						Year Ended
	June 30,						June 30,						December 31,
	2010			2009			2010			2009			2009

Sales		15,546,556			14,479,429			31,510,715			28,215,509			58,115,878

Cost of goods sold		9,273,872			7,978,110			17,892,871			16,102,691			36,083,553
Depreciation expense		281,220			353,654			684,595			570,428			1,134,404

Total cost of goods sold		9,555,092			8,331,764			18,577,466			16,673,119			37,217,957

Gross profit		5,991,464			6,147,665			12,933,249			11,542,390			20,897,921

Selling expenses		2,183,304			1,386,815			4,710,777			2,694,740			5,987,917
General and administrative		1,478,062			1,437,505			2,968,219			2,810,103			5,294,550
Amortization expense		175,761			168,698			351,521			339,388			676,786

Total Operating Expenses		3,837,127			2,993,018			8,030,517			5,844,231			11,959,253

Income from operations		2,154,337			3,154,647			4,902,732			5,698,159			8,938,668

Other income (expense):
Interest and dividend income		53,176			48,506			107,684			110,717			199,047
Rental Income		2,800			11,947			4,035			21,294			35,240
Interest expense		( 80,164	)		( 110,090	)		( 176,106	)		( 264,473	)		( 442,703	)
Loss on Disposition of Equipment		—			( 2,825	)		—			( 2,825	)		( 2,826	)
Gain (loss) on sale of marketable securities, net		84,043			53,638			54,784			( 96,152	)		( 278,474	)
Total other income (expense)		59,855			1,176			( 9,603	)		( 231,439	)		( 489,716	)

Income before provision for income taxes		2,214,192			3,155,823			4,893,129			5,466,720			8,448,952

Provision for income taxes		1,029,688			623,918			1,939,936			1,387,350			2,879,250

Net income	$	1,184,504		$	2,531,905		$	2,953,193		$	4,079,370		$	5,569,702

Basic and diluted earnings per common share		0.07			0.15			0.18			0.24			0.33

Weighted average number of shares outstanding		16,701,539			16,823,691			16,731,549			16,823,691			16,798,164

COMPREHENSIVE INCOME

Net income	$	1,184,504		$	2,531,905		$	2,953,193		$	4,079,370		$	5,569,702

Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investments (net of tax)		( 55,842	)		338,409			( 9,339	)		( 93,913	)		325,086
Less reclassification adjustment for (gains) losses included in net income (net of taxes)		(49,333	)		(31,486	)		(32,158	)		56,441			163,464

Comprehensive income	$	1,079,329		$	2,838,828		$	2,911,696		$	4,041,898		$	6,058,252

- 5 -

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders' Equity

For the Six Months Ended June 30, 2010 and 2009 (Unaudited)

and for the Year Ended December 31, 2009

	Common Stock, No Par Value 20,000,000 Shares					# of Shares												Accumulated Other
	Authorized					of												Comprehensive
	# of Shares		# of Shares			Treasury			Common		Paid In		Treasury			Retained		Income (Loss),
	Issued		Outstanding			Stock			Stock		Capital		Stock			Earnings		Net of Tax			Total

Balances at December 31, 2008		17,273,776		16,724,467			549,309		$	6,509,267	$	1,202,009	$	(3,302,025	)	$	22,383,707	$	(498,909	)	$	26,294,049

Redemption of stock		—		( 87,991	)		87,991			—		—		( 905,607	)		—		—			( 905,607	)

Issuance of treasury stock for compensation		—		13,132			( 13,132	)		—		119,039		25,597			—		—			144,636

Issuance of treasury stock for Fresh Made acquisition		—		128,947			( 128,947	)		—		644,738		335,262			—		—			980,000

Other comprehensive income (loss):
Unrealized gains on securities, net of taxes and reclassification adjustment		—		—			—			—		—		—			—		488,550			488,550

Net income for the year ended December 31, 2009		—		—			—			—		—		—			5,569,702		—			5,569,702

Balances at December 31, 2009		17,273,776		16,778,555			495,221		$	6,509,267	$	1,965,786	$	(3,846,773	)	$	27,953,409	$	(10,359	)	$	32,571,330


Balances at January 1, 2009		17,273,776		16,724,467			549,309		$	6,509,267	$	1,202,009	$	(3,302,025	)	$	22,383,707	$	(498,909	)	$	26,294,049

Redemption of stock		—		( 48,341	)		48,341			—		—		( 402,947	)		—		—			( 402,947	)

Issuance of treasury stock for compensation		—		7,882			( 7,882	)		—		66,098		16,220			—		—			82,318

Issuance of treasury stock for Fresh Made acquisition		—		128,947			( 128,947	)		—		644,738		335,262			—		—			980,000

Other comprehensive income (loss):
Unrealized gains on securities, net of taxes and reclassification adjustment		—		—			—			—		—		—			—		( 37,472	)		(37,472	)

Net income for the six months ended June 30, 2009		—		—			—			—		—		—			4,079,370		—			4,079,370

Balances at June 30, 2009		17,273,776		16,812,955			460,821		$	6,509,267	$	1,912,845	$	(3,353,490	)	$	26,463,077	$	(536,381	)	$	30,995,318


Balances at January 1, 2010		17,273,776		16,778,555			495,221		$	6,509,267	$	1,965,786	$	(3,846,773	)	$	27,953,409	$	(10,359	)	$	32,571,330

Redemption of stock		—		( 129,841	)		129,841			—		—		( 1,418,657	)		—		—			( 1,418,657	)

Issuance of treasury stock for compensation		—		8,764			( 8,764	)		—		52,941		9,376			—		—			62,317

Other comprehensive income (loss):
Unrealized gains on securities, net of taxes and reclassification adjustment		—		—			—			—		—		—			—		( 41,497	)		( 41,497	)


Net income for the six months ended June 30, 2010		—		—			—			—		—		—			2,953,193		—			2,953,193

Balances at June 30, 2010		17,273,776		16,657,478			616,298		$	6,509,267	$	2,018,727	$	(5,256,054	)	$	30,906,602	$	(51,856	)	$	34,126,686

- 6 -

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2010 and 2009 (Unaudited)

and for the Year Ended December 31, 2009

	(Unaudited)
	June 30,						December 31,
	2010			2009			2009

Cash flows from operating activities:
Net income	$	2,953,193		$	4,079,370		$	5,569,702
Adjustments to reconcile net income to net cash flows from operating activities, net of acquisition:
Depreciation and amortization		1,036,116			909,816			1,811,190
(Gain) Loss on sale of investments, net		( 54,784	)		96,152			278,474
Loss on disposition of assets		—			2,825			2,826
Deferred income taxes		( 290,465	)		179,796			389,754
Treasury stock issued for compensation		62,317			82,318			144,636
Decrease in allowance for doubtful accounts		—			—			( 75,000	)
(Increase) decrease in operating assets:
Accounts receivable		( 1,780,774	)		( 752,978	)		( 612,915	)
Other receivables		( 92,631	)		( 25,416	)		( 7,758	)
Inventories		( 857,743	)		( 346,800	)		173,419
Refundable income taxes		1,308,978			( 435,205	)		( 475,635	)
Prepaid expenses and other current assets		( 29,433	)		5,029			9,506
Increase (decrease) in operating liabilities:
Accounts payable		( 504,764	)		( 440,911	)		298,800
Accrued expenses		( 82,791	)		36,719			96,062
Accrued income taxes		604,323			—			—
Net cash provided by operating activities		2,271,542			3,390,715			7,603,061

Cash flows from investing activities:
Purchases of investments		( 538,852	)		( 3,342,662	)		( 6,156,682	)
Proceeds from sale of investments		1,502,724			4,127,666			6,928,321
Proceeds from redemption of certificates of deposit		102,545			—			—
Purchases of property and equipment		( 1,292,741	)		( 714,052	)		( 1,766,280	)
Acquisition of Fresh Made, net of cash acquired		—			( 10,498,224	)		( 11,042,546	)
Net cash used in investing activities		( 226,324	)		( 10,427,272	)		( 12,037,187	)

Cash flows from financing activities:
Proceeds of note payable		250,000			9,342,085			9,353,504
Checks written in excess of bank balances		504,398			—			342,976
Purchases of treasury stock		( 1,418,657	)		( 402,947	)		( 905,607	)
Repayment of notes payable		( 1,152,876	)		( 1,597,063	)		( 4,003,588	)
Net cash (used in) provided by in financing activities		( 1,817,135	)		7,342,075			4,787,285

Net increase in cash and cash equivalents		228,083			305,518			353,159

Cash and cash equivalents at the beginning of the period		630,407			277,248			277,248

Cash and cash equivalents at the end of the period	$	858,490		$	582,766		$	630,407

- 7 -

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2010 and 2009

and December 31, 2009

Note 1 – NATURE OF BUSINESS

Lifeway Foods, Inc. (The “Company”) commenced operations in February 1986 and incorporated under the laws of the state of Illinois on May 19, 1986. The Company’s principal business activity is the production of dairy products. Specifically, the Company produces Kefir, a drinkable product which is similar to but distinct from yogurt, in several flavors sold under the name “Lifeway’s Kefir;” a plain farmer’s cheese sold under the name “Lifeway’s Farmer’s Cheese;” a fruit sugar-flavored product similar in consistency to cream cheese sold under the name of “Sweet Kiss;” and a dairy beverage, similar to Kefir, with increased protein and calcium, sold under the name “Basics Plus.” The Company also produces several soy-based products under the name “Soy Treat” and a vegetable-based seasoning under the name “Golden Zesta.” The Company currently distributes its products throughout the Chicago Metropolitan area and various cities in the East Coast through local food stores. In addition, the products are sold throughout the United States and Ontario, Canada by distributors. The Company also distributes some of its products to Eastern Europe.

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows:

Basis of presentation

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, such information reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of Management, necessary for fair statement of results for the interim periods.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, LFI Enterprises, Inc., Helios Nutrition, Ltd., Pride of Main Street, L.L.C., Starfruit, L.L.C., Fresh Made, Inc and Starfruit Franchisor, L.L.C. All significant intercompany accounts and transactions have been eliminated. The financial statements include the results of operations from Fresh Made, Inc from February 6, 2009 through the end of the period (see Note 3).

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing the consolidated financial statements include the allowance for doubtful accounts and discounts, the valuation of investment securities, the valuation of goodwill, intangible assets, and deferred taxes.

Revenue Recognition

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

- 8 -

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2010 and 2009

and December 31, 2009

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Cash and cash equivalents

All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents.

The Company maintains cash deposits at several institutions located in the greater Chicago, Illinois and Philadelphia, Pennsylvania metropolitan areas.

Investments

All investment securities are classified as available-for-sale and are carried at fair value. Unrealized gains and losses on available-for-sale securities are reported as a separate component of stockholders’ equity. Amortization, accretion, interest and dividends, realized gains and losses, and declines in value judged to be other-than-temporary on available-for-sale securities are recorded in other income. All of the Company's securities are subject to a periodic impairment evaluation. This evaluation depends on the specific facts and circumstances. Factors that we consider in determining whether an other-than-temporary decline in value has occurred include: the market value of the security in relation to its cost basis; the financial condition of the investee; and the intent and ability to retain the investment for a sufficient period of time to allow for possible recovery in the market value of the investment.

Accounts receivable

Credit terms are extended to customers in the normal course of business. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral.

Accounts receivable are recorded at invoice amounts, and reduced to their estimated net realizable value by recognition of an allowance for doubtful accounts and net of anticipated discounts. The Company’s estimate of the allowance for doubtful accounts is based upon historical experience, its evaluation of the current status of specific receivables, and unusual circumstances, if any. Accounts are considered past due if payment is not made on a timely basis in accordance with the Company’s credit terms. Accounts considered uncollectible are charged against the allowance.

Inventories

Inventories are stated at the lower of cost or market, cost being determined by the first-in, first-out method.

Property and equipment

Property and equipment is stated at depreciated cost or fair value where depreciated cost is not recoverable. Depreciation is computed using the straight-line method. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized.

Property and equipment is being depreciated over the following useful lives:

Category		Years
Buildings and improvements		31 and 39
Machinery and equipment		5 – 12
Office equipment		5 – 7
Vehicles		5

- 9 -

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2010 and 2009

and December 31, 2009

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

Intangible assets

The Company accounts for intangible assets at historical cost. Intangible assets acquired in a business combination are recorded under the purchase method of accounting at their estimated fair values at the date of acquisition. Goodwill represents the excess purchase price over the fair value of the net tangible and other intangible assets acquired. Goodwill is not amortized, but is reviewed for impairment at least annually. Brand assets represent the fair value of brands acquired. Brand assets have an indefinite life and therefore are not amortized, rather are reviewed periodically for impairment. The Company amortizes other intangible assets over their estimated useful lives, as disclosed in the table below.

The Company reviews intangible assets and their related useful lives at least once a year to determine if any adverse conditions exist that would indicate the carrying value of these assets may not be recoverable. The Company conducts more frequent impairment assessments if certain conditions exist, including: a change in the competitive landscape, any internal decisions to pursue new or different strategies, a loss of a significant customer, or a significant change in the market place including changes in the prices paid for the Company’s products or changes in the size of the market for the Company’s products.

If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life.

Intangible assets are being amortized over the following useful lives:

Category		Years
Recipes		4
Customer lists and other customer related intangibles		7-10
Lease agreement		7
Trade names		15
Formula		10
Customer relationships		12

Income taxes

Deferred income taxes arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of the assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.

The principal sources of temporary differences are different depreciation and amortization methods for financial statement and tax purposes, unrealized gains or losses related to investments, capitalization of indirect costs for tax purposes, purchase price adjustments, and the recognition of an allowance for doubtful accounts for financial statement purposes.

- 10 -

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2010 and 2009

and December 31, 2009

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The only periods subject to examination for the Company’s federal return are the 2006 through 2009 tax years. The Company believes that its income tax filing positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded.

Subsequent to June 30, 2010, the IRS completed a review of the Company’s 2007 and 2008 federal tax return filings, resulting in a liability of approximately $220,000 being recognized as of June 30, 2010. The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income before taxes. There were no such items during the periods covered in this report.

Treasury stock

Treasury stock is recorded using the cost method.

Advertising costs

The Company expenses advertising costs as incurred. During the year ended December 31, 2009 and for the six months ended June 30, 2010 and 2009, approximately $1,689,540, $2,272,520 and $780,116 of such costs respectively, were expensed.

Earnings per common share

Earnings per common share were computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. For the six months ended June 30, 2010 and 2009 and for the year ended December 31, 2009, diluted and basic earnings per share were the same, as the effect of dilutive securities options outstanding was not significant.

Reclassification

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

Note 3 – ACQUISITION

On February 6, 2009, we completed a Stock Purchase Agreement (the “Stock Agreement”) under which Lifeway purchased all of the issued and outstanding stock (the “Shares”) of Fresh Made, Inc., a Pennsylvania corporation (“Fresh”). The consideration for the Shares was an aggregate of $8,048,000 in cash, a note in the principal amount of $2,735,000, due on August 1, 2010 as amended and restated, 128,948 shares of common stock of Lifeway valued at a total of $980,000 (“Lifeway’s Common Stock”), the cancellation of a loan in the principal amount of $265,000. The issuance of Lifeway’s Common Stock was exempted from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

Also on February 6, 2009, we entered into and consummated a Real Property Purchase Agreement (the “Real Property Agreement”) under which we acquired 1.1355 acres of land in Philadelphia, PA (the “Property”). The consideration for the Property was approximately $2,000,000.

The acquisition was consummated to expand the geographic footprint of Lifeway as well as grow market share. The acquisition was accounted for using the purchase accounting method of accounting, and accordingly, the purchase price was allocated to assets acquired and the liabilities assumed based on the

- 11 -

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2010 and 2009

and December 31, 2009

Note 3 – ACQUISITION - Continued

fair value as of the merger date. Acquisition costs for legal and professional fees have been included in General and Administrative costs. None of the goodwill resulting from the acquisition is tax deductible.

The estimated fair value of assets acquired, including the real property, and liabilities assumed consisted of the following:

Cash and cash equivalents	$	226,000
Accounts receivable (contractual amounts totaling $545,958)		546,000
Other current assets		361,000
Building and other fixed assets		2,617,000
Customer list		4,000,000
Non amortizable goodwill and brand asset		8,391,000
Current liabilities		( 461,000	)
Deferred tax liability associated with purchase adjustments		( 1,652,000	)
Total fair value of assets acquired and liabilities assumed	$	14,028,000

The following pro forma disclosures, including the effect of purchase accounting adjustments, depict the results of operations for the six months ended June 30, 2009 and the year ended December 31, 2009 as though the merger with Fresh had taken place as of January 1, 2009:

	For the Six Months Ended June 30, 2009		For the Year Ended December 31, 2009
Gross revenue	$	29,331,092	$	59,231,461

Net income	$	4,128,139	$	5,618,471

Earnings per share	$	0.25	$	0.33

Note 4 – INTANGIBLE ASSETS

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

	June 30, 2010				June 30, 2009				December 31, 2009
	Cost		Accumulated Amortization		Cost		Accumulated Amortization		Cost		Accumulated Amortization
Recipes	$	43,600	$	43,600	$	43,600	$	43,600	$	43,600	$	43,600
Customer lists and other customer related intangibles		4,305,200		803,744		4,305,200		385,166		4,305,200		587,393
Lease acquisition		87,200		73,707		87,200		61,245		87,200		67,473
Other		6,638		6,638		6,638		6,638		6,638		6,638
Customer relationship		985,000		321,490		985,000		239,410		985,000		280,454
Contractual backlog		12,000		12,000		12,000		12,000		12,000		12,000
Trade names		1,980,000		517,000		1,980,000		385,000		1,980,000		451,000
Formula		438,000		171,550		438,000		127,750		438,000		149,650
	$	7,857,638	$	1,949,729	$	7,857,638	$	1,260,809	$	7,857,638	$	1,598,208

- 12 -

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2010 and 2009

and December 31, 2009

Note 4 – INTANGIBLE ASSETS - Continued

Amortization expense is expected to be as follows for the 12 months ending June 30:

2011	$	703,040
2012		690,583
2013		690,583
2014		676,958
2015		657,883
Thereafter		2,488,862
	$	5,907,909

Amortization expense during the six months ended June 30, 2010 and 2009 and for the year ended December 31, 2009 was $351,521, $339,388 and $676,786, respectively.

Note 5 – INVESTMENTS

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

June 30, 2010	Cost		Unrealized Gains		Unrealized Losses			Fair Value

Equities	$	653,068	$	26,400	$	( 117,892	)	$	561,576
Mutual Funds		206,961		3,056		( 7,853	)		202,164
Preferred Securities		272,629		6,650		( 64,789	)		214,490
Corporate Bonds		1,751,719		89,355		( 30,140	)		1,810,934
Government Agency Obligations		615,767		8,625		( 1,752	)		622,640
Total	$	3,500,144	$	134,086	$	( 222,426	)	$	3,411,804

June 30, 2009	Cost		Unrealized Gains		Unrealized Losses			Fair Value

Equities	$	1,536,976	$	57,665	$	( 178,926	)	$	1,415,715
Mutual Funds		617,082		842		( 267,818	)		350,106
Preferred Securities		680,527		14,361		( 207,218	)		487,670
Corporate Bonds		506,165		5,836		( 7,781	)		504,220
Government Agency Obligations		1,889,963		15,201		( 3,714	)		1,901,450
Total	$	5,230,713	$	93,905	$	( 665,457	)	$	4,659,161

- 13 -

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2010 and 2009

and December 31, 2009

Note 5 – INVESTMENTS - Continued

December 31, 2009	Cost		Unrealized Gains		Unrealized Losses			Fair Value

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

Proceeds from the sale of investments were $6,928,321, $1,605,269 and $4,127,666 during the year ended December 31, 2009 and for the six months ended June 30, 2010 and 2009, respectively.

Gross gains of $351,419, $120,850 and $235,408 and gross losses of $629,893, $66,066 and $331,562 were realized on these sales during the year ended December 31, 2009 and for the six months ended June 30, 2010 and 2009, respectively.

The following table shows the gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2010 and 2009 and at December 31, 2009:

	Less Than 12 Months					12 Months or Greater					Total
June 30, 2010	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

Equities	$	58,222	$	( 10,953	)	$	154,154	$	(106,939	)	$	212,376	$	( 117,892	)
Mutual Funds		278		( 4	)		99,486		( 7,849	)		99,764		( 7,853	)
Preferred Securities		—		—			193,090		( 64,789	)		193,090		( 64,789	)
Corporate Bonds		499,285		( 26,989	)		181,076		( 3,151	)		680,361		( 30,140	)
Government Agency Obligations		—		—			84,775		( 1,752	)		84,775		( 1,752	)
	$	557,785	$	( 37,946	)	$	712,581	$	(184,480	)	$	1,270,366	$	(222,426	)

- 14 -

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2010 and 2009

and December 31, 2009

Note 5 – INVESTMENTS - Continued

	Less Than 12 Months					12 Months or Greater					Total
June 30, 2009	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

Equities	$	537,047	$	( 113,772	)	$	270,700	$	( 65,154	)	$	807,747	$	( 178,926

Lifeway Foods (LWAY)

Annual Reports

Quarterly Reports

8-K

Other

Documents found in this filing: