Notes to Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data)
Note 1 – Basis of Presentation
The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) for interim
financial information, and do not include certain information and footnote disclosures required for complete, audited financial statements.
In the opinion of management, these statements include all adjustments necessary for a fair presentation of the results of all interim
periods reported herein. The consolidated financial statements and related notes should be read in conjunction with the consolidated financial
statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Results
of operations for any interim period are not necessarily indicative of future or annual results.
Principles of consolidation
The consolidated financial statements include the
accounts of Lifeway Foods, Inc. and all its wholly owned subsidiaries (collectively “Lifeway” or the “Company”).
All significant intercompany accounts and transactions have been eliminated.
Note 2 – Summary of Significant Accounting
Policies
Our significant accounting policies, which are
summarized in detail in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, have not materially changed. The following
is a description of certain of our significant accounting policies.
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 consolidated 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 valuation of goodwill and intangible assets, stock-based
and incentive compensation, and deferred income taxes.
Cash and cash equivalents
Lifeway considers cash and all highly liquid investments
purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at cost, which
approximates or equals fair value due to their short-term nature.
Lifeway from time to time may have bank deposits in
excess of insurance limits of the Federal Deposit Insurance Corporation. The Company places its cash and cash equivalents with high credit
quality financial institutions. Lifeway has not experienced any losses in such accounts and believes the financial risks associated with
these financial instruments are minimal.
Customer concentration
Sales are predominately to companies in the retail
food industry located within the United States. Two major customers accounted for approximately 24% and 21% of net sales for the three
months ended March 31, 2023 and 2022, respectively.
Advertising and promotional costs
Lifeway expenses advertising costs as incurred and
is reported in Selling expense in the Company’s consolidated statement of operations. Total advertising expense was $1,463 and $1,204
for the three months ended March 31, 2023 and 2022, respectively.
Segments
The Company is managed as a single reportable segment.
The Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), reviews financial information
on an aggregate basis for purposes of allocating resources and assessing financial performance, as well as for making strategic operational
decisions and managing the organization. Substantially all of Lifeway’s consolidated revenues relate to the sale of cultured dairy
products that it produces using the same processes and materials and are sold to consumers through a common network of distributors and
retailers in the United States.
Recent accounting pronouncements
Adopted
In October 2021, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-08, Business Combinations (Topic 805):
Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new guidance provides a single comprehensive
accounting model on revenue recognition for contracts with customers and requires that the acquirer in a business combination recognize
and measure contract assets and liabilities acquired in a business combination in accordance with Topic 606 (Revenue from Contracts with
Customers). The amendments in this ASU are effective for fiscal years beginning after December 15, 2022. The Company adopted this standard
during the first quarter of 2023. The adoption did not have a material impact on the Company’s financial statements.
In March 2020, the FASB issued ASU No. 2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The new guidance provides
optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference LIBOR
or another reference rate expected to be discontinued because of reference rate reform. The guidance will be effective prospectively as
of March 12, 2020 through December 31, 2022 and interim periods within those fiscal years. The Company adopted this standard during the
first quarter of 2023. The adoption did not have a material impact on the Company’s financial statements.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, in November 2018 issued
an amendment, ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, and in November 2019 issued
two amendments, ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases
(Topic 842): Effective Dates, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. The
series of new guidance amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather
than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result
in the earlier recognition of allowances for losses. The guidance should be applied on either a prospective transition or modified-retrospective
approach depending on the subtopic. The guidance is effective for annual periods beginning after December 15, 2022, including interim
periods within those fiscal years, with early adoption permitted. The Company adopted this standard during the first quarter of 2023.
The adoption did not have a material impact on the Company’s financial statements.
Note 3 – Inventories, net
Inventories consisted of the following:
Schedule of inventories | |
| | | |
| | |
| |
March 31, 2023 | | |
December 31, 2022 | |
Ingredients | |
$ | 3,029 | | |
$ | 2,859 | |
Packaging | |
| 2,929 | | |
| 3,233 | |
Finished goods | |
| 3,334 | | |
| 3,539 | |
Total inventories, net | |
$ | 9,292 | | |
$ | 9,631 | |
Note 4 – Property, Plant and Equipment, net
Property, plant and equipment consisted of the following:
Schedule of property, plant and equipment | |
| | | |
| | |
| |
March 31, 2023 | | |
December 31, 2022 | |
Land | |
$ | 1,565 | | |
$ | 1,565 | |
Buildings and improvements | |
| 19,356 | | |
| 19,341 | |
Machinery and equipment | |
| 32,786 | | |
| 32,786 | |
Vehicles | |
| 712 | | |
| 640 | |
Office equipment | |
| 1,024 | | |
| 979 | |
Construction in process | |
| 2,931 | | |
| 1,180 | |
| |
| 58,374 | | |
| 56,491 | |
Less accumulated depreciation | |
| (36,234 | ) | |
| (35,586 | ) |
Total property, plant and equipment, net | |
$ | 22,140 | | |
$ | 20,905 | |
Note 5 – Goodwill and Intangible Assets
Goodwill
Goodwill consisted of the following:
Schedule of goodwill | |
| | |
| |
Total | |
Balance at December 31, 2022, before accumulated impairment loses | |
$ | 12,948 | |
Accumulated impairment losses | |
| (1,244 | ) |
Balance at December 31, 2022 | |
$ | 11,704 | |
Balance at March 31, 2023 | |
$ | 11,704 | |
Intangible Assets
Other intangible assets, net consisted of the following:
Schedule of finite-lived intangible assets | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
March 31, 2023 | | |
December 31, 2022 | |
| |
Gross | | |
| | |
Net | | |
Gross | | |
| | |
Net | |
| |
Carrying | | |
Accumulated | | |
Carrying | | |
Carrying | | |
Accumulated | | |
Carrying | |
| |
Amount | | |
Amortization | | |
Amount | | |
Amount | | |
Amortization | | |
Amount | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Recipes | |
$ | 44 | | |
$ | (44 | ) | |
$ | – | | |
$ | 44 | | |
$ | (44 | ) | |
$ | – | |
Customer lists and other customer related intangibles | |
| 4,529 | | |
| (4,529 | ) | |
| – | | |
| 4,529 | | |
| (4,529 | ) | |
| – | |
Customer relationship | |
| 3,385 | | |
| (1,252 | ) | |
| 2,133 | | |
| 3,385 | | |
| (1,212 | ) | |
| 2,173 | |
Brand names | |
| 7,948 | | |
| (2,778 | ) | |
| 5,170 | | |
| 7,948 | | |
| (2,683 | ) | |
| 5,265 | |
Formula | |
| 438 | | |
| (438 | ) | |
| – | | |
| 438 | | |
| (438 | ) | |
| – | |
Total intangible assets, net | |
$ | 16,344 | | |
$ | (9,041 | ) | |
$ | 7,303 | | |
$ | 16,344 | | |
$ | (8,906 | ) | |
$ | 7,438 | |
Estimated amortization expense on intangible assets
for the next five years is as follows:
Schedule of amortization expense on intangible assets | |
| | |
Year | |
Amortization | |
Nine months ended December 31, 2023 | |
$ | 405 | |
2024 | |
$ | 540 | |
2025 | |
$ | 540 | |
2026 | |
$ | 540 | |
2027 | |
$ | 540 | |
Note 6 – Accrued Expenses
Accrued expenses consisted of the following:
Schedule of accrued expenses | |
| | | |
| | |
| |
March 31, 2023 | | |
December 31, 2022 | |
Payroll and incentive compensation | |
$ | 2,327 | | |
$ | 2,925 | |
Real estate taxes | |
| 309 | | |
| 394 | |
Current portion of operating lease liabilities | |
| 66 | | |
| 70 | |
Other | |
| 526 | | |
| 424 | |
Total accrued expenses | |
$ | 3,228 | | |
$ | 3,813 | |
Note 7 – Debt
Note payable consisted of the following:
Schedule of debt | |
| | | |
| | |
| |
March 31, 2023 | | |
December 31, 2022 | |
Term loan due August 18, 2026. Interest (6.71% at March 31, 2023) payable monthly. | |
$ | 3,250 | | |
$ | 3,750 | |
Unamortized deferred financing costs | |
| (22 | ) | |
| (23 | ) |
Total note payable | |
| 3,228 | | |
| 3,727 | |
Less current portion | |
| (1,000 | ) | |
| (1,250 | ) |
Total long-term portion | |
$ | 2,228 | | |
$ | 2,477 | |
The scheduled maturities of the term loan, excluding deferred financing
costs, at March 31, 2023 are as follows:
Schedule of maturities of long-term debt | |
| | |
Nine months ended December 31, 2023 | |
$ | 750 | |
2024 | |
| 1,000 | |
2025 | |
| 1,000 | |
2026 | |
| 500 | |
Total term loan | |
$ | 3,250 | |
Credit Agreement
On August 18, 2021, Lifeway entered into the Fourth
Modification (the “Fourth Modification”) to the Amended and Restated Loan and Security Agreement (as amended and modified
from time to time, the “Credit Agreement” and, as amended and modified by the Fourth Modification, the “Modified Credit
Agreement”) with its existing lender and certain of its subsidiaries. The Fourth Modification amends the Credit Agreement to provide
for, among other things, a $5 million term loan by the existing lender to the borrowers to be repaid in quarterly installments of principal
and interest over a term of five years (the “Term Loan”). The termination date of the Term Loan is August 18, 2026, unless
earlier terminated. The Amended and Restated Loan and Security Agreement continues to provide Lifeway with a revolving line of credit
up to a maximum of $5 million (the “Revolving Loan”) and provides the Borrowers with an incremental facility not to exceed
$5 million (the “Incremental Facility” and together with the Revolving Loan, the “Loans”). The Termination Date
of the Revolving Loan was extended to June 30, 2025, unless earlier terminated.
As amended, all outstanding amounts under the revolving
line of credit and term loan bear interest, at Lifeway’s election, at either the lender Base Rate (the Prime Rate minus 1.00%) or
the LIBOR plus 1.95%, payable monthly in arrears. Lifeway is also required to pay a quarterly unused revolving line of credit fee of 0.20%
and, in conjunction with the issuance of any letters of credit, a letter of credit fee of 0.20%.
The Modified Credit Agreement includes customary representations,
warranties, and covenants, including financial covenants requiring the Company to maintain a fixed charge coverage ratio of no less than
1.25 to 1.00, and a minimum working capital financial covenant, as defined, of no less than $11.25 million, in each of the fiscal quarters
ending through the expiration date. The Modified Credit Agreement continues to provide for events of default, including failure to repay
principal and interest when due and failure to perform or violation of the provisions or covenants of the agreement, as a result of which
amounts due under the Modified Credit Agreement may be accelerated. The loans and all other amounts due and owed under the Credit Agreement
and related documents are secured by substantially all of the Company’s assets.
Lifeway was in compliance with the fixed charge coverage
ratio and minimum working capital covenants at March 31, 2023.
Revolving Credit Facility
As of March 31, 2023, the Company had $2,777 outstanding
under the Revolving Credit Facility. The Company had $2,223 available for future borrowings under the Revolving Credit Facility as of
March 31, 2023. Lifeway’s interest rate on debt outstanding under the Revolving Credit Facility as of March 31, 2023 was 6.66%.
Note 8 – Leases
The Company leases certain machinery and equipment
with fixed base rent payments and variable costs based on usage. Remaining lease terms for these leases range from less than one year
to five years. The Company includes lease extension options, if applicable and reasonably certain to be exercised, in the calculation
of the right-of-use asset and lease liabilities. Lifeway includes only fixed payments for lease components in the measurement of the right-of-use
asset and lease liability. Variable lease payments are those that vary because of changes in facts or circumstances occurring after the
commencement date, other than the passage of time. There are no residual value guarantees. Lifeway does not currently have leases which
meet the finance lease classification as defined under ASC 842.
Lifeway treats contracts as a lease when the contract
conveys the right to use a physically distinct asset for a period of time in exchange for consideration, it directs the use of the asset
and obtains substantially all the economic benefits of the asset.
Right-of-use assets and lease liabilities are measured
and recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Lifeway has
elected the practical expedient to combine lease and non-lease components into a single component for all of its leases. When the Company
is unable to determine an implicit interest rate, it uses its incremental borrowing rate based on the information available at the commencement
date in determining the present value of future payments for those leases. Lifeway includes options to extend or terminate the lease in
the measurement of the right-of-use asset and lease liability when it is reasonably certain that it will exercise such options. Lease
expense for minimum lease payments is recognized on a straight-line basis over the lease term.
The Company does not record leases with an initial
term of 12 months or less on the balance sheet. Expense for these short-term leases is recorded on a straight-line basis over the lease
term. Total lease expense was $31 and $65 (including short term leases) for the three months ended March 31, 2023 and 2022, respectively.
Future maturities of lease liabilities were as follows:
Future maturities of lease liabilities | |
| | |
Year | |
Operating Leases | |
Nine months ended December 31, 2023 | |
$ | 62 | |
2024 | |
| 67 | |
2025 | |
| 33 | |
2026 | |
| 10 | |
2027 | |
| 3 | |
Thereafter | |
| – | |
Total lease payments | |
| 175 | |
Less: Interest | |
| (21 | ) |
Present value of lease liabilities | |
$ | 154 | |
The weighted-average remaining lease term for its
operating leases was 2.54 years as of March 31, 2023. The weighted average discount rate of its operating leases was 11.67% as of March
31, 2023. Cash paid for amounts included in the measurement of lease liabilities was $25 and $43 for the three months ended March 31,
2023 and 2022, respectively.
Note 9 – Commitments and contingencies
Litigation
Lifeway is involved in various legal proceedings,
claims, disputes, regulatory matters, audits, and proceedings arising in the ordinary course of, or incidental to the Company’s
business, including commercial disputes, product liabilities, intellectual property matters and employment-related matters. See footnote
13 for subsequent event litigation.
Lifeway records provisions in the consolidated financial
statements for pending legal matters when it believes it is probable that a loss will be incurred and the amount of such loss can be reasonably
estimated. The Company evaluates, on a periodic basis, developments in legal matters that could affect the amount of any accrual and developments
that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable, it
does not establish an accrued liability. Currently, none of its accruals for outstanding legal matters are material individually or in
the aggregate to its financial position and it is management’s opinion that the ultimate resolution of these outstanding legal matters
will not have a material adverse effect on its business, financial condition, results of operations, or cash flows. However, if the Company
is ultimately required to make payments in connection with an adverse outcome, it is possible that such contingency could have a material
adverse effect on the Company’s business, financial condition, results of operations or cash flows.
Note 10 – Income taxes
Income taxes were recognized at effective rates of
37.9%
and 18.1%
for the three months ended March 31, 2023 and 2022, respectively. The change in the Company’s effective tax rate for the three
months ended March 31, 2023 compared to 2022 is primarily driven by the change in method for calculation of period expense. The current
period applies the estimated annual rate method. As described below, the period ended March 31, 2022 applied the discrete rate method.
The Company calculates the provision for income taxes
during interim reporting periods by applying an estimate of the annual effective tax rate for the full year, excluding unusual or infrequently
occurring discrete items, and applies that rate to income (loss) before provision for income taxes for the period. In accordance with
the authoritative guidance, the Company used a discrete effective tax rate method to calculate income taxes for the quarter ended March
31, 2022 because small changes in the estimated level and mix of annual income or loss by jurisdiction would result in significant changes
in the estimated annual effective tax rate making the historical method unreliable.
The Company’s effective tax rate may change
from period to period based on recurring and non-recurring factors including the relative mix of pre-tax earnings (or losses), the jurisdictional
mix of earnings, enacted tax legislation, state income taxes, the impact of non-deductible items, changes in valuation allowances, settlement
of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits. The Company records discrete
income tax items such as enacted tax rate changes and completed tax audits in the period in which they occur. The Company consistently
reflects non-deductible officer compensation expense, non-deductible compensation expense related to equity incentive awards and separate
state tax rates from period to period. Although similar items were reflected in 2023, the percentage effect is different due to the difference
in pre-tax income (loss) in 2023 compared to 2022.
Unrecognized tax benefits were $0 at March 31, 2023
and 2022, respectively. The Company does not expect material changes to its unrecognized tax benefits during the next twelve months. However,
the outcome of tax audits cannot be predicted with certainty. If a tax audit is resolved in a manner inconsistent with its expectations,
the Company could be required to adjust its provision for income taxes in the period such resolution occurs.
Note 11 – Stock-based and Other Compensation
Omnibus Incentive Plan
In December 2015, Lifeway stockholders approved the
2015 Omnibus Incentive Plan, which authorized the issuance of an aggregate of 3.5 million shares to satisfy awards of stock options, stock
appreciation rights, unrestricted stock, restricted stock, restricted stock units, performance shares and performance units to qualifying
employees. Under the Plan, the Board or its Audit and Corporate Governance Committee approves stock awards to executive officers and certain
senior executives, generally in the form of restricted stock or performance shares. The number of performance shares that participants
may earn depends on the extent to which the corresponding performance goals have been achieved. Stock awards generally vest over a three-year
performance or service period. At March 31, 2023, no shares remain available for award under the 2015 Omnibus Incentive Plan as it was
terminated on August 31, 2022. However, any outstanding awards under the 2015 Omnibus Incentive Plan are unaffected by the termination
of the 2015 Omnibus Incentive Plan or by the approval of the 2022 Omnibus Incentive Plan (the “2022 Plan”) as described below.
On August 31, 2022, Lifeway
stockholders approved the 2022 Plan. Under the 2022 Plan, the Compensation Committee of the Board of Directors may grant awards of various
types of compensation, including, nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted
stock units, performance shares, performance units, cash-based awards and other stock-based awards. The maximum number of shares authorized
to be awarded under the 2022 Plan is 3.25 million shares of common stock, which includes shares that remained available under the now
terminated 2015 Omnibus Incentive Plan.
Awards granted under the
2022 Plan are generally subject to a minimum vesting period of at least one year. Awards may be subject to cliff-vesting or graded-vesting
conditions, with graded vesting starting no earlier than one year after the grant date. The Plan Administrator may provide for shorter
vesting periods in an award agreement for no more than five percent of the maximum number of shares authorized for issuance under the
2022 Plan. As of March 31, 2023, 3.00 million shares remain available to award under the 2022 Plan.
Stock Options
The following table summarizes stock option activity during the three months
ended March 31, 2023:
Schedule of stock option activity | |
| | | |
| | | |
| | | |
| | |
| |
Options | | |
Weighted average exercise price | | |
Weighted average remaining contractual life | | |
Aggregate intrinsic value | |
Outstanding at December 31, 2022 | |
| 41 | | |
$ | 10.42 | | |
| 3.22 | | |
$ | – | |
Granted | |
| – | | |
| – | | |
| – | | |
| – | |
Exercised | |
| – | | |
| – | | |
| – | | |
| – | |
Forfeited | |
| – | | |
| – | | |
| – | | |
| – | |
Outstanding at March 31, 2023 | |
| 41 | | |
$ | 10.42 | | |
| 2.97 | | |
$ | – | |
Exercisable at March 31, 2023 | |
| 41 | | |
$ | 10.42 | | |
| 2.97 | | |
$ | – | |
Restricted Stock Awards
A Restricted Stock Award (“RSA”) represents
the right to receive one share of common stock in the future. RSAs have no exercise price. The grant date fair value of the awards is
determined by the Company’s closing stock price on the grant date. Lifeway expenses RSAs over the vesting period. The following
table summarizes RSA activity during the three months ended March 31, 2023.
Schedule of RSA Activity | |
| | | |
| | |
| |
Restricted Stock Awards | | |
Weighted Average Grant Date Fair Value | |
Outstanding at December 31, 2022 | |
| 164 | | |
$ | 5.69 | |
Granted | |
| – | | |
| – | |
Shares issued upon vesting | |
| – | | |
| – | |
Forfeited | |
| – | | |
| – | |
Outstanding at March 31, 2023 | |
| 164 | | |
$ | 5.69 | |
Vested and deferred at March 31, 2023 | |
| 37 | | |
$ | 5.60 | |
For the three months ended March 31, 2023 and 2022
total pre-tax stock-based compensation expense recognized in the consolidated statements of operations was $104 and $63, respectively.
For the three months ended March 31, 2023 and 2022 tax-related benefits of $29 and $18, respectively, were also recognized. Future compensation
expense related to restricted stock awards was $417 as of March 31, 2023 and will be recognized on a weighted average basis over the next
1.29 years.
Long-Term Incentive Plan Compensation
Lifeway has established long-term incentive-based
compensation programs for certain senior executives and key employees pursuant to the terms of its incentive plans.
2020 CEO Incentive Award
During the fourth quarter 2020, Lifeway awarded a
long-term equity-based incentive of $750 to its Chief Executive Officer (the “2020 CEO Award”) depending on Lifeways 2020
performance levels compared to the respective targets. The equity-based incentive compensation is payable in restricted stock that vests
one-third in April 2022, one-third in April 2023, and one-third in April 2024. The issuance of vested equity awards is subject to approval
under the Stock Purchase Agreement dated October 1, 1999. For the three months ended March 31, 2023 and 2022, $43 and $85 was expensed
as stock-based compensation expense in the consolidated statements of operations, respectively. As of March 31, 2023, the total remaining
unearned compensation was $86, of which $62 will be recognized in 2023, and $24 in 2024, respectively, subject to vesting.
2021 Equity Award
The 2021 long-term equity incentive plan compensation
is based on Lifeway’s achievement of adjusted EBITDA performance versus the respective target established by the Board for 2021.
Under the 2021 plan, collectively the participants earned equity-based incentive compensation of $1,069 based on Lifeway’s achievement
of the respective financial target. The equity-based incentive compensation is payable in restricted stock that vests one-third in April
2022, one-third in April 2023, and one-third in April 2024. For the three months ended March 31, 2023 and 2022, $84 and $166 was expensed
as stock-based compensation expense in the consolidated statements of operations, respectively. As of March 31, 2023, the total remaining
unearned compensation was $150, of which $110 will be recognized in 2023, $40 in 2024, respectively, subject to vesting.
2022 Equity Award
Under the 2022 long-term incentive plan, participants
can earn a specified number of target level Performance Share Units (“PSUs”) contingent upon the achievement of strategic
milestones during the three-year Measurement Period, which is fiscal year 2022 to 2024. The strategic milestones are 1) 3-year cumulative
net revenue, and 2) 3-year cumulative adjusted EBITDA. The target number of PSU awards are weighted 50% on net revenue and 50% on adjusted
EBITDA. Collectively, the participants can earn 125,066 PSUs at the target level. Participants may earn more or less than the target number
of shares based on actual results, however the minimum and maximum number of shares that can be earned are bound by minimum and maximum
thresholds of net revenue and adjusted EBITDA. The PSU awards will be earned and will vest, if at all, after the end of the three-year
measurement period based on achievement of the milestones. The PSU awards do not vest during the three-year measurement period. The PSUs
have a grant date fair value of $6.25 dollars per share. For the three months ended March 31, 2023 and 2022, $112 and $0 was expensed
as stock-based compensation expense in the consolidated statements of operations, respectively.
The 2022 long-term incentive plan also granted restricted
stock unit awards that contain only a service condition and vest on the passage of time in three equal installments on each of the first
three anniversaries of the August 31, 2022 grant date. The stock-based compensation expense for these awards is included in the Restricted
Stock Award section above.
Non-Employee Director Plan
On August 31, 2022, Lifeway
stockholders approved the 2022 Non-Employee Director Equity and Deferred Compensation Plan (the
“2022 Director Plan”), which authorizes the grant of restricted stock units (“RSUs”), which will vest on
such schedule as the Company, in its sole discretion, shall determine. Each non-employee director of the Company is eligible to be a participant
in the 2022 Director Plan until they no longer serve as a non-employee director. As of the date of each annual shareholder meeting, the
Company may grant each director a number of RSUs for such year and set the vesting schedule for the RSUs granted. Whether and how many
RSUs the Company will grant to directors in any year is subject to the sole discretion of the Company and shall in any event be subject
to the 2022 Director Plan’s overall share limits. The maximum aggregate number of shares of common stock that may be issued under
the 2022 Directors Plan is 500 thousand shares. As of March 31, 2023, 466 thousand shares remain available to award under the 2022 Director
Plan. The aggregate fair market value of shares underlying RSU compensation that may be issued as RSU compensation to a director in any
year shall not exceed $170. In addition to the grant of RSUs, the 2022 Director Plan also provides for the deferral by electing participants
of all or part of their cash compensation (in 10% increments) into a deferred cash account, and they may defer all or part of their cash
and/or RSU compensation (in 10% increments) into a deferred RSU account. Deferred benefits are paid in a lump sum upon the applicable
director’s departure from the Board of Directors.
Retirement Benefits
Lifeway has a defined contribution plan which is available
to substantially all full-time employees. Under the terms of the plan, the Company matches employee contributions under a prescribed formula.
For the three months ended March 31, 2023 and 2022, total contribution expense recognized in the consolidated statements of operations
was $150 and $129, respectively.
Note 12 – Related Party Transactions
Consulting Services
Lifeway obtained consulting services from Ludmila
Smolyansky, a member of the Company’s Board of Directors and former Chairperson of its Board of Directors. On January 4, 2022, the
Company notified Ms. Smolyansky that it was terminating the amended and restated consultancy agreement effective January 17, 2022. Service
fees earned are included in general and administrative expenses in the accompanying consolidated statements of operations and were $0
and $22 during each of the three months ended March 31, 2023 and 2022, respectively.
Endorsement Agreement
Lifeway was also a party to an endorsement agreement,
dated as March 14, 2016, by and between the Company and Ludmila Smolyansky, a member of the Company’s Board of Directors and former
Chairperson of its Board of Directors (the “Endorsement Agreement”) under which it paid the Chairperson a royalty based on
the sale of certain Lifeway products, not to exceed $50 in any fiscal month.
On September 6, 2022, the Company entered into an
agreement (the “Termination Agreement”) with Ms. Smolyansky that terminated the Endorsement Agreement as of September 6, 2022.
Pursuant to the Termination
Agreement, the Company and Ms. Smolyansky have agreed, among other things, that (i) the Company will pay Ms. Smolyansky a lump sum payment
of $400, (ii) Ms. Smolyansky will no longer have any further claims against the Company under
the Endorsement Agreement, and (iii) the Endorsement Agreement was terminated and of no further force or effect except for the provisions
thereof that expressly survive termination.
Royalties earned were $0 and $150 during each of the
three months ended March 31, 2023 and 2022, respectively.
Note 13 – Subsequent Events
On April 14, 2023, the Company filed a lawsuit against
Ludmila Smolyansky, a current director of the Company (“Ms. Smolyansky”), and Edward Smolyansky, a former director and
executive officer of the Company (“Mr. Smolyansky,” and together with Ms. Smolyansky, the “Defendants”) in
the Circuit Court of Cook County, Illinois. The Company alleged, among other claims, that the Defendants breached their contractual obligations
under the Proxy Settlement Agreement, the Employment Settlement Agreement between the Company and Mr. Smolyansky and the Endorsement Termination
Agreement between the Company and Ms. Smolyansky (collectively, the “Agreements”), as applicable, by publicly making statements
which negatively commented upon the Company, including the Company’s corporate activities, Board and management and submitting what
was purported to be an alternate slate of director nominees for consideration at this Annual Meeting in violation of the Proxy Settlement
Agreement. The Company is seeking recovery of at least $100 from Mr. Smolyansky and at least
$400 from Ms. Smolyansky.