Form 10-Q LIFEWAY FOODS INC For: Mar 31

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

_____________________

For the quarterly period ended:  March 31, 2016

For the transition period from __________ to __________

Commission File Number: 000-17363

_____________________

 

LIFEWAY FOODS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

_____________________

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  ☒   No  ☐

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  ☒   No  ☐

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

 

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☐

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

As of April 18, 2016, 16,158,858 shares of the registrant's common stock, no par value, were outstanding.

 

 

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LIFEWAY FOODS, INC.

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ITEM 1.  FINANCIAL STATEMENTS.

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

March 31, 2016 and December 31, 2015

(In thousands)

 

 

 

 

See accompanying notes to consolidated financial statements

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Income and Comprehensive Income

For the three months ended March 31, 2016 and 2015

(Unaudited)

(In thousands, except per share data)

 

 

 

 

 

See accompanying notes to consolidated financial statements

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders' Equity

For the Three Months Ended March 31, 2016 and 2015

 (Unaudited)

(In thousands, except per share data)

 

 

 

 

See accompanying notes to consolidated financial statements

 

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2016 and 2015

 (Unaudited)

(In thousands, except per share data)

 

 

 

 

Cash flows from operating activities:		2016				2015
Net income		$	648			$	654
Adjustments to reconcile net income to operating cash flow:
Depreciation and amortization			807				770
Loss on sale of investments, net			12				5
Impairment of investments			—				180
Deferred income taxes			—				(196	)
Stock based compensation			21				—
Gain on sale of equipment			—				(36	)
(Increase) decrease in operating assets:
Accounts receivable			(584	)			(33	)
Inventories			(627	)			(513	)
Refundable income taxes			(427	)			1,050
Prepaid expenses and other current assets			(71	)			180
Increase (decrease) in operating liabilities:
Accounts payable			(1,054	)			(1,464	)
Accrued expenses			311				1,395
Income taxes payable			(52	)			145
Net cash (used in) provided by operating activities			(1,016	)			2,137
Cash flows from investing activities:
Purchases of investments			(373	)			(1,005	)
Proceeds from sale of investments			152				693
Redemption of certificates of deposits			363				100
Investments in certificates of deposit			—				(85	)
Purchases of property and equipment			(336	)			(1,040	)
Proceeds from sale of equipment			—				36
Net cash used in investing activities			(194	)			(1,301	)
Cash flows from financing activities:
Purchase of treasury stock			(440	)			—
Repayment of notes payable			(210	)			(271	)
Net cash used in financing activities			(650	)			(271	)
Net increase (decrease) in cash and cash equivalents			(1,860	)			565
Cash and cash equivalents at the beginning of the year			5,646				3,260
Cash and cash equivalents at the end of the year		$	3,786			$	3,825
Supplemental cash flow information:
Cash paid for income taxes, net of refunds		$	886			$	40
Cash paid for interest		$	58			$	65

 

 

 

 

See accompanying notes to consolidated financial statements

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

March 31, 2016 and December 31, 2015

 (Unaudited)

(In thousands, except per share data)

Note 1 – 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, audited 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 as of and for the year ended December 31, 2015.  Certain amounts in prior-year financial statements were reclassified to conform to the current-year presentation.  The results for the period are not necessarily indicative of the results to be expected for other interim periods or the full year.

 

 

Our Consolidated Financial Statements include the accounts of Lifeway Foods, Inc. and all of its wholly owned subsidiaries (collectively "Lifeway" or the "Company").  All significant intercompany accounts and transactions have been eliminated.

 

Note 2 – Significant Accounting Policies

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 fair value of investment securities, the valuation of goodwill and intangible assets, and deferred income taxes.

The Company records sales when 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 gross sales and the related costs are included 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.

The Company expenses advertising costs as incurred.  For the three months ended March 31, 2016 and 2015 total advertising expenses were $241 and $1,500 respectively.

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.

In May 2014, the FASB issued new guidance regarding revenue recognition.  Additional revenue recognition guidance has been issued subsequent to May 2014.    Collectively the new revenue recognition guidance supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific requirements. The new guidance 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. The new guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers.  The Company is required to adopt the new guidance not later than January 1, 2018. Management is currently evaluating the impact that the new guidance will have on the consolidated financial statements and the method of retrospective application, either full or modified.

 

 

 

 

Note 3 – Intangible Assets

Goodwill & indefinite-lived intangible assets consists of the following:

Other intangible assets, net consists of the following:

 

Note 4 – Investments

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

 

 

 

Gross gains of $2, and $6 and gross losses of $14 and $11 were realized on the sales of investments during the three months ended March 31, 2016 and 2015 respectively.

The following table shows the gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2016 and December 31, 2015:

 

		Less Than 12 Months								12 Months or Greater								Total
March 31, 2016		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Common stocks & ETF's		$	83			$	(30	)		$	273			$	(62	)		$	356			$	(92	)
Mutual Funds
Preferred Securities
Corporate Bonds			398				(4	)			566				(94	)			964				(98	)
		$	481			$	(34	)		$	839			$	(156	)		$	1,320			$	(190	)

 

 

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 $0 and $180 during the first quarter of 2016 and 2015, respectively.  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.

 

 

 

 

Note 5 – Inventories

Inventories consist of the following:

 

Note 6 – Property and Equipment

Property and equipment consist of the following:

 

Note 7 – Accrued Expenses

Accrued expenses consist of the following:

 

 

 

 

 

Note 8 – Notes Payable

 

 

The variable rate bank notes are subject to interest at the prime rate or at the LIBOR rate plus 2.5% and are collateralized by substantially all of the assets of the Company. In addition, under the terms of the related agreements, the Company is subject to minimum fixed charged ratio and tangible net worth thresholds, which among other things may limit the Company's ability to pay dividends or repurchase shares of its common stock. The Company was in compliance with these financial covenants at March 31, 2016.  Further, under the agreements the Company is required to deliver its annual and quarterly financial statements and related SEC filings within specified timeframes.

In addition, the Company has a $5 million revolving credit facility. Borrowings under the facility are subject to interest at the prime rate or LIBOR plus 2.5%.  As of March 31, 2016 and December 31, 2015 there were no borrowings under the facility. Unless renewed the facility expires in July 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 9 – Commitments and contingencies

Lease obligations -The Company leases three stores for its Starfruit subsidiary. Total rent expense for these leases was $45 and $30 for the three months ended March 31, 2016 and 2015, respectively. The Company is also responsible for additional rent equal to real estate taxes and other operating expenses.

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

 

Note 11 – Fair Value Measurements

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 March 31, 2016 and December 31, 2015.

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 March 31, 2016 and December 31, 2015.  Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:

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.

Note 12 — Stock-based Compensation

 

 

We measure the fair value of stock options using the Black-Scholes option pricing model. The expected term of options granted was based on the weighted average time of vesting and the end of the contractual term. We utilized this simplified method as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term.

The following assumptions were used for the grants in 2016:

We expense stock options on a straight-line basis over the service period.  As of March 31, 2016, the total remaining unearned compensation related to non-vested stock options was $90, which will be amortized over the weighted-average remaining service period of 1.6 years.

 

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 package configurations.  In addition to the drinkable products, Lifeway manufactures "Lifeway Farmer Cheese," a line of various farmer cheeses.

Gross sales of products by category for the three months ended March 31 were as follows:

 

		Three months ended March 31,
		2016				2015
Drinkable Kefir other than ProBugs		$	32,249			$	28,200
Pro Bugs			1,885				2,079
Lifeway Farmer Cheese			2,637				2,513
Frozen Kefir			259				311
Gross Sales		$	37,030			$	33,103

 

 

 

 

 

 

 

 

 

 

 

 

Note 14 – Related party transactions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Results of Operations

Net Sales

Net sales increased by $2,948 or 10% to $32,570.  The increase in net sales reflects an 11.9% increase in gross sales reflecting higher volumes of drinkable Kefir offset by modestly higher discounts and promotional allowances given to customers.  Sales of our flagship 32-ounce product led the overall volume increase followed by strong private label sales and the introduction of new items.

Gross Profit

Gross profit as a percent of net sales declined to 26.4% during the three-month period ended March 31, 2016 from 28.3% during the same three-month period in 2015.  The decline in the gross profit percent reflects higher indirect manufacturing costs, primarily related to our Waukesha facility which continued to expand production volumes and an increase in certain ingredient costs, partially offset by improved labor productivity.     Milk prices in the 2016 period were relatively flat compared to the year ago period.

 

 

 

Selling Expenses

Selling expenses decreased by $358 or 10.8% to $2,944 during the three-month period ended March 31, 2016 from $3,302 during the same period in 2015 reflecting significantly lower advertising programs offset by higher salaries and additional royalty expenses.  In the first quarter of 2015 the company ran its first national TV commercial that aired during the Golden Globe awards.  Selling expenses as a percentage of sales were 9.0% for the three-month period ended March 31, 2016 compared to 11.1% for the same period in 2015.

 

General and administrative expenses

General and administrative expenses increased $864 or 24.7% to $4,356 during the three-month period ended March 31, 2016 from $3,492 during the same period in 2015.  The increase is primarily a result of increases in salaries and professional fees.  The increase in salaries reflects higher levels of executive compensation for senior management and an increase in the headcount of the overall management team.  Professional fees, which consists primarily of legal and accounting fees increased modestly in the three-month period ended March 31, 2016 due primarily to our process improvement initiatives aimed at remediating internal control deficiencies, redundancies and inefficiencies associated with engaging a new audit firm and elevated legal fees associated with the improved governance.

 

Income from operations and net income

Liquidity and Capital Resources

Sources and Uses of Cash

 

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

For information regarding our exposure to certain market risk, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Form 10-K. There have been no significant changes in our market risk exposures from the 2015 year-end.

 

ITEM 4.  CONTROLS AND PROCEDURES.

(a)

Evaluation of Disclosure Controls and Procedures

(b)

Changes in Internal Control over Financial Reporting

Management's Remediation Initiatives

 

·	Our leadership team remains committed to achieving and maintaining a strong control environment, high ethical standards and financial reporting integrity. This commitment continues to be communicated to and reinforced with our employees.

·	We continue to foster awareness and understanding of standards and principles for accounting and financial reporting. This includes the implementation and clarification of specific accounting policies and procedures.

·	We continue to enhance the development, communication, and monitoring of processes and controls to ensure that appropriate account reconciliations and journal entry controls are performed, documented, and reviewed as part of our standardized procedures.

·	We continue to improve the planning, coordination, communication and discipline in our period-end closing and financial statement preparation process in order to increase both its effectiveness and efficiency.

·	The audit committee of our board of directors has maintained an elevated frequency and depth of its discussions with management regarding financial reporting and internal control matters.

·	During the three months ended March 31, 2016 we in-sourced our fixed asset system and related transaction processing from a third party service provider.

·	During the three months ended March 31, 2016 we consolidated our income tax accounting services and income tax return preparation under a single third party service provider.

PART II – OTHER INFORMATION

 

 

ITEM 1.  LEGAL PROCEEDINGS.

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

 

ITEM 1A.  RISK FACTORS.

There have been no material changes to the Risk Factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

 

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

Issuer Purchases of Equity Securities

(a)	During the fourth quarter of 2015, the company had a publicly announced share repurchase program. Under this program, which was announced on September 24, 2015, the company's Board of Directors authorized the purchase of up to $3.5 million of company stock. The program has no expiration date.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

None.

 

ITEM 4.  MINE SAFETY DISCLOSURE.

Not applicable.

 

ITEM 5.  OTHER INFORMATION.

None.

 

 

 

 

 

 

ITEM 6.  EXHIBITS.

 

 

 

* This exhibit is furnished and will not be deemed "filed."

 

 

 

 

 

 

 

 

 

 

 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INDEX OF EXHIBITS

 

 

 

 

 

* This exhibit is furnished and will not be deemed "filed."

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SECTION 302 CERTIFICATION OF C.E.O.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Julie Smolyansky, certify that:

 

 

 

 

 

 

 

 

 

 

 

 

 

SECTION 302 CERTIFICATION OF C.F.O.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, John P. Waldron, certify that:

 

 

 

 

 

 

 

 

 

 

 

 

 

Date: May 10, 2016

By: /s/ John P. Waldron                         John P. Waldron Chief Financial Officer (Principal Financial Officer)

 

 

SECTION 906 CERTIFICATION OF C.E.O.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Lifeway Foods, Inc. (the "Company") for the period ended March 31, 2016 as filed with the SEC (the "Report"), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to her knowledge:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

 

 

 

SECTION 906 CERTIFICATION OF C.F.O.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report on Form 10-Q of Lifeway Foods, Inc. (the "Company") for the period ended March 31, 2016 as filed with the SEC (the "Report"), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

 

 

Date: May 10, 2016

By: /s/ John P. Waldron                         John P. Waldron Chief Financial Officer (Principal Financial Officer)

 

Lifeway Foods, Inc. Announces Results for the First Quarter Ended March 31, 2016

First Quarter Net Sales Increase 10% Year-Over-Year to $32.6 Million

Morton Grove, IL — May 10, 2016 — Lifeway Foods, Inc., (Nasdaq: LWAY), the leading U.S. supplier of kefir cultured dairy products, today reported financial results for the first quarter ended March 31, 2016.

"We are pleased to announce an encouraging start to 2016 in which we achieved double-digit top-line revenue growth and a sequential increase in profitability," said Julie Smolyansky, CEO of Lifeway Foods, Inc. "Our solid first quarter results demonstrate the success of our strategic initiatives. In addition, increased distribution and brand awareness of our probiotic and functional dairy health food products drove our improved operational and financial performance. This positive momentum has us well-positioned for growth and we are confident in our ability to increase value for our shareholders."

First Quarter Results

First quarter of 2016 net sales increased 10.0% to $32.6 million from $29.6 million in the first quarter of 2015.  Gross sales increased 12% driven by higher sales of the Company's Kefir products slightly offset by increased trade promotions and allowances.

Gross profit as a percent of net sales declined to 26.4% from 28.3% in the same period last year.  The first quarter of 2016 gross margin decline reflects increased manufacturing costs primarily related to the ramp up of the Waukesha facility, which continued to expand its production volumes during the quarter. Milk prices were essentially flat versus the year ago period.

Selling expenses decreased approximately 10.8% to $2.9 million during the first quarter of 2016 from $3.3 million in the first quarter of 2015.  The decrease in selling expenses reflects lower advertising programs. General and administrative expenses increased $0.9 million to $4.4 million from $3.5 million compared to the same period last year primarily due to the increased professional fees associated with legal and regulatory functions.

Net income was approximately $0.6 million, or $0.04 per diluted share for the quarter ended March 31, 2016, consistent with the first quarter of 2015.

The effective tax rate for first quarter of 2016 was 38.8% compared to 49.9% in the first quarter of 2015.  The lower tax rate in the first quarter of 2016 was driven by the deductibility of certain operating expenses for federal income tax purposes that were not fully deductible in 2015.

Balance Sheet

Cash and cash equivalents were approximately $3.8 million as of March 31, 2016 compared to cash and cash equivalents of $5.6 million as of December 31, 2015 reflecting the unfavorable timing of payments to suppliers and service providers as well as share repurchase activity.

The Company repurchased approximately 39,000 shares of common stock at a cost of $0.4 million in the three months ended March 31, 2016. Approximately 76,000 shares remained available to repurchase under this program as of March 31, 2016.  The stock repurchase program has no expiration date and may be suspended or discontinued at any time.

Conference Call

The Company will host a conference call to discuss these results with additional comments and details on Tuesday, May 10, 2016 at 4:30 p.m. ET. The call will be broadcast live over the Internet hosted at the Investor Relations section of Lifeway Foods' website at www.lifewaykefir.com, and will be archived online through May 24, 2016. In addition, listeners may dial 877-407-3982 in North America, and international listeners may dial 201-493-6780. Participants from the Company will be Julie Smolyansky, President and Chief Executive Officer, Ed Smolyansky, Chief Operating Officer, and John Waldron, Chief Financial Officer.

About Lifeway Foods

Lifeway Foods, Inc. (LWAY), recently named one of Forbes' Best Small Companies, is America's leading supplier of the probiotic fermented beverage known as kefir. In addition to its line of drinkable kefir, the company also produces frozen kefir, specialty cheeses and a ProBugs line for kids. Lifeway's tart and tangy cultured dairy products are available throughout the United States and on a small, but growing basis, in Canada, Latin America and the United Kingdom. Learn how Lifeway is good for more than just you at www.lifewaykefir.com.

Forward Looking Statements

This news release contains forward-looking statements. Investors are cautioned that actual results may differ materially from such forward-looking statements. Forward-looking statements involve risks and uncertainties including, but not limited to, competitive pressures and other important factors detailed in the Company's reports filed with the Securities and Exchange Commission.

Contact:

 

 

 

 

 

 

 

 

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

March 31, 2016 and December 31, 2015

(In thousands)