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Item 1A. Risk Factors

2021-03-25 compared with 2020-04-14 · 228 added, 247 removed, 263 unchanged (64% of the section changed)

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financial condition, results of operations, and future prospects could be materially and adversely affected.

RISKS RELATED TO OUR BUSINESS

Our product categories face a high

level of competition, which could negatively impact our sales and results of operations.

We face significant competition for limited

retailer shelf space in each of our product categories.

Competition in our product categories is based on product innovation, product

quality, price, brand recognition and loyalty, effectiveness of marketing, promotional activity, and our ability to identify and

satisfy consumer tastes and preferences.

We believe that our brands have benefited in many cases from being the first to introduce

products in their categories, and their success has attracted competition from other food and beverage companies that produce branded

products, as well as from private label competitors.

Some of our competitors, such as Danone, General Mills, Chobani, Hain Celestial

Group, and Nestle, have substantial financial and marketing resources.

These competitors and others may be able to introduce innovative

products more quickly or market their products more successfully than we can, which could cause our growth rate to be slower than

we anticipate and could cause sales to decline.

We compete with a limited number of other

domestic kefir producers and consequently faces a small amount of direct competition for kefir products.

However, our kefir-based

products compete with other dairy products, notably spoonable and drinkable yogurt, and, increasingly, with non-dairy probiotic

products that incorporate kefir cultures but are not kefir.

We face significant competition for limited retailer shelf space in

each of our product categories.

Competition in our product categories is based on product innovation, product quality, price, brand

recognition and loyalty, effectiveness of marketing, promotional activity, and our ability to identify and satisfy consumer tastes

and preferences.

We believe that our brands have benefited in many cases from being the first to introduce products in their categories,

and their success has attracted competition from other food and beverage companies that produce branded products, as well as from

private label competitors.

Some of our competitors, such as Danone, General Mills, Chobani, Hain Celestial Group, and Nestle, have

substantial financial and marketing resources.

These competitors and others may be able to introduce innovative products more quickly

or market their products more successfully than we can, which could cause our growth rate to be slower than we anticipate and could

cause sales to decline.

We also compete with producers of non-dairy

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is to introduce timely, new, cost-effective, and appealing products and to innovate successfully within our existing product categories.

New items introduced through our innovation efforts partially offset lower volumes in 2019 of our core drinkable kefir products.

However, consumer tastes and preferences change rapidly, and evolve over time.

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This process is inherently

risky and will result in investments in substantial time and resources for which we do not achieve any return or value.

risky and will result in investments of substantial time and resources for which we may not achieve any return or value.

product development and innovation is also affected by our ability to launch new or improved products successfully and on a timely

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not be able to create or sustain growth or successfully implement our business strategy.

The consolidation of our customers

or the loss of any of our largest customers could negatively impact our sales and results of operations.

Customers, such as supermarkets and food

distributors, continue to consolidate.

This consolidation has produced larger, more sophisticated organizations with increased

negotiating and buying power that are able to resist price increases or demand increased promotional programs, as well as operate

with lower inventories, decrease the number of brands that they carry and increase their emphasis on private label products, all

of which could negatively impact our business.

The consolidation of retail customers also increases the risk that a significant

adverse impact on their business could have a corresponding material adverse impact on our business.

Two of our customers together accounted

for 22% of our net sales in the fiscal year ended December 31, 2019.

Where we enter into written agreements with our customers,

they are generally terminable after short notice periods by the customer.

In addition, our customers sometimes award contracts

based on competitive bidding, which could result in lower profits for contracts we win and the loss of business for contracts we

The loss of any large customer, the reduction of purchasing levels, or the cancellation of any business from a large customer

for an extended period of time could negatively affect our sales and results of operations.

We rely on sales made by or through our

independent distributors to customers.

Distributors purchase directly for their own account for resale.

The loss of, or business

disruption at, one or more of these distributors may harm our business.

If we are required to obtain additional or alternative

distribution agreements or arrangements in the future, we cannot be certain that we will be able to do so on satisfactory terms

or in a timely manner.

Our inability to enter into satisfactory distribution agreements may inhibit our ability to implement our

business plan or to establish markets necessary to expand the distribution of our products successfully.

We are subject to the risk of product

contamination and product liability claims, which could harm our reputation, force us to recall products and incur substantial

The sale of food products for human consumption

involves the risk of injury to consumers.

Such injuries may result from tampering by unauthorized third parties, inadvertent mislabeling,

product contamination or spoilage including the presence of foreign objects, substances, chemicals, other agents, or residues introduced

during the storage, processing, handling or transportation phases.

We also may be subject to liability if our products or production

processes violate applicable laws or regulations, including environmental, health, and safety requirements, or in the event our

products cause injury, illness, or death.

Under certain circumstances, we may be

required to recall or withdraw products, suspend production of our products, or cease operations, which may lead to a material

adverse effect on our business.

In addition, customers may cancel orders for such products as a result of such events.

a situation does not necessitate a recall or market withdrawal, and even if we and each of our co-packers and suppliers comply

in all material respects with all applicable laws and regulations, we may become subject to claims or lawsuits relating to such

Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion

that our products caused illness or physical harm, including the risk of reputational harm being magnified and/or distorted through

the rapid dissemination of information over the Internet, including through news articles, blogs, chat rooms, and social media,

could adversely affect our reputation with existing and potential customers and consumers and our corporate and brand image.

claims or liabilities of this type might not be covered by our insurance or by any rights of indemnity or contribution that we

may have against others.

We maintain product liability insurance in an amount that we believe to be adequate.

However, we cannot

be sure that we will not incur claims or liabilities for which we are not insured or that exceed the amount of our insurance coverage.

A product liability judgment against us or a product recall could have a material adverse effect on our business, consolidated

financial condition, results of operations or liquidity.

We rely on independent certification for several of our

products and facilities.

We rely on independent certification, such

as certifications of our products as “organic”, or “gluten-free,”

to differentiate our products from others.

The loss of any independent certifications could adversely affect our market position as a probiotic-based products and natural,

“better for you”

foods company, which could harm our business.

We rely on independent SQF certification at some of

our facilities, a certification that some of our customers require us to maintain.

We must comply with the requirements of

independent organizations or certification authorities in order to label our products as certified.

For example, we can lose our

“organic”

certification if a manufacturing plant becomes contaminated with non-organic materials, or if it is not properly

cleaned after a production run.

In addition, all organic raw materials must be certified organic.

Our products could lose their

organic certifications if our raw material suppliers lose their organic certifications.

Similarly, we could lose our SQF certification

if we do not meet the requirements of the SQF Code.

The loss of these certifications could cause us to lose customers that require

Lifeway products and/or facilities to carry some or all of them, which could negatively affect our sales and results of operations.

Increases in the cost of raw milk

could reduce our gross margin and profit.

Conventional and organic raw milk, our

primary raw material, is an agricultural commodity that is subject to price fluctuations.

Although both conventional and organic

milk prices in fiscal 2019 were relatively consistent with the prior year, there can be no assurance that such prices will remain

at these levels in the future.

The supply and price of raw milk may be impacted by, among other things, weather, natural disasters,

real or perceived supply shortages, lower dairy and crop yields, general increases in farm inputs and costs of production, political

and economic conditions, labor actions, government actions, and trade barriers.

Increases in the market price for raw milk or over-order

premiums charged by producers may also impact our ability to enter into purchase commitments at a fixed price.

There can be no

assurance that our purchasing practices will mitigate future price risk.

As a result, increases in the cost of raw milk could have

an adverse impact on our profitability.

In addition, the dairy industry continues

to experience periodic imbalances between supply and demand for organic raw milk.

Industry regulation and the costs of organic

farming compared to costs of conventional farming can impact the supply of organic raw milk in the market.

Oversupply levels of

organic raw milk can increase competitive pressure on our products and pricing, while supply shortages can cause higher input costs

and reduce our ability to deliver product to our customers.

Cost increases in raw materials and other inputs could cause our profits

to decrease significantly compared to prior periods, as we may be unable to increase our prices to offset the increased cost of

these raw materials and other inputs.

If we are unable to obtain raw materials and other inputs for our products or offset any

increased costs for such raw materials and inputs, our business could be negatively affected.

Reduced availability of raw materials

and other inputs, as well as increased costs for them, could adversely affect us.

Our business depends heavily on raw materials

and other inputs in addition to conventional and organic raw milk, such as sweeteners, diesel fuel, packaging material, resin,

and other commodities.

Our raw materials are generally sourced from third-party suppliers, and we are not assured of continued

supply, pricing, or exclusive access to raw materials from any of these suppliers.

In addition, some of our raw materials are also

agricultural products, and therefore subject to the same vulnerabilities described above for raw milk.

Other events that adversely

affect our third-party suppliers and that are out of our control could also impair our ability to obtain the raw materials and

other inputs that we need in the quantities and at the prices that we desire.

Such events include problems with our suppliers’

businesses, finances, labor relations, costs, production, insurance, and reputation.

The organic ingredients we use in some

of our products are less plentiful and available from a fewer number of suppliers than their conventional counterparts.

with other manufacturers in the procurement of organic product ingredients may increase in the future if consumer demand for organic

products increases.

Interruption of our supply chain could affect our ability

to manufacture or distribute products, could adversely affect our business and sales, and/or could increase our operating costs

and capital expenditures.

Interruption of our supply chain could affect our

ability to manufacture or distribute products, could adversely affect our business and sales, and/or could increase our operating

costs and capital expenditures.

We have several supply agreements with

suppliers and co-packers that require them to provide us with specific finished goods, including packaging, kefir, and probiotic

For some of these products, we essentially rely on a single supplier or co-packer as our sole source for the item.

The failure for any reason of any such sole source or other co-packer to fulfill its obligations under the applicable agreements

with us or the termination or renegotiation of any such sourcing agreement could result in disruptions to our supply of finished

goods and have an adverse effect on our results of operations.

Additionally, our suppliers and co-packers are subject to risk,

including labor disputes, union organizing activities, financial liquidity, inclement weather, natural disasters, supply constraints,

and general economic and political conditions that could limit their ability to timely provide us with acceptable products, which

could disrupt our supply of finished goods, or require that we incur additional expense by providing financial accommodations to

the supplier or co-packer or taking other steps to seek to minimize or avoid supply disruption, such as establishing new arrangements

with other providers.

suppliers and co-packers that require them to provide us with specific finished goods, including packaging and kefir.

of these products, we essentially rely on a single supplier or co-packer as our sole source for the item.

The failure for any reason

of any such sole source or other co-packer to fulfill its obligations under the applicable agreements with us or the termination

or renegotiation of any such sourcing agreement could result in disruptions to our supply of finished goods and have an adverse

effect on our results of operations.

Additionally, our suppliers and co-packers are subject to risk, including labor disputes,

union organizing activities, financial liquidity, inclement weather, natural disasters, supply constraints, and general economic

and political conditions that could limit their ability to timely provide us with acceptable products, which could disrupt our

supply of finished goods, or require that we incur additional expense by providing financial accommodations to the supplier or

co-packer or taking other steps to seek to minimize or avoid supply disruption, such as establishing new arrangements with other

A new arrangement may not be available on terms as favorable to us as our existing arrangements, if at all.

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As of December 31, 2020, we had outstanding

borrowings of approximately $2,745, net of $32 of unamortized deferred financing costs, which consisted of a revolving line

Our loan agreements contain certain restrictions and requirements that among other things:

require us to maintain a minimum year-to-date EBITDA in fiscal year 2019, and a quarterly fixed charge coverage ratio;

borrowings of $2,768, net of $9 of unamortized deferred financing costs, which consisted of a revolving line of credit.

agreements contain certain restrictions and requirements that among other things:

require us to maintain a quarterly fixed charge coverage ratio and minimum working capital ratio;

limit our ability to obtain additional financing in the future for working capital, capital expenditures and acquisitions, to fund growth or for general corporate purposes;

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impose on us financial and operational restrictions.

Our ability to meet our debt service obligations

will depend on our future performance, which will be affected by the other risk factors described in this Annual Report on Form

If we do not generate enough cash flow to pay our debt service obligations, we may be required to refinance all or part of

our existing debt, sell our assets, borrow more money or raise equity.

There is no guarantee that we will be able to take any of

these actions on a timely basis, on terms satisfactory to us, or at all.

Our ability to meet our debt service

obligations will depend on our future performance, which will be affected by the other risk factors described in this Annual Report

on Form 10-K.

If we do not generate enough cash flow to pay our debt service obligations, we may be required to refinance all

or part of our existing debt, sell our assets, borrow more money or raise equity.

There is no guarantee that we will be able to

take any of these actions on a timely basis, on terms satisfactory to us, or at all.

Our notes bear interest at variable rates.

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license or royalty agreements, or stop the sale of certain products, any of which could have a negative effect on our results of

Litigation or legal proceedings could

expose us to significant liabilities and have a negative impact on our reputation.

We are or may become party to various claims

and legal proceedings in the ordinary course of our business.

These claims and legal proceedings may include lawsuits or claims

relating to contracts, intellectual property, product recalls, product liability, the marketing and labeling of products, employment

matters, environmental matters, regulatory compliance, or other aspects of our business.

Even when not merited, the defense of

these claims and legal proceedings may divert our management’s attention, and we may incur significant expenses in defending

these claims and proceedings.

In addition, we may be required to pay damage awards or settlements or become subject to injunctions

or other equitable remedies, which could have a material adverse effect on our financial position, cash flows, or results of operations.

The outcome of litigation is often difficult to predict, and the outcome of pending or future claims and legal proceedings may

have a material adverse effect on our financial position, cash flows, or results of operations.

We evaluate these claims and legal

proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses.

on these assessments and estimates, we establish reserves or disclose the relevant litigation claims or legal proceedings, as appropriate.

These assessments and estimates are based on the information available to management at the time and involve a significant amount

of management judgment.

Actual outcomes or losses may differ materially from our current assessments and estimates.

If actual outcomes

or losses differ materially from our current assessments and estimates or additional claims or legal proceedings are initiated,

we could be exposed to significant liabilities.

The Smolyansky family controls a majority of our common

stock and has the ability to control the outcome of matters submitted for stockholder approval.

A majority of our common stock is controlled

by members of the Smolyansky family, and collectively, they have the ability to control the outcome of stockholder votes, including

the election of all of our directors and the approval or rejection of any merger, change of control, or other significant corporate

No person interested in acquiring Lifeway will be able to do so without obtaining the consent of the Smolyansky family.

We believe that having the Smolyansky family as a significant part of a long-term-focused, committed, and engaged stockholder base

provides us with an important strategic advantage, particularly in a business with a mature, well-recognized brand.

This advantage

could be eroded or lost, however, should Smolyansky family members cease, collectively, to be controlling stockholders of Lifeway.

We desire to remain independent and family-owned, and we believe the Smolyansky family shares these interests.

However, the Smolyansky

family’s interests may not always be aligned with other stockholders’

By exercising their control, the Smolyansky

family could cause Lifeway to take actions that are at odds with the investment goals of institutional, short-term, non-voting,

or other non-controlling investors, or that have a negative effect on our stock price.

Because the Smolyansky family, collectively,

controls a majority of our common stock (approximately 50.1%), we are considered a “controlled company”

Listing Rules.

Controlled companies are exempt from Nasdaq listing standards that require a board composed of a majority of independent

directors, a fully independent nominating/corporate governance committee, and a fully independent compensation committee.

Board of Directors has determined that Lifeway will avail itself of these exemptions, though we currently maintain a Board composed

of a majority of independent directors.

As a result of the controlled company exemption, our corporate governance practices differ

from those of non-controlled companies, which are subject to all of the Nasdaq corporate governance requirements.

Specifically,

while we continue to maintain a majority of independent directors on the Board and to ensure that a committee of those independent

directors select director nominees and determine the compensation of our officers, we have not, in the past, maintained separate

compensation or nominating committees.

In May, 2020, the Board of Directors formed a separate Compensation Committee and adopted

a Compensation Committee Charter.

In the event we cease to be a controlled company, we will be required to comply with all of

the corporate governance standards under Nasdaq’s rules, subject to applicable transition periods.

RISKS RELATED TO OUR INDUSTRY