Lifeway Foods, Inc. 10-K

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Accounting Firm F-1 Consolidated Balance Sheets as of December 31, 2020 and 2019 F-2 Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019 F-3 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and 2019 F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019 F-5 Notes to Consolidated Financial Statements F-6 26 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Lifeway Foods, Inc. and Subsidiaries: Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Lifeway Foods, Inc. and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ Mayer Hoffman McCann P.C. We have served as the Company's auditor since 2015 Chicago, Illinois March 25 2021 F- 1 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2020 and 2019 (In thousands) December 31, 2020 2019 Current assets Cash and cash equivalents $ 7,926 $ 3,836 Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $1,350 and $1,100 at December 31, 2020 and 2019, respectively 8,002 6,692 Inventories, net 6,930 6,392 Prepaid expenses and other current assets 1,163 1,598 Refundable income taxes 31 681 Total current assets 24,052 19,199 Property, plant and equipment, net 21,048 22,274 Operating lease right-of use asset 345 738 Intangible assets Goodwill and indefinite-lived intangibles 12,824 12,824 Other intangible assets, net – 152 Total intangible assets 12,824 12,976 Other Assets 1,800 1,800 Total assets $ 60,069 $ 56,987 Current liabilities Accounts payable $ 5,592 $ 5,282 Accrued expenses 2,196 4,087 Accrued income taxes 653 154 Total current liabilities 8,441 9,523 Line of credit 2,768 2,745 Operating lease liabilities 165 488 Deferred income taxes, net 1,764 922 Other long-term liabilities 77 58 Total liabilities 13,215 13,736 Commitments and contingencies Stockholders’ equity Preferred stock, no par value; 2,500 shares authorized; no shares issued or outstanding at 2020 and 2019 – – Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,604 and 15,710 shares outstanding at 2020 and 2019 6,509 6,509 Paid-in capital 2,600 2,380 Treasury stock, at cost (12,450 ) (12,601 ) Retained earnings 50,195 46,963 Total stockholders’ equity 46,854 43,251 Total liabilities and stockholders’ equity $ 60,069 $ 56,987 See accompanying notes to consolidated financial statements F- 2 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the Years Ended December 31, 2020 and 2019 (In thousands, except per share data) 2020 2019 Net sales $ 102,026 $ 93,662 Cost of goods sold 72,006 68,367 Depreciation expense 3,087 3,146 Total cost of goods sold 75,093 71,513 Gross profit 26,933 22,149 Selling expenses 10,197 11,062 General and administrative 11,661 12,828 Amortization expense 152 192 Total operating expenses 22,010 24,082 Income (loss) from operations 4,923 (1,933 ) Other income (expense): Interest expense (118 ) (249 ) Fair value gain on investments – 1,731 Realized gain on investments, net 4 1,413 (Loss) gain on sale of property and equipment (28 ) 189 Other income 47 84 Total other (expense) income (95 ) 3,168 Income before provision for income taxes 4,828 1,235 Provision for income taxes 1,596 782 Net income $ 3,232 $ 453 Basic earnings per common share $ 0.21 $ 0.03 Diluted earnings per common share $ 0.21 $ 0.03 Weighted average number of shares outstanding - Basic 15,597 15,748 Weighted average number of shares outstanding - Diluted 15,766 15,804 See accompanying notes to consolidated financial statements F- 3 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity For the Years Ended December 31, 2020 and 2019 (In thousands) Common Stock Issued In treasury Paid-In Retained Total Shares $ Shares $ Capital Earnings Equity Balance, January 1, 2019 17,274 $ 6,509 (1,460 ) $ (12,970 ) $ 2,303 $ 46,563 $ 42,405 Cumulative impact of change in accounting principles, net of tax – – – – – (53 ) (53 ) Treasury stock purchased – – (211 ) (538 ) – – (538 ) Issuance of common stock in connection with stock-based compensation – – 107 907 (438 ) – 469 Stock-based compensation – – – – 515 – 515 Net income – – – – – 453 453 Balance, December 31, 2019 17,274 $ 6,509 (1,564 ) $ (12,601 ) $ 2,380 $ 46,963 $ 43,251 Treasury stock purchased – – (179 ) (405 ) – – (405 ) Issuance of common stock in connection with stock-based compensation – – 74 556 (62 ) – 494 Stock-based compensation – – – – 282 – 282 Net Income – – – – – 3,232 3,232 Balance, December 31, 2020 17,274 $ 6,509 (1,669 ) $ (12,450 ) $ 2,600 $ 50,195 $ 46,854 See accompanying notes to consolidated financial statements F- 4 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended December 31, 2020 and 2019 (In thousands) 2020 2019 Cash flows from operating activities: Net income $ 3,232 $ 453 Adjustments to reconcile net income to operating cash flow: Depreciation and amortization 3,239 3,338 Non-cash interest expense 23 23 Non-cash rent expense (37 ) (17 ) Bad debt expense (6 ) 7 Deferred Revenue (91 ) (97 ) Reserve for inventory obsolescence – (52 ) Stock-based compensation 393 838 Deferred income taxes 841 533 Fair value gain on investment – (1,731 ) Net gain on sale of investment – (1,413 ) (Loss) gain on sale of property and equipment 28 (189 ) (Increase) decrease in operating assets: Accounts receivable (1,304 ) (423 ) Inventories (538 ) (523 ) Refundable income taxes 649 2,067 Prepaid expenses and other current assets 423 (526 ) Increase (decrease) in operating liabilities: Accounts payable 311 710 Accrued expenses (1,278 ) 783 Operating lease asset amortization/liability – (17 ) Accrued income taxes 500 47 Net cash provided by operating activities 6,385 3,811 Cash flows from investing activities: Purchases of investments – (15 ) Proceeds from sale of investments – 1,509 Purchases of property and equipment (1,895 ) (1,178 ) Proceeds from sale of property and equipment 5 522 Net cash (used in) provided by investing activities (1,890 ) 838 Cash flows from financing activities: Purchase of treasury stock (405 ) (538 ) Repayment of line of credit – (3,273 ) Net cash used in financing activities (405 ) (3,811 ) Net increase in cash and cash equivalents 4,090 838 Cash and cash equivalents at the beginning of the period 3,836 2,998 Cash and cash equivalents at the end of the period $ 7,926 $ 3,836 Supplemental cash flow information: Cash paid for income taxes, net of (refunds) $ (426 ) $ (1,865 ) Cash paid for interest 99 259 Non-cash investing activities Right-of-use assets recognized at ASU 2016-02 transition – 944 Operating lease liability recognized at ASU 2016-02 transition – 997 Increase (decrease) in right-of-use assets and operating lease obligations (44 ) 305 Non-cash financing activities Issuance of common stock under equity incentive plans 522 – See accompanying notes to consolidated financial statements F- 5 LIFEWAY FOODS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2020 and 2019 (In thousands) Note 1 – Basis of presentation The accompanying consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Our consolidated financial statements include all of the assets, liabilities and results of operations of Lifeway’s wholly owned subsidiaries (collectively “Lifeway” or the “Company”). All inter-company balances and transactions have been eliminated in the consolidated financial statements. Note 2 – Summary of 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. Going Concern The Company follows the guidance in Accounting Standards Codification (“ASC”) 205-40, Presentation of Financial Statements - Going Concern which requires management to assess an entity’s ability to continue as a going concern and to provide related disclosure in certain circumstances. There were no conditions or events, when considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. Revenue Recognition We sell food and beverage products across select product categories to customers predominantly within the United States (see Note 12, Segments, Products and Customers). We also sell bulk cream, a byproduct of our fluid milk manufacturing process. In accordance with ASC 606, Revenue from Contracts with Customers, we recognize revenue when control over the products transfers to our customers, which generally occurs upon delivery to our customers or their common carriers. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, using the five-step method required by ASC 606. For the Company, the contract is the approved sales order, which may also be supplemented by other agreements that formalize various terms and conditions with customers. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer. F- 6 Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer, which is the delivery of food products which provide immediate benefit to the customer. We account for product shipping and handling as fulfillment activities with revenues for these activities recorded within net revenue and costs recorded within cost of goods sold. Any taxes collected on behalf of government authorities are excluded from net revenues. Variable consideration, which typically includes volume-based rebates, known or expected pricing or revenue adjustments, such as trade discounts, allowances for non-saleable products, product returns, trade incentives and coupon redemption, is estimated utilizing the most likely amount method. Key sales terms, such as pricing and quantities ordered, are established on a frequent basis such that most customer arrangements and related incentives have a one year or shorter duration. As such, we do not capitalize contract inception costs and we capitalize product fulfillment costs in accordance with U.S. GAAP and our inventory policies. We do not have any significant deferred revenue or unbilled receivables at the end of a period. We generally do not receive noncash consideration for the sale of goods, nor do we grant payment financing terms greater than one year. Accounts Receivable We provide credit terms to customers in-line with industry standards and maintain allowances for potential credit losses based on historical experience. Customer balances are written off after all collection efforts are exhausted. Estimated product returns, which have not been material, are deducted from sales at the time of revenue recognition. The Company does not charge interest on past due accounts receivable. 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. Lifeway has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk related to its cash and cash equivalents. Inventories Inventories are stated at the lower of cost or net realizable value, valued on a first in, first out basis (“FIFO”). The costs of finished goods inventories include raw materials, direct labor, and overhead costs. Inventories are stated net of reserves for excess or obsolete inventory. Property, plant and equipment Property, plant and equipment are recorded at cost. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets as follows: Asset Useful Life Buildings and improvements 31 and 39 years Machinery and equipment 5 – 12 years Office equipment 3 – 7 years Vehicles 5 years Leasehold improvements Shorter of expected useful life or lease term F- 7 We perform impairment tests when circumstances indicate that the carrying value of an asset may not be recoverable. Expenditures for repairs and maintenance, which do not improve or extend the life of the assets, are expensed as incurred. Intangible Assets Goodwill and indefinite-lived intangible assets Goodwill represents the excess purchase price over the fair value of the net tangible and other identifiable intangible assets acquired. We estimate the fair value of our one reporting unit annually (as of December 31), or more frequently if certain conditions exist, using a combination of the fair values derived from both the income approach and the market approach. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on our estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used to determine the present value of future cash flows is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the business's ability to execute on the projected cash flows. The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable publicly traded companies with similar operating and investment characteristics. The resulting fair value, based on the income and market approaches, is then compared to the carrying value to determine if impairment is necessary. We assess whether indefinite-lived intangible asset impairment exists using both qualitative and quantitative assessments annually in the fourth quarter or more frequently, if certain conditions exist. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If, based on this qualitative assessment, we determine it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount or if we elect not to perform a qualitative assessment, a quantitative assessment is performed to determine whether an indefinite-lived intangible asset impairment exists. We test the indefinite-lived intangible assets for impairment by comparing the carrying value to the fair value based on current revenue projections of the related operations, under the relief from royalty method. Any excess of the carrying value over the amount of fair value is recognized as an impairment. Any such impairment would be recognized in full in the reporting period in which it has been identified. Definite lived intangible assets Intangible assets acquired in a business combination are recorded at their estimated fair values at the date of acquisition. Identifiable intangible assets with finite lives are amortized over their estimate useful lives as follows: Asset Useful Life Recipes 4 years Trade names 8-15 years Formula 10 years Customer lists 5-10 years Customer relationships 12 years All amortization expense related to intangible assets is recorded in Amortization expense in the consolidated statements of operations. F- 8 Amortizable intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Lifeway conducts more frequent impairment assessments if certain conditions exist, such as 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 our products or changes in the size of the market for our products. If an evaluation of the undiscounted cash flows indicates impairment, the asset is written down to its estimated fair value, which is generally based on discounted future cash flows. If the estimated remaining useful life of an intangible asset is changed, the remaining carrying amount of the intangible asset is amortized prospectively over the revised remaining useful life. Fair value measurements Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement: Level 1 – Quoted prices in active markets for identical assets or liabilities. Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3. Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability. Lifeway’s financial assets and liabilities that are not carried at fair value on a recurring basis include cash and cash equivalents, accounts receivable, other receivables, accounts payable, accrued expenses and revolving line of credit for which carrying value approximates fair value. The Company records its investments in equity securities without a readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. During October 2019, the Company sold approximately 45.6% of one of its investments recorded under the cost method and recognized a $1,438 gain on sale of investment, which is recorded in other income (expense) on the consolidated statements of operations. The Company also recorded an unrealized gain of $1,731 resulting from the observable price change of this transaction, which is recorded in other income (expense) on the consolidated statements of operations. As of December 31, 2020, and 2019, the Company has one investment without a readily determinable fair value which is recorded at $1,800 in other assets on the consolidated balance sheet. Income taxes The Provision for income taxes includes federal, state, local and foreign income taxes currently payable, and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using enacted tax rates expected to apply to taxable income in the year in which the deferred tax assets or liabilities are expected to be realized or settled. The principal sources of temporary differences are different depreciation and amortization methods for financial statement and tax purposes, incentive compensation, unrealized gain, capitalization of indirect inventory costs for tax purposes, reserves for excess and obsolete inventory and the allowance for doubtful accounts. Valuation allowances are recorded to reduce deferred tax assets when it is more likely not that a tax benefit will not be realized. Deferred income tax expense or benefit is based on the changes in the asset or liability from period to period. F- 9 Lifeway has analyzed filing positions in all the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. We recognize the income tax benefit from an uncertain tax position when it is more likely than not that, based on technical merits, the position will be sustained upon examination, including resolutions of any related appeals or litigation processes. We apply a more likely than not threshold to the recognition and derecognition of uncertain tax positions. Accordingly, we recognize the amount of tax benefit that has a greater than 50% likelihood of being ultimately realized upon settlement. Future changes in judgment related to the expected ultimate resolution of uncertain tax positions will affect earnings in the period of such change. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. The total amount of unrecognized tax benefits can change due to audit settlements, tax examination activities, statute expirations and the recognition and measurement criteria under accounting for uncertainty in income taxes. Lifeway recognizes penalties and interest related to unrecognized tax benefits in the provision (benefit) for income taxes in the consolidated statements of operations. Share-based compensation Share-based compensation expense is recognized for equity awards over the vesting period based on their grant date fair value. The fair value of restricted stock awards is equal to the closing price of our stock on the date of grant. We do not estimate forfeitures in measuring the grant date fair value, but rather account for forfeitures as they occur. The Company issues share based equity awards from treasury shares. Treasury stock Treasury stock is recorded using the cost method. Advertising costs Lifeway expenses advertising costs as incurred and reported in Selling expense in our consolidated statements of operations. For the years ended December 31, 2020 and 2019 total advertising expenses were $2,407 and $3,394, respectively. Earnings (loss) per common share Basic earnings (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares issued and outstanding during the reporting period. Diluted earnings (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares issued and outstanding and the effect of all dilutive common stock equivalents related to the Company’s outstanding stock-based compensation awards outstanding during the reporting period. For the years ended December 31, 2020 and 2019, there were 169 and 56 common stock equivalents outstanding, respectively. Recent accounting pronouncements Issued by not yet effective In March 2020, the FASB issued Accounting Standards Update (“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 generally accepted accounting principles (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. Management is currently evaluating the impact that the new guidance will have on the consolidated financial statements. F- 10 In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new guidance is intended to enhance and simplify various aspects of the accounting for income taxes. The new guidance eliminates certain exceptions to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes. The guidance will be effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. Management does not anticipate the adoption of this ASU will have a material impact on our consolidated financial statements and disclosures. 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. Management is currently evaluating the impact that the new guidance will have on the consolidated financial statements. Note 3 – Inventories, net Inventories consisted of the following: December 31, 2020 2019 Ingredients $ 1,725 $ 1,942 Packaging 2,234 2,230 Finished goods 2,971 2,220 Total inventories, net $ 6,930 $ 6,392 Note 4 – Property, Plant and Equipment, net Property, plant and equipment consisted of the following: December 31, 2020 2019 Land $ 1,565 $ 1,565 Buildings and improvements 17,834 17,332 Machinery and equipment 31,707 30,670 Vehicles 778 778 Office equipment 857 851 Construction in process 228 362 52,969 51,558 Less accumulated depreciation (31,921 ) (29,284 ) Total property, plant and equipment, net $ 21,048 $ 22,274 F- 11 Note 5 – Goodwill and Intangible Assets Goodwill and indefinite-lived intangible assets consisted of the following: December 31, 2020 2019 Goodwill $ 10,368 $ 10,368 Accumulated impairment losses (1,244 ) (1,244 ) Goodwill 9,124 9,124 Brand names 3,700 3,700 Goodwill and indefinite lived intangible assets $ 12,824 $ 12,824 Goodwill The Company performed the annual impairment assessment of goodwill for our single reporting unit as of December 31, 2020 and 2019, noting no impairment loss. Considerable management judgment is necessary to evaluate goodwill for impairment. We estimate fair value using widely accepted valuation techniques including discounted cash flows and market multiples analysis with respect to our single reporting unit. These valuation approaches are dependent upon a number of factors, including estimates of future growth rates, our cost of capital, capital expenditures, income tax rates, and other variables. Assumptions used in our valuations were consistent with our internal projections and operating plans. Our discounted cash flows forecast could be negatively impacted by 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 our products or changes in the size of the market for our products. Additionally, under the market approach analysis, we used significant other observable inputs including various guideline company comparisons. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Changes in these estimates or assumptions could materially affect the determination of fair value and the conclusions of the quantitative goodwill test for our one reporting unit. Indefinite-lived Intangible Assets The Company performed the annual impairment assessment on the indefinite-lived intangible asset as of December 31, 2020 and 2019, resulting in no impairment losses. Finite-lived Intangible Assets Other intangible assets, net consisted of the following: December 31, 2020 2019 Recipes $ 44 $ 44 Customer lists and other customer related intangibles 4,529 4,529 Customer relationships 985 985 Trade names 2,248 2,248 Formula 438 438 8,244 8,244 Accumulated amortization (8,244 ) (8,092 ) Intangible assets, net $ – $ 152 F- 12 Note 6 – Accrued Expenses Accrued expenses consisted of the following: December 31, 2020 2019 Payroll and incentive compensation $ 1,366 $ 3,009 Real estate taxes 341 398 Current portion of operating lease liabilities 179 285 Other 310 395 Total accrued expenses $ 2,196 $ 4,087 Note 7 – Debt Line of Credit On May 7, 2018, Lifeway entered into an Amended and Restated Loan and Security Agreement (the “Revolving Credit Facility”) with its existing lender. On April 10, 2019, effective March 31, 2019, Lifeway entered into the First Modification to the Amended and Restated Loan and Security Agreement (the “Modified Revolving Credit Facility”) with its existing lender. Under the amendment, the Modified Revolving Credit Facility provides for a revolving line of credit up to a maximum of $9 million (the “Revolving Loan”) with an incremental facility not to exceed $5 million (the “Incremental Facility” and together with the Revolving Loan, the “Loans”). On December 10, 2019, Lifeway entered into the Second Modification to the Amended and Restated Loan and Security Agreement, as amended, (the “Second Modification”) with its existing lender. The Second Modification amends the Amended and Restated Loan and Security Agreement, as amended, by redefining the “Borrowing Base” and further clarifying the definitions of “Eligible Accounts” and “Eligible Inventory.” The “Borrowing Base” under this amendment means, generally, an amount equal to the sum of (a) 85% of the unpaid amount of all eligible accounts receivable, plus (b) 50% of the value of all eligible inventory. The Second Modification also addresses the calculation of interest after the potential discontinuance of LIBOR and its replacement with a replacement benchmark interest rate. On September 30, 2020, Lifeway entered into the Third Modification to the Amended and Restated Loan and Security Agreement, as amended, (the “Third Modification”) with its existing lender. The Third Modification amends the Amended and Restated Loan and Security Agreement, as amended, by removing the monthly borrowing base reporting requirement effective September 30, 2020, including a covenant to maintain a quarterly minimum working capital financial covenant, as defined, of no less than $11.25 million each of the fiscal quarters commencing the fiscal quarter ending December 31, 2020 through the expiration date, and eliminating the tier interest pricing structure. 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. Except as described above, as amended, the Modified Revolving Credit Facility remains substantively unchanged and in full force and effect, including customary representations, warranties, and covenants on the part of Lifeway, including financial covenants requiring us to maintain a fixed charge coverage ratio of no less than 1.25 to 1.00 each of the fiscal quarters ending through the expiration date. The Modified Revolving Credit Facility 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 Revolving Credit Facility may be accelerated. The loans and all other amounts due and owed under the Revolving Credit Facility and related documents are secured by substantially all of our assets. F- 13 As of December 31, 2020, we had $2,768 net of $9 of unamortized deferred financing costs, outstanding under the Revolving Credit Facility. We had $2,223 available for future borrowings as of December 31, 2020. As amended, all outstanding amounts under the Loans 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 line fee of 0.20% and, in conjunction with the issuance of any letters of credit, a letter of credit fee of 0.20%. Lifeway’s interest rate on debt outstanding under our Revolving Credit Facility as of December 31, 2020 was 2.10%. We were in compliance with the fixed charge coverage ratio and minimum working capital covenants at December 31, 2020. Note 8 – Leases Lifeway has operating leases for two retail stores for its Lifeway Kefir Shop subsidiary and office space which includes fixed base rent payments as well as variable rent payments to reimburse the landlord for operating expenses and taxes. The Company terminated its office space leases in June 2020. The Company also lease 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 1 year to 4 years. Some of our leases include options to extend the leases for up to 5 years and have been included in our 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. We do not currently have leases which meet the finance lease classification as defined under ASC 842. We do 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 $440 and $688 (including short term leases) for the years ended December 31, 2020 and 2019, respectively. 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, we direct the use of the asset and obtain 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. We have elected the practical expedient to combine lease and non-lease components into a single component for all of its leases. For many of our leases such as real estate leases, we are unable to determine an implicit rate; therefore, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments for those leases. We include 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 we will exercise such options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Future maturities of lease liabilities were as follows Year Operating Leases 2021 $ 198 2022 154 2023 18 2024 2 Total lease payments 372 Less: Interest (28 ) Present value of lease liabilities $ 344 The weighted-average remaining lease term for our operating leases was 2.0 years as of December 31, 2020. The weighted average discount rate of our operating leases was 7.75% as of December 31, 2020. Cash paid for amounts included in the measurement of lease liabilities was $384 for the year ended December 31, 2020. F- 14 Note 9 – Commitments and Contingencies Litigation Lifeway is engaged in various legal actions, claims, audits, and proceedings arising in the normal course of business, including commercial disputes, product liabilities, intellectual property matters and employment-related matters resulting from our business activities. We record accruals for outstanding legal matters when we believe it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated. We evaluate, 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, we do not establish an accrued liability. Currently, none of our accruals for outstanding legal matters are material individually or in the aggregate to our 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 our business, financial condition, results of operations, or cash flows. However, if we ultimately are required to make payments in connection with an adverse outcome, it is possible that it could have a material adverse effect on our business, financial condition, results of operations or cash flows. Lifeway’s contingencies are subject to substantial uncertainties, including for each such contingency the following, among other factors: (i) the procedural status of the case; (ii) whether the case has or may be certified as a class action suit; (iii) the outcome of preliminary motions; (iv) the impact of discovery; (v) whether there are significant factual issues to be determined or resolved; (vi) whether the proceedings involve a large number of parties and/or parties and claims in multiple jurisdictions or jurisdictions in which the relevant laws are complex or unclear; (vii) the extent of potential damages, which are often unspecified or indeterminate; and (viii) the status of settlement discussions, if any, and the settlement posture of the parties. Consequently, Lifeway cannot predict with any reasonable certainty the timing or outcome of such contingencies, and we are unable to estimate a possible loss or range of loss. Note 10 – Income taxes The provision (benefit) for income taxes consists of the following: For the Years Ended December 31, 2020 2019 Current: Federal $ 398 $ (27 ) State and local 357 276 Total current 755 249 Deferred 841 533 Provision for income taxes $ 1,596 $ 782 F- 15 A reconciliation of the U.S. federal statutory rate to the effective tax rate used in the provision for income taxes is as follows: 2020 2019 Amount Percentage Amount Percentage Federal income tax at statutory rate $ 1,015 21.0% $ 259 21.0% State and local tax, net 428 8.9% 180 14.5% Other permanent differences 12 0.3% 14 1.1% Section 162m 296 6.1% 105 8.5% Stock based compensation 157 3.2% 149 12.1% Uncertain tax positions (43 ) (0.9% ) 79 6.4% Change in tax rates (245 ) (5.0% ) 8 0.7% Change in tax estimate - 0.0% (12 ) (1.0% ) Other (24 ) (0.5% ) – 0.0% Provision for income taxes $ 1,596 33.1% $ 782 63.3% The tax effects of temporary differences giving rise to deferred income tax assets and liabilities are as follows: December 31, 2020 2019 Deferred tax liabilities attributable to: Accumulated depreciation and amortization $ (2,101 ) $ (2,015 ) Unrealized gains (467 ) (465 ) Total deferred tax liabilities (2,568 ) (2,480 ) Deferred tax assets attributable to: Net operating losses 6 507 Accrued compensation 149 89 Incentive compensation 168 473 Inventory 323 312 Allowances for doubtful accounts and discounts 109 115 Deferred revenue 15 40 Other 34 22 Total net deferred tax assets 804 1,558 Net deferred tax liabilities $ (1,764 ) $ (922 ) The following table details the Company's tax attributes related to net operating losses for which it has recorded deferred tax assets. Tax Attributes Gross Amount Net Amount Expiration Years State net operating losses $ 116 $ 6 2035 $ 6 F- 16 A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: 2020 2019 Balance at January 1 $ 142 $ 63 Additions based on tax positions of prior years – 79 Reduction for tax positions of prior years (47 ) – Balance at December 31 $ 95 $ 142 Lifeway is subject to U.S. federal income tax as well as income tax in multiple state and city jurisdictions. With limited exceptions, our calendar year 2017 and subsequent federal and state tax years remain open by statute. The amount of unrecognized tax benefits that, if recognized, would impact the annual effective tax rate was not significant as of December 31, 2020. The annual effective tax rate would have decreased by 2.0% as of December 31, 2019 if the unrecognized tax benefits were recognized. The amount of interest and penalties recognized in the consolidated statements of operations was $(16) and $41 during 2020 and 2019, respectively. The amount of accrued interest and penalties recognized in the consolidated balance sheets was $44 and $60 at December 31, 2020 and 2019, respectively. Note 11 – Stock-based and Other Compensation 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 December 31, 2020, 3.317 million shares remain available under the Omnibus Incentive Plan. While we plan to continue to issue awards pursuant to the Plan at least annually, we may choose to suspend the issuance of new awards in the future and may grant additional awards at any time including issuing special grants of restricted stock, restricted stock units, and stock options to attract and retain new and existing executives. Stock Options The following table summarizes stock option activity during the year ended December 31, 2020: Options Weighted average exercise price Weighted average remaining contractual life Aggregate intrinsic value Outstanding at December 31, 2019 41 $ 10.42 6.22 $ – Granted – – – Exercised – – – – Forfeited – – – – Outstanding at December 31, 2020 41 $ 10.42 5.22 $ – Exercisable at December 31, 2020 41 $ 10.42 5.22 $ – F- 17 As of December 31, 2019, all outstanding options were vested and there was no remaining unearned compensation expense. For the year ended December 31, 2019 total stock-based compensation expense recognized in the consolidated statements of operations was $1. For the year ended December 31, 2019, no tax-related benefits were recognized. 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 did not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. 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 equal to our closing stock price on the grant date. The following table summarizes RSA activity during the year ended December 31, 2020. RSA’s Outstanding at December 31, 2019 47 Granted 57 Shares issued upon vesting (13 ) Forfeited (13 ) Outstanding at December 31, 2020 78 Weighted average grant date fair value per share outstanding $ 3.06 We expense RSA’s over the service period. For the years ended December 31, 2020 and 2019 total stock-based compensation expense recognized in the consolidated statements of operations was $83 and $109, respectively. For the years ended December 31, 2020 and 2019 tax-related benefits of $22 and $30, respectively, were also recognized. As of December 31, 2020, the total remaining unearned compensation related to non-vested RSA’s was $134, which is expected to be amortized over the weighted-average remaining service period of 1.36 years. Long-Term Incentive Plan Compensation Lifeway established long-term incentive-based compensation programs for fiscal year 2017 (the “2017 Plan”) and for fiscal year 2019 (the “2019 Plan”) for certain senior executives and key employees (the “participants”). Under both the 2017 Plan, long-term incentive compensation is based on Lifeway’s achievement of certain sales and adjusted EBITDA performance levels versus respective targets established by the Board for each fiscal year. Under the 2019 Plan, long-term equity incentive compensation is based on Lifeway’s achievement of four strategic milestones over a three-year period from Fiscal 2019 through Fiscal 2021. 2017 Plan Under the 2017 Plan, collectively the participants had the opportunity to earn cash and equity-based incentive compensation in amounts ranging from $0 to $11,025 depending on Lifeway’s performance levels compared to the respective targets and the participants performance compared to their individual objectives. The equity portion of the incentive compensation is payable in restricted stock that vests one-third in each of the three years from the 2017 grant dates. For the years ended December 31, 2020 and 2019, $49 and $288 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. As of December 31, 2020, there was no remaining expense. F- 18 2019 Plan Under the 2019 Plan, collectively the participants have the opportunity to earn equity-based incentive compensation in amounts ranging from $0 to $1,733 depending on Lifeway’s performance levels compared to the respective targets. The equity-based incentive compensation is payable in restricted stock that vests 50% of unvested shares in year one, 50% of unvested shares in year two, and 100% of remaining unvested shares in year three from the 2019 grant date. For the years ended December 31, 2020 and 2019, $112 and $51 was expensed under the 2019 Plan as stock-based compensation expense in the consolidated statements of operations, respectively. 2019 Retention Award During 2019, we awarded a special retention grant (the “2019 Retention Award”) of restricted stock to senior executives and key employees (the “participants”). The equity-based incentive compensation is payable in restricted stock that vests one-third in March 2019, one-third in March 2020 and one-third in March 2021. For the years ended December 31, 2020 and 2019, $87 and $342 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. As of December 31, 2020, the total remaining unearned compensation was $14, which will be recognized in 2021, subject to vesting. 2020 CEO Incentive Award During the fourth quarter 2020, we awarded a long-term equity-based incentive of $750 to our 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 March 2022, one-third in March 2023, and one-third in March 2024. The issuance of vested equity awards is subject to approval under the Stock Purchase Agreement dated October 1, 1999. For the year ended December 31, 2020, $50 was expensed as stock-based compensation expense in the consolidated statements of operations. As of December 31, 2020, the total remaining unearned compensation was $700, of which $364 will be recognized in 2021, $221 in 2022, $98 in 2023, and $17 in 2024, respectively, subject to vesting. Retirement Benefits Lifeway has a defined contribution plan which is available to substantially all full-time employees. Under the terms of the plan we match employee contributions under a prescribed formula. For the years ended December 31, 2020 and 2019 total contribution expense recognized in the consolidated statements of operations was $420 and $367, respectively. Note 12 – Segments, Products and Customers Lifeway’s primary product is drinkable kefir, a cultured dairy product. Lifeway Kefir is tart and tangy, high in protein, calcium and vitamin D. Thanks to our exclusive blend of kefir cultures, each cup of kefir contains 12 live and active cultures and 25 to 30 billion beneficial CFU (Colony Forming Units) at the time of manufacture. We manufacture (directly or through co-packers) and market products under the Lifeway and Fresh Made brand names, as well as under private labels on behalf of certain customers. F- 19 Our product categories are: · Drinkable Kefir, sold in a variety of organic and non-organic sizes, flavors, and types, including low-fat, non-fat, whole milk, protein, and BioKefir (a 3.5 oz. kefir with additional probiotic cultures). · European-style soft cheeses, including farmer cheese, white cheese, and Sweet Kiss. · Cream and other, which consists primarily of cream, a byproduct of making our kefir. · ProBugs, a line of kefir products designed for children. · Other Dairy, which includes Cupped Kefir and Icelandic Skyr, a line of strained kefir and yogurt products in resealable cups. · Frozen Kefir, available in soft serve and pint-size containers. Lifeway has determined that it has one reportable segment based on how our chief operating decision maker manages the business and in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing our performance, has been identified collectively as the Chief Financial Officer, the Chief Operating Officer, the Chief Executive Officer, and Chairperson of the board of directors. Substantially all of our consolidated revenues relate to the sale of cultured dairy products that we produce using the same processes and materials and are sold to consumers through a common network of distributors and retailers in the United States. Net sales of products by category were as follows for the years ended December 31: 2020 2019 In thousands $ % $ % Drinkable Kefir other than ProBugs $ 81,437 80% $ 71,822 77% Cheese 12,905 13% 11,459 12% Cream and other 2,872 3% 4,228 4% ProBugs Kefir 2,733 2% 2,780 3% Other dairy 1,594 1% 1,756 2% Frozen Kefir (a) 485 1% 1,617 2% Net Sales $ 102,026 100% $ 93,662 100% (a) Includes Lifeway Kefir Shop sales F- 20 Significant Customers – Sales are predominately to companies in the retail food industry located within the United States. Two major customers accounted for approximately 21% and 22% of net sales for the years ended December 31, 2020 and 2019, respectively. Two major customers accounted for approximately 22% and 17% of accounts receivable as of December 31, 2020 and 2019, respectively. Note 13 – Share repurchase program On September 24, 2015, Lifeway’s Board of Directors authorized a stock repurchase program (the “2015 stock repurchase program”) under which we may, from time to time, repurchase shares of our common stock for an aggregate purchase price not to exceed the lesser of $3,500 or 250 shares. On November 1, 2017, the Board amended the 2015 stock repurchase program (the “2017 amendment”), by adding to (i.e., exclusive of the shares previously authorized under the 2015 stock repurchase program) the authorization the lesser of $5,185 or 625 shares. Under the amended authorization, share repurchases may be executed through various means, including without limitation in the open market or in privately negotiated transactions, in accordance with all applicable securities laws and regulations, including without limitation Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The extent to which Lifeway repurchases its shares and the timing of such repurchases will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations. The repurchase program does not obligate us to purchase any shares, and the program may be terminated, suspended, increased, or decreased by our Board in its discretion at any time. Pursuant to the share repurchase program, during the year ended December 31, 2020, the Company repurchased 179 shares at a cost of $405 or approximately $2.27 per share. During the year ended December 31, 2019, the Company repurchased 211 shares at a cost of $538 or approximately $2.55 per share. During the year, the Company reached the amended threshold of 625 shares and therefore no shares of common stock remain available to be purchased under the 2017 Repurchase Plan Amendment as of December 31, 2020. Note 14 – Related party transactions Lifeway obtains consulting services from the Chairperson of its board of directors. Fees earned are included in general and administrative expenses in the accompanying consolidated statements of operations and were $1,000 during the years ended December 31, 2020 and 2019. On December 28, 2020, Lifeway entered into an amended and restated consulting agreement (the “Agreement”), effective as of December 31, 2020, with the Chairperson. Under the terms and conditions of the Agreement, the Chairperson will continue to provide consulting services with respect to, among other things, our business strategy, international expansion and product management and expansion. For the services, the Company will pay an annual service fee of $500. The Chairperson will also be eligible for an annual performance fee target of $500 based on the achievement of specified performance criteria. The Chairpersons annual service fee and target bonus amounts are subject to periodic change by the Compensation Committee of the Company’s Board of Directors on 30 days’ prior written notice to the Chairperson. The Agreement shall continue until either party provides at least a 10-day written notice of termination. Lifeway is also a party to a royalty agreement with the Chairperson of its board of directors under which we pay the Chairperson a royalty based on the sale of certain Lifeway products, not to exceed $50 in any fiscal month. Royalties earned are included in selling expenses in the accompanying consolidated statements of operations and were $600 and $588 during the years ended December 31, 2020 and 2019, respectively. F- 21 Note 15 – COVID-19 The ultimate impact that the COVID-19 pandemic or any future pandemic or disease outbreak will have on our business and our consolidated results of operations is uncertain. To date we have seen increased customer and consumer demand for our products as consumers initially began pantry loading and have increased their at-home consumption as a result of social distancing and stay-at-home and work-from-home mandates and recommendations. However, this increased customer and consumer demand may decrease in the coming months if and when the need for social distancing and stay-at-home and work-from-home mandates and recommendations decrease, and we are unable to predict the nature and timing of when that impact may occur, if at all. . Although to date we have not experienced supply chain constraints, and we have continued to be able to fully satisfy customer and consumer demand for our products, the continued unprecedented demand for food and other consumer packaged goods products as a result of the COVID-19 pandemic or any future pandemic may limit the availability of, or increase the cost of, ingredients, packaging and other raw materials necessary to produce our products, and our operations may be negatively impacted. Additionally, pandemics or disease outbreaks could result in a widespread health crisis that could adversely affect economies and financial markets, consumer spending and confidence levels resulting in an economic downturn that could affect customer and consumer demand for our products. Our efforts to manage and mitigate these factors may be unsuccessful, and the effectiveness of these efforts depends on factors beyond our control, including the duration and severity of any pandemic or disease outbreak, as well as third party actions taken to contain its spread and mitigate public health effects. The ultimate impact of the COVID-19 pandemic on our business will depend on many factors, including, among others, the duration of social distancing and stay-at-home and work-from-home mandates and recommendations and whether additional waves of COVID-19 or different variants of COVID-19 will affect the United States and other markets, our ability and the ability of our suppliers to continue to operate our and their manufacturing facilities and maintain the supply chain without material disruption and procure ingredients, packaging and other raw materials when needed despite unprecedented demand in the food industry, and the extent to which macroeconomic conditions resulting from the pandemic and the pace of the subsequent recovery may impact consumer eating and shopping habits. We cannot predict the duration or scope of the disruption. Therefore, the financial impact cannot be reasonably estimated at this time. F- 22 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None