What changed in this filing

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Item 1. Business

2023-03-27 compared with 2022-07-21 · 129 added, 142 removed, 156 unchanged (63% of the section changed)

ITEM 1 BUSINESS

Lifeway was founded in 1986 by Michael Smolyansky

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consumer on a commercial scale, initially catering to ethnic consumers in the Chicago, Illinois metropolitan

In the thirty-five years that have followed, Lifeway has grown to become the largest producer and marketer of kefir in the U.S.

and an important player in the broader market spaces of probiotic-based products and natural, “better for you” foods.

In the thirty-six years that have followed, Lifeway has grown to become the largest producer and marketer of kefir in the U.S.

an important player in the broader market spaces of probiotic-based products and natural, “better for you” foods.

Our primary product is drinkable kefir, a cultured

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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, Fresh Made and Glen Oaks Farms brand names, as well as under private labels on behalf of certain

We manufacture (directly or through co-packers) and

market products under the Lifeway, Fresh Made and Glen Oaks Farms brand names, as well as under private labels on behalf of certain customers.

Our product categories are:

Drinkable Kefir, sold in

a variety of organic and non-organic sizes, flavors, and types;

European-style

soft cheeses, including farmer cheese, white cheese, and Sweet Kiss;

and other, which consists primarily of cream, a byproduct of making our kefir;

a line of kefir products designed for children;

Drinkable Yogurt, sold

in a variety of sizes and flavors;

Other Dairy, which

consists primarily of Fresh Made butter and sour cream.

Drinkable Kefir, sold in a variety of organic and non-organic sizes, flavors, and types;

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;

Drinkable Yogurt, sold in a variety of sizes and flavors;

Other Dairy, which consists primarily of Fresh Made butter and sour cream.

Net sales of products by category were as follows

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Cream and other

ProBugs Kefir

Drinkable Yogurt

Other dairy (a)

Includes Lifeway Kefir

Probugs Kefir

Product innovation and new product development

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We routinely evaluate opportunities for

new product flavors and formulations, improved package design, new product configurations and other innovation opportunities.

our core drinkable kefir products, we have an ongoing effort to extend the strength of the Lifeway brand and leverage the capabilities

of the Lifeway organization into categories both inside and outside of the dairy aisle, including into non-food categories and into additional

channels, such as gyms and fitness studios.

In 2021, we maintained the level of focus on product innovations, packaging innovations,

and growth opportunities.

These product innovation and development efforts have led to additional revenue opportunities.

new product flavors and formulations, improved package design, new product configurations and other innovation avenues.

Beyond our core

drinkable kefir products, we have an ongoing effort to extend the strength of the Lifeway brand and leverage the capabilities of the Lifeway

organization into fresh categories and into additional channels of trade, such as Convenience;

maintained the level of focus on product innovations, packaging innovations, and growth opportunities.

These product innovation and development

efforts have led to additional revenue opportunities.

Lifeway considers research and development of

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of our current products, and less on new product development.

In August 2021, we purchased the Glen Oaks drinkable yogurt product line

and in December 2021 launched our drinkable oat-based kefir product line.

In August 2021, we purchased the Glen Oaks Farms drinkable yogurt product

line, and launched our drinkable oat-based kefir product line in December 2021.

Manufacturing

During 2021 and 2020, approximately 98% and 99%

of our revenue, respectively, was derived from products manufactured at our own facilities.

During 2022 and 2021, approximately 96% and 98% of

our revenue, respectively, was derived from products manufactured at our own facilities.

We currently operate the following manufacturing

and distribution facilities:

Morton Grove, Illinois,

which produces drinkable kefir, drinkable ProBugs kefir, and cheese products;

Waukesha, Wisconsin, which

produces drinkable kefir products and from which we store and distribute products;

Niles, Illinois, which

stores and serves as a distribution point for products;

Philadelphia, Pennsylvania,

which produces drinkable kefir, cheese, and butter products, from which we store and distribute products.

Morton Grove, Illinois, which produces drinkable kefir, drinkable ProBugs kefir, and cheese products;

Waukesha, Wisconsin, which produces drinkable kefir products and from which we store and distribute products;

Niles, Illinois, which stores and serves as a distribution point for products;

Philadelphia, Pennsylvania, which produces drinkable kefir, cheese, and butter products, from which we store and distribute products.

We own these manufacturing facilities.

our fixed assets associated with manufacturing, storage, and distribution of our products are located in the United States.

All our fixed

assets associated with manufacturing, storage, and distribution of our products are in the United States.

In addition to the products manufactured in our

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manufacture drinkable yogurt in California.

We have co-packer agreements to manufacture drinkable and frozen kefir in Ireland and the

United Kingdom, respectively, to serve our European markets.

During 2021 and 2020, approximately 2% and 1% of our revenue, respectively,

was derived from products manufactured by co-packers.

Our domestic co-packer is Safe Quality Food (“SQF”) certified and follows

Good Manufacturing Practices (GMPs).

Additionally, the co-packers are required to ensure our products are manufactured in accordance with

our quality specifications and that they are compliant with all applicable laws and regulations.

We have a co-packer agreement to manufacture drinkable kefir in Ireland, to serve our European

During 2022 and 2021, approximately 4% and 2% of our revenue, respectively, was derived from products manufactured by co-packers.

Our domestic co-packer is Safe Quality Food (“SQF”) certified and follows Good Manufacturing Practices (GMPs).

Additionally,

the co-packers are required to ensure our products are manufactured in accordance with our quality specifications and that they are compliant

with all applicable laws and regulations.

SALES AND DISTRIBUTION

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efforts and our brand strength.

Our relationships with food brokers provide additional retail customer coverage as a supplement to our

direct sales force.

Our relationships with food brokers provide additional customer coverage as a supplement to our direct

Distribution inside the United States

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include Kroger, Walmart and Trader Joe’s.

Under the retail direct-model, optimal product merchandising, assortments and product

presentation are attended to by the retailer with limited support from Lifeway’s broker network.

Sales to our retail-direct customers

represent approximately 46% of our total net sales for the year ended 2021.

Under the retail direct-model, optimal product merchandising, assortment and product presentation

are attended to by the retailer.

Sales to our retail-direct customers represent approximately 50% of our total net sales for the year

Under the distributor channel, we sell our products

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The distributor

attends to optimal product merchandising, assortments, and product presentations at the retail end of the channel, with support from Lifeway’s

attends to optimal product merchandising, assortment, and product presentations at the retail end of the channel, with support from Lifeway’s

direct sales force and broker network.

Sales to our distributor customers represented approximately 48% of our total net sales for year

Under the direct store delivery (DSD) route to

market, we sell our products to retailers and deliver it directly to the store using Company-owned vehicles and a team of Lifeway merchandisers

Under the direct store delivery (DSD) route to market,

we sell our products to retailers and deliver it directly to the store using Company-owned vehicles and a team of Lifeway merchandisers

who engage face-to-face with store management to ensure optimal product assortments and presentations.

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Sales to our DSD customers represent approximately 2% of our total net sales for the year ended

In the Chicago, Illinois metropolitan area, Lifeway

operated two retail stores and a food truck under its Lifeway Kefir Shop subsidiary.

This subsidiary was closed during 2021.

Kefir Shop sold frozen and drinkable kefir products, as well as certain Lifeway products, through these retail outlets.

Sales through

these retail outlets represented less than 1% of net sales for the year ended 2021.

Distribution outside of the U.S .

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our distributors and brokers.

We provide our independent distributors with

products at wholesale prices for distribution to their retail accounts.

Lifeway believes that the prices at which we sell our products

to distributors are competitive with the prices generally paid by distributors for similar products in the markets served.

perishable nature of our products and the costs to return, we do not offer return privileges to any of our distributors or channel customers;

however, from time to time we do provide our customers with allowances for non-saleable product.

We provide our independent distributors with products

at wholesale prices for distribution to their retail accounts.

Lifeway believes that the prices at which we sell our products to distributors

are competitive with the prices generally paid by distributors for similar products in the markets served.

Due to the perishable nature

of our products and the costs to return, we do not offer return privileges to any of our distributors or channel customers;

however, from

time to time we do provide our customers with allowances for non-saleable product.

Lifeway engages independent food brokers generally

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Our brokers represent our products to a variety of prospective buyers.

These buyers could be specialty stores,

retail grocery chains, wholesalers, foodservice operators and distributors, drug chains, mass merchandisers, industrial users, schools

and universities, or military installations.

These buyers could be specialty stores, retail

grocery chains, wholesalers, foodservice operators and distributors, drug chains, mass merchandisers, industrial users, schools and universities,

or military installations.

With support from our direct sales force, brokers may provide other value-added services.

These may include scheduling and coordinating promotions, merchandising, centralized ordering, and data collection services.

We use a combination of sales incentives, trade

promotions, and consumer promotions to market our products.

Sales Incentives and Trade Promotion

These may include

scheduling and coordinating promotions, merchandising, centralized ordering, and data collection services.

We use a combination of sales incentives, trade promotions,

and consumer promotions to market our products.

Sales Incentives and Trade Promotion Allowances

Lifeway offers various sales incentives and trade

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We engage in an ongoing and wide variety of marketing

and media campaigns - primarily digital and social media, print advertising, and television advertising.

We complement these marketing

and media efforts by sponsoring cultural and community events, and various festivals, as well as participating in industry-related trade

shows and in-store promotional events.

Our consumer marketing efforts also include cooperative advertising programs with our retail customers

and various couponing campaigns, online consumer relationship programs, and other similar forms of promotions.

and media campaigns – primarily digital and social media, print advertising, television advertising, and event marketing.

We complement

these marketing and media efforts with industry-related trade shows and in-store promotional events.

Our consumer marketing efforts also

include cooperative advertising programs with our retail customers and various couponing campaigns, online consumer relationship programs,

and other similar forms of promotions.

Our marketing efforts are aimed at stimulating

demand with new and existing consumers by elevating awareness and consumption of kefir and probiotics, as well as enhancing our brand

Our awareness marketing seeks to promote the verifiable nutritional profile, purity, benefits, and good taste of our kefir.

Lifeway competes with a limited number of other

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

However, Lifeway’s kefir-based

products compete with other dairy products, such as spoonable and drinkable yogurt, and, increasingly, with non-dairy probiotic products.

Many of our competitors are well-established and have significantly greater financial resources than Lifeway to promote their products.

Our awareness marketing seeks to promote the positive nutritional attributes and flavor of our products.

Lifeway competes with a limited number of other domestic

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

However, Lifeway’s kefir-based products

compete with other dairy products, such as spoonable and drinkable yogurt, and, increasingly, with non-dairy probiotic products.

of our competitors are well-established and have significantly greater financial resources than Lifeway to promote their products.

We purchase our ingredients such as milk, pectin,

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collectively accounted for approximately 22% of our total net sales.

These customers collectively accounted for approximately 32% of net

Two customers collectively accounted for approximately 28% of net

accounts receivable as of December 31, 2022.

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The chief operating decision maker, who is responsible for allocating resources and assessing

Company performance, has been identified collectively as the Chief Executive Officer and, Chief Financial Officer.

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.

Company performance, has been identified as the Chief Executive Officer.

Substantially all 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.

Since October 1999, Danone SA, through subsidiaries

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and Danone are parties to a Stockholders’ Agreement dated October 1, 1999, which as amended provides Danone the right to designate

one director nominee, provides Danone with anti-dilutive rights relating to certain future offerings and issuances of capital stock,

and grants Danone limited registration rights.

one director nominee, provides Danone with anti-dilutive rights relating to certain future offerings and issuances of capital stock, and

grants Danone limited registration rights.

INTELLECTUAL PROPERTY

We believe that our rights in our trademarks

and service marks are important to our marketing efforts to develop brand recognition and differentiate our brand from our competitors

and are a valuable part of our business.

We believe that our rights in our trademarks and service

marks are important to our marketing efforts to develop brand recognition and differentiate our brand from our competitors and are a valuable

part of our business.

We own many domestic and international trademarks and service marks.

In addition, we own numerous

registered and unregistered copyrights, registered domain names, and proprietary trade secrets, trade dress, technology, know-how, processes,

and other proprietary rights that are not registered.

Depending on the jurisdiction, trademarks are generally valid as long as they are

in use and/or their registrations are properly maintained, and they have not been found to have become generic.

Registrations of trademarks

can also generally be renewed indefinitely as long as the trademarks are in use.

We also have licenses to use certain trademarks inside

and outside of the United States and to certain product formulas, all subject to the terms of the agreements under which such licenses

In addition, we own numerous registered and

unregistered copyrights, registered domain names, and proprietary trade secrets, trade dress, technology, know-how, processes, and other

proprietary rights that are not registered.

Depending on the jurisdiction, trademarks are generally valid as long as they are in use and/or

their registrations are properly maintained, and they have not been found to have become generic.

Registrations of trademarks can also

generally be renewed indefinitely as long as the trademarks are in use.

We also have licenses to use certain trademarks inside and outside

of the United States and to certain product formulas, all subject to the terms of the agreements under which such licenses are granted.

Lifeway’s policy is to pursue registration of intellectual property whenever appropriate.

We protect our intellectual

property rights by relying on a combination of trademark, copyright, trade dress, trade secret and other intellectual property laws,

and domain name dispute resolution systems;

as well as licensing agreements, third-party confidentiality, nondisclosure, and assignment

and by policing third-party misuses of our intellectual property.

We regard the Lifeway family of trademarks and other intellectual

property as having substantial value and as being an important factor in the marketing of our products.

The loss of such protection would

have a material adverse impact on our operations and share price.

Lifeway is subject to extensive regulation by

federal, state, and local governmental authorities.

In the United States, agencies governing the manufacture, marketing, and distribution

of our products include, among others, the Federal Trade Commission (“FTC”), the United States Food & Drug Administration

(“FDA”), the United States Department of Agriculture (“USDA”), the United States Environmental Protection Agency

(“EPA”), the Occupational Safety and Health Administration (“OSHA”), and their state and local equivalents.

various statutes, these agencies prescribe, among other things, the requirements and standards for quality, safety, and representation

of our products to consumers.

We protect our intellectual property rights

by relying on a combination of trademark, copyright, trade dress, trade secret and other intellectual property laws, and domain name dispute

resolution systems;

as well as licensing agreements, third-party confidentiality, nondisclosure, and assignment agreements;

and by policing

third-party misuses of our intellectual property.

We regard the Lifeway family of trademarks and other intellectual property as having

substantial value and as being an important factor in the marketing of our products.

The loss of such protection would have a material

adverse impact on our operations and share price.

Lifeway is subject to extensive regulation by federal,

state, and local governmental authorities.

In the United States, agencies governing the manufacture, marketing, and distribution of our

products include, among others, the Federal Trade Commission (“FTC”), the United States Food & Drug Administration (“FDA”),

the United States Department of Agriculture (“USDA”), the United States Environmental Protection Agency (“EPA”),

the Occupational Safety and Health Administration (“OSHA”), and their state and local equivalents.

Under various statutes,

these agencies prescribe, among other things, the requirements and standards for quality, safety, and representation of our products to

We are also subject to federal laws and regulations relating to our products and production.

as required by the National Organic Program (“NOP”), we rely on third parties to certify certain of our products and production

locations as organic.

Additionally, our facilities are subject to various laws and regulations regarding the release of material into

the environment and the protection of the environment in other ways.

Internationally, we are subject to the laws and

regulatory authorities of the foreign jurisdictions in which we manufacture and sell our products, including the Food Standards Agency

in the United Kingdom;

For example, as required by the

National Organic Program (“NOP”), we rely on third parties to certify certain of our products and production locations as

Additionally, our facilities are subject to various laws and regulations regarding the release of material into the environment

and the protection of the environment in other ways.

Internationally, we are subject to the laws and regulatory

authorities of the foreign jurisdictions in which we manufacture and sell our products, including the Food Standards Agency in the United

the National Service of Health, Food Safety and Agro-Food Quality (known by its Spanish-language acronym “SENASICA”)

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and the European Food Safety Authority, which supports the European Commission, as well as individual country, province, state, and local

Changes in these laws or regulations, or the introduction of new laws

or regulations, could increase the costs of doing business for the Company, our customers, or suppliers, or restrict our actions, causing

our results of operations to be adversely affected.

MILK INDUSTRY REGULATION

Our primary raw material is milk.

government establishes minimum prices for raw milk purchased in federally regulated areas.

Some states have established their own rules

for determining minimum prices.

The federal government

establishes minimum prices for raw milk purchased in federally regulated areas.

Some states have established their own rules for determining

minimum prices.

The federal government announces prices for raw milk each month.

While we are subject to federal government

regulations that establish minimum prices for milk, and we also pay producer (“over-order”) premiums, federal order administration

costs, and other related charges that vary by milk product, location, and supplier.

Lifeway takes appropriate precautions to ensure

the safety of our products.

In addition to routine inspections by state and federal regulatory agencies, including the USDA and FDA,

we have instituted Company-wide quality systems that address topics such as supplier control;

While we are subject to federal government regulations

that establish minimum prices for milk, and we also pay producer (“over-order”) premiums, federal order administration costs,

and other related charges that vary by milk product, location, and supplier.

Lifeway takes appropriate precautions to ensure the

safety of our products.

In addition to routine inspections by state and federal regulatory agencies, including the USDA and FDA, we have

instituted Company-wide quality systems that address topics such as supplier control;

ingredient, packaging, and product specifications;

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product liability and product recall coverages, which we believe to be sufficient to cover potential product liabilities.

We have also implemented the SQF program at our

Illinois and Wisconsin facilities.

SQF is a fully integrated food safety and quality management protocol designed specifically for the

We have also implemented the SQF program at our Illinois

and Wisconsin facilities.

SQF is a fully integrated food safety and quality management protocol designed specifically for the food sector.

The SQF Code, based on universally accepted CODEX Alimentarius, HACCP guidelines and the Global Food Safety Initiative (“GFSI”)

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business