Lifeway Foods(LWAY) - 2021 Q1 - Quarterly Report

SEC Filing Details This section provides an overview of the SEC filing, including company identification and common stock outstanding details Form 10-Q Details This section details the filing specifics for Lifeway Foods, Inc.'s Form 10-Q for the quarterly period ended March 31, 2021, identifying the company as a non-accelerated and smaller reporting filer with 15,631,314 shares of common stock outstanding as of May 3, 2021 - Filing is a Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended March 31, 2021[2] | Filer Status | Value | | :--- | :--- | | Large accelerated filer | No | | Accelerated filer | No | | Non-accelerated filer | Yes | | Smaller reporting company | Yes | | Emerging growth company | No | - Number of shares of Common Stock, no par value, outstanding as of May 3, 2021: 15,631,314[4] PART I – FINANCIAL INFORMATION This part presents the unaudited consolidated financial statements and management's discussion and analysis for the quarter ended March 31, 2021 Item 1. Financial Statements. This section presents the unaudited consolidated financial statements of Lifeway Foods, Inc. and its subsidiaries for the quarter ended March 31, 2021, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific financial accounts Consolidated Balance Sheets This section details the company's financial position, including assets, liabilities, and equity as of March 31, 2021 | Metric | March 31, 2021 (Unaudited) (in thousands) | December 31, 2020 (in thousands) | | :--- | :--- | :--- | | Total current assets | $26,471 | $24,052 | | Total assets | $62,156 | $60,069 | | Total current liabilities | $9,091 | $8,441 | | Total liabilities | $13,932 | $13,215 | | Total stockholders' equity | $48,224 | $46,854 | Consolidated Statements of Operations This section outlines the company's financial performance, including net sales, gross profit, and net income for the three months ended March 31 | Metric (Three Months Ended March 31) | 2021 (in thousands) | 2020 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $29,376 | $25,388 | +15.7% | | Gross profit | $8,049 | $5,997 | +34.2% | | Income from operations | $1,936 | $238 | +713.4% | | Net income | $1,306 | $146 | +794.5% | | Basic EPS | $0.08 | $0.01 | +700% | | Diluted EPS | $0.08 | $0.01 | +700% | Consolidated Statements of Stockholders' Equity This section details changes in stockholders' equity, including common stock, paid-in capital, and retained earnings | Metric (in thousands) | Balance, January 1, 2021 | Balance, March 31, 2021 | | :--- | :--- | :--- | | Common Stock | $6,509 | $6,509 | | Paid-In Capital | $2,600 | $2,664 | | Treasury stock, at cost | $(12,450) | $(12,450) | | Retained earnings | $50,195 | $51,501 | | Total Equity | $46,854 | $48,224 | - Net income for the three months ended March 31, 2021, contributed $1,306 thousand to retained earnings, and stock-based compensation added $64 thousand to paid-in capital[15] Consolidated Statements of Cash Flows This section presents cash flows from operating, investing, and financing activities for the three months ended March 31 | Cash Flow Activity (Three Months Ended March 31) | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $1,210 | $(1,055) | | Net cash used in investing activities | $(518) | $(398) | | Net cash used in financing activities | $0 | $(405) | | Net increase (decrease) in cash and cash equivalents | $692 | $(1,858) | | Cash and cash equivalents at end of period | $8,618 | $1,978 | Notes to Consolidated Financial Statements This section provides detailed explanations supporting the financial statements, covering accounting policies and specific accounts Note 1 – Basis of Presentation This note describes the preparation of unaudited consolidated financial statements in accordance with U.S. GAAP - Unaudited consolidated financial statements prepared in accordance with U.S. GAAP for interim financial information, including all necessary adjustments for fair presentation[19] - Consolidated financial statements include Lifeway Foods, Inc. and all wholly-owned subsidiaries, with significant intercompany accounts and transactions eliminated[21] Note 2 – Significant Accounting Policies This note outlines key accounting principles and estimates, including revenue recognition and expense treatment - Management makes estimates and assumptions affecting reported amounts, including reserves for promotional allowances, valuation of goodwill and intangible assets, stock-based compensation, and deferred income taxes[22] - Revenue is recognized when control of food and beverage products transfers to customers, generally upon delivery, using the five-step method of ASC 606[23] - Advertising expenses are expensed as incurred, totaling $1,393 thousand for Q1 2021, up from $536 thousand in Q1 2020[29] Note 3 – Inventories, net This note provides a breakdown of inventory categories as of March 31, 2021, and December 31, 2020 | Inventory Category (in thousands) | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Ingredients | $1,684 | $1,725 | | Packaging | $2,114 | $2,234 | | Finished goods | $2,938 | $2,971 | | Total inventories | $6,736 | $6,930 | Note 4 – Property, Plant and Equipment, net This note details the composition of property, plant, and equipment, net of depreciation | Asset Category (in thousands) | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Land | $1,565 | $1,565 | | Buildings and improvements | $17,182 | $17,834 | | Machinery and equipment | $31,716 | $31,707 | | Construction in process | $587 | $228 | | Total property, plant and equipment, net | $20,744 | $21,048 | Note 5 – Goodwill and Intangible Assets This note presents the carrying amounts of goodwill and other intangible assets | Intangible Asset (in thousands) | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Goodwill | $9,124 | $9,124 | | Brand names | $3,700 | $3,700 | | Total goodwill and indefinite-lived intangible assets | $12,824 | $12,824 | - Finite-lived intangible assets, including recipes, customer lists, customer relationships, trade names, and formulas, were fully amortized to $0 as of March 31, 2021, and December 31, 2020[36] Note 6 – Accrued Expenses This note itemizes accrued expenses, including payroll, incentive compensation, and real estate taxes | Accrued Expense Category (in thousands) | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Payroll and incentive compensation | $1,825 | $1,366 | | Real estate taxes | $271 | $341 | | Current portion of operating lease liabilities | $174 | $179 | | Other | $317 | $310 | | Total accrued expenses | $2,587 | $2,196 | Note 7 – Debt This note describes the company's debt obligations, including its revolving credit facility and financial covenants - Lifeway has a Modified Revolving Credit Facility with a maximum revolving line of credit of $5 million and an incremental facility not exceeding $5 million, extended to June 30, 2025[40] - As of March 31, 2021, $2,774 thousand was outstanding under the Revolving Credit Facility, with $2,223 thousand available for future borrowings[42] - The company was in compliance with fixed charge coverage ratio and minimum working capital covenants as of March 31, 2021[44] Note 8 – Leases This note details operating lease commitments, remaining terms, future payments, and discount rates - Lifeway holds operating leases for two retail stores and certain machinery/equipment, with remaining lease terms ranging from less than 1 year to 4 years[45] | Year | Operating Leases (in thousands) | | :--- | :--- | | Nine months ended December 31, 2021 | $147 | | 2022 | $158 | | 2023 | $23 | | 2024 | $7 | | 2025 | $5 | | Thereafter | $2 | | Total lease payments | $342 | | Less: Interest | $(26) | | Present value of lease liabilities | $316 | - The weighted-average remaining lease term for operating leases was 2.05 years, and the weighted average discount rate was 7.85% as of March 31, 2021[49] Note 9 – Commitments and contingencies This note addresses legal actions and claims, and management's assessment of their potential financial impact - Lifeway is involved in various legal actions and claims in the normal course of business, accruing for probable and estimable losses[50][51] - Management believes the ultimate resolution of outstanding legal matters will not have a material adverse effect on the business, financial condition, results of operations, or cash flows, though outcomes are uncertain[51][52] Note 10 – Income taxes This note discusses the effective tax rate, its changes, and unrecognized tax benefits - The effective tax rate for the three months ended March 31, 2021, was 31.2%, an increase from 27.5% in the prior year, partly due to a tax benefit from the CARES Act in Q1 2020[53][54] - Unrecognized tax benefits were $96 thousand at March 31, 2021, and no material changes are expected in the next twelve months[55] Note 11 – Stock-based and Other Compensation This note details stock-based compensation plans, authorized shares, and unearned compensation - The 2015 Omnibus Incentive Plan authorized 3.5 million shares for various stock awards, with 3.317 million shares remaining available as of March 31, 2021[56] | Stock-based Compensation Expense (in thousands) | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Restricted Stock Awards | $36 | $5 | | 2019 Plan | $19 | $13 | | 2019 Retention Award | $8 | $43 | | 2020 CEO Incentive Award | $90 | $0 | | Total Stock-based Compensation Expense | $153 | $61 | - Total remaining unearned compensation for non-vested RSAs was $108 thousand as of March 31, 2021, expected to be amortized over 1.22 years[59] Note 12 – Segments, Products and Customers This note describes Lifeway's single reportable segment, primary products, and major customer sales concentration - Lifeway operates as one reportable segment, primarily selling drinkable kefir and other cultured dairy products in the United States[67][69] | Product Category (Three Months Ended March 31) | 2021 Net Sales (in thousands) | 2021 % of Total | 2020 Net Sales (in thousands) | 2020 % of Total | | :--- | :--- | :--- | :--- | :--- | | Drinkable Kefir other than ProBugs | $24,203 | 82% | $19,857 | 78% | | Cheese | $3,199 | 11% | $3,260 | 13% | | Cream and other | $863 | 3% | $781 | 3% | | ProBugs Kefir | $680 | 2% | $860 | 3% | | Other dairy | $384 | 1% | $371 | 2% | | Frozen Kefir | $47 | 1% | $259 | 1% | | Total Net Sales | $29,376 | 100% | $25,388 | 100% | - Two major customers accounted for approximately 22% of net sales for the three months ended March 31, 2021, and 21% for the same period in 2020[70] Note 13 – Related Party Transactions This note discloses transactions with related parties, including service fees and royalties paid to the Chairperson - Lifeway pays its Chairperson an annual service fee of $500 thousand and a potential annual performance fee target of $500 thousand for consulting services[72] - Service fees to the Chairperson were $125 thousand in Q1 2021 (down from $250 thousand in Q1 2020), and $94 thousand was recorded for the 2021 performance fee target[73] - Royalties of $150 thousand were paid to the Chairperson in both Q1 2021 and Q1 2020, based on sales of certain products, not exceeding $50 thousand per fiscal month[74] Note 14 – COVID-19 This note discusses the pandemic's impact on operations, demand, and ongoing uncertainties - The company experienced increased customer and consumer demand due to pantry loading and increased at-home consumption during the COVID-19 pandemic[76] - Uncertainty remains regarding the pandemic's ultimate impact, including potential decreases in demand, supply chain constraints, and increased costs for raw materials[77][79] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This section provides management's perspective on Lifeway Foods, Inc.'s financial condition and operational results for the three months ended March 31, 2021, discussing key performance drivers, the impact of the COVID-19 pandemic, and liquidity and capital resources. It highlights significant increases in net sales, gross profit, and net income, while also addressing forward-looking statements and associated risks Cautionary Statement Regarding Forward-Looking Statements This section advises that the report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially - This report contains forward-looking statements identified by terms like 'anticipate,' 'intend,' 'plan,' and 'expect,' which are based on management's beliefs and assumptions about future events[81] - Actual outcomes may differ materially due to various risks and uncertainties, including competitor actions, customer decisions, commodity pricing, government regulation, and the impact of the COVID-19 outbreak[81][84] Recent Developments (COVID-19 Pandemic Impact) This section discusses increased consumer demand during COVID-19 and management's successful mitigation efforts - Lifeway experienced increased orders from retail customers due to higher consumer demand for at-home food consumption and the immune-boosting qualities of its products during the COVID-19 pandemic[83] - Management implemented proactive measures to mitigate COVID-19 effects on supply, transportation, and staffing, successfully avoiding disruptions and meeting increased demand[87] - The company has maintained full production capacity and does not anticipate manufacturing or staffing disruptions in the near term[87] Results of Operations This section analyzes the company's financial performance, detailing changes in net sales, gross profit, and expenses Net Sales This section analyzes the drivers behind the 15.7% increase in net sales, primarily from higher branded drinkable kefir volumes | Metric | Q1 2021 (in thousands) | Q1 2020 (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $29,376 | $25,388 | $3,988 | 15.7% | - The increase in net sales was primarily driven by higher volumes of branded drinkable kefir, with approximately 30% of the increase attributed to the USDA's Farmers to Families Food Box program[89] Gross Profit This section examines the 34.2% increase in gross profit and improved percentage due to operating leverage and milk pricing | Metric | Q1 2021 | Q1 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Gross profit | $8,049 (in thousands) | $5,997 (in thousands) | +34.2% | | Gross Profit % to net sales | 27.4% | 23.6% | +3.8 pp | - The increase in gross profit percentage was mainly due to favorable operating leverage from higher net sales relative to fixed costs and, to a lesser extent, favorable milk pricing[90] Selling Expenses This section details the 25.1% increase in selling expenses, primarily driven by higher advertising costs | Metric | Q1 2021 (in thousands) | Q1 2020 (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Selling expenses | $3,222 | $2,575 | $(647) | (25.1%) | | Selling expenses % to net sales | 11.0% | 10.1% | +0.9 pp | - The increase in selling expenses was primarily due to higher advertising costs for television and digital campaigns in Q1 2021, partially offset by lower compensation expense[91] General and Administrative Expenses This section analyzes the 8.1% decrease in general and administrative expenses, mainly due to lower compensation and professional fees | Metric | Q1 2021 (in thousands) | Q1 2020 (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | General and administrative expenses | $2,891 | $3,145 | $254 | 8.1% | | General and administrative % to net sales | 9.8% | 12.4% | -2.6 pp | - The decrease in general and administrative expenses was mainly due to lower compensation expense from organizational changes in 2020 and reduced professional fees[92] Provision for Income Taxes This section explains the increase in the effective tax rate to 31.2%, due to the absence of a prior-year CARES Act benefit | Metric | Q1 2021 (in thousands) | Q1 2020 (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Provision for income taxes | $593 | $55 | $(538) | (978.2%) | | Effective income tax rate | 31.2% | 27.5% | +3.7 pp | - The effective tax rate increased due to the absence of the CARES Act's net operating loss carryback benefit, which reduced the Q1 2020 rate[94] - Beginning in 2020, compensation exceeding $1,000,000 for covered employees is non-deductible for income tax purposes under Section 162(m) of the Internal Revenue Code[97] Net Income This section highlights the significant 794.5% increase in net income and basic and diluted EPS | Metric | Q1 2021 (in thousands) | Q1 2020 (in thousands) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net income | $1,306 | $146 | $1,160 | 794.5% | | Basic EPS | $0.08 | $0.01 | +$0.07 | +700% | | Diluted EPS | $0.08 | $0.01 | +$0.07 | +700% | Liquidity and Capital Resources This section assesses the company's ability to meet financial obligations, discussing cash flow, capital spending, and debt COVID-19 Pandemic Impact This section confirms COVID-19 has not significantly impacted manufacturing and proactive measures maintained operations - Lifeway's manufacturing facilities have not been significantly impacted by COVID-19, maintaining full production capacity[105] - The food industry, including Lifeway, was classified by the U.S. federal government as a critical infrastructure industry, allowing continued operations during the pandemic[105] - Management's proactive planning mitigated COVID-19 effects on supply, transportation, and staffing, preventing disruptions[105] Cash Flow This section states the company expects to meet liquidity needs through operating cash flows and its revolving credit facility - The COVID-19 pandemic has not materially impacted operations, and Lifeway expects to meet liquidity needs through anticipated cash flows from operations, its revolving credit facility, and cash equivalents[106] Sources and Uses of Cash This section analyzes changes in cash flows from operating, investing, and financing activities, highlighting increased operating cash | Cash Flow Activity (Three Months Ended March 31) | 2021 (in thousands) | 2020 (in thousands) | Change ($) | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $1,210 | $(1,055) | +$2,265 | | Net cash used in investing activities | $(518) | $(398) | $(120) | | Net cash used in financing activities | $0 | $(405) | +$405 | | Net increase (decrease) in cash and cash equivalents | $692 | $(1,858) | +$2,550 | - The increase in operating cash flow was driven by higher revenues and reduced expenses in 2021, alongside a change in working capital[107] - Capital spending increased to $518 thousand in Q1 2021 (from $403 thousand in Q1 2020), focusing on growth, cost reduction, and facility improvements[108] Debt Obligations This section details the revolving credit facility, outstanding debt, available borrowings, and compliance with financial covenants - The Revolving Credit Facility's termination date was extended to June 30, 2025, with a maximum line of credit of $5 million and an incremental facility of $5 million[111] - As of March 31, 2021, $2,774 thousand was outstanding under the Revolving Credit Facility, with $2,223 thousand available for future borrowings[113] - Lifeway was in compliance with all financial debt covenants as of March 31, 2021, including a fixed charge coverage ratio of no less than 1.25 to 1.00 and a minimum working capital of $11.25 million[112][115] Item 3. Quantitative and Qualitative Disclosures About Market Risk. This section states that there are no quantitative and qualitative disclosures about market risk applicable for the reporting period - Not applicable for this reporting period[116] Item 4. Controls and Procedures. Management, with the participation of the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of March 31, 2021, concluding they were effective. There were no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2021[117] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2021[118] PART II – OTHER INFORMATION This part covers various other information, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings. Lifeway is involved in routine litigation, but management believes no current matter is likely to have a material adverse effect on its financial position or results of operations - The company is engaged in litigation matters arising in the ordinary course of business[121] - Management believes no current legal matter is reasonably likely to have a material adverse effect on financial position or results of operations[121] Item 1A. Risk Factors. There have been no material changes to the risk factors previously disclosed in Part I, Item 1A of the company's 2020 Form 10-K - No material changes to risk factors disclosed in the 2020 Form 10-K[122] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. There were no unregistered sales of equity securities or use of proceeds to report for the period - None to report[123] Item 3. Defaults Upon Senior Securities. There were no defaults upon senior securities to report for the period - None to report[124] Item 4. Mine Safety Disclosure. Mine safety disclosure is not applicable to the company's operations - Not applicable[125] Item 5. Other Information. There is no other information to report for the period - None to report[126] Item 6. Exhibits. This section lists the exhibits filed or furnished with the Form 10-Q, including certifications, a press release, and interactive data files | No. | Description | | :--- | :--- | | 31.1 | Rule 13a-14(a)/15d-14(a) Certification of Julie Smolyansky | | 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Eric Hanson | | 32.1 | Section 1350 Certification of Julie Smolyansky* | | 32.2 | Section 1350 Certification of Eric Hanson* | | 99.1 | Press release dated May 17, 2021 reporting Lifeway's financial results for the three months ended March 31, 2021.* | | 101 | Interactive Data Files | Signatures This section confirms the official signing of the report by the company's Chief Executive Officer and Chief Financial Officer Signatures Details The report is duly signed on behalf of Lifeway Foods, Inc. by Julie Smolyansky, Chief Executive Officer, President, and Director, and Eric Hanson, Chief Financial & Accounting Officer, on May 17, 2021 - Report signed by Julie Smolyansky (CEO, President, Director) and Eric Hanson (CFO & Accounting Officer) on May 17, 2021[133]