Lifeway Foods(LWAY) - 2022 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements. Presents unaudited consolidated financial statements for Q1 2022 and Q4 2021, detailing financial position, performance, and cash flows, noting a net loss Consolidated Balance Sheets Presents the company's financial position, detailing assets, liabilities, and equity as of March 31, 2022, and December 31, 2021 Consolidated Balance Sheet Data (in thousands) | Balance Sheet Item (in thousands) | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :---------------- | | Total current assets | $29,594 | $29,046 | | Total assets | $70,979 | $70,874 | | Total current liabilities | $13,112 | $12,063 | | Total liabilities | $22,634 | $21,743 | | Total stockholders' equity | $48,345 | $49,131 | Consolidated Statements of Operations Details the company's revenues, expenses, and net income or loss for the three months ended March 31, 2022, and 2021 Consolidated Statements of Operations Data (in thousands, except per share data) | Income Statement Item (in thousands, except per share data) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net Sales | $34,099 | $29,376 | | Gross profit | $5,580 | $8,049 | | (Loss) income from operations | $(1,049) | $1,936 | | Net (loss) income | $(895) | $1,306 | | Basic Earnings (loss) per common share | $(0.06) | $0.08 | | Diluted Earnings (loss) per common share | $(0.06) | $0.08 | Consolidated Statements of Stockholders' Equity Outlines changes in stockholders' equity, including net loss and stock-based compensation, for Q1 2022 Consolidated Statements of Stockholders' Equity Data (in thousands) | Stockholders' Equity Item (in thousands) | Balance, January 1, 2022 | Balance, March 31, 2022 | | :--------------------------------------- | :----------------------- | :---------------------- | | Total Equity | $49,131 | $48,345 | | Net loss | - | $(895) | | Stock-based compensation | - | $109 | Consolidated Statements of Cash Flows Presents cash inflows and outflows from operating, investing, and financing activities for Q1 2022 and Q1 2021 Consolidated Statements of Cash Flows Data (in thousands) | Cash Flow Item (in thousands) | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash (used in) provided by operating activities | $(648) | $1,210 | | Net cash used in investing activities | $(348) | $(518) | | Net cash used in financing activities | $(250) | $0 | | Net (decrease) increase in cash and cash equivalents | $(1,246) | $692 | | Cash and cash equivalents at end of period | $7,987 | $8,618 | Notes to Consolidated Financial Statements Provides detailed explanations of accounting policies, specific account balances, and recent accounting pronouncements Note 1 – Basis of Presentation Describes the basis of financial statement presentation, including restatements for prior period errors - The consolidated financial statements for the three months ended March 31, 2021, have been restated to correct errors in accounting for deferred income tax liabilities and goodwill from a 2009 acquisition[24] Note 2 – Summary of Significant Accounting Policies Outlines key accounting policies, including revenue recognition, segment reporting, and evaluation of new accounting pronouncements - Lifeway recognizes revenue when control over products transfers to customers, generally upon delivery, estimating variable consideration like rebates and allowances[29][32] - The company operates as a single reportable segment, primarily selling cultured dairy products in the United States[35] - Management is evaluating the impact of new ASUs on Business Combinations (ASU 2021-08), Reference Rate Reform (ASU 2020-04), and Credit Losses (ASU 2016-13), but does not currently expect a material impact from the first two[36][37][38] Note 3 – Inventories, net Details the composition of inventories, including ingredients, packaging, and finished goods, as of March 31, 2022, and December 31, 2021 Inventories, Net (in thousands) | Inventory Item (in thousands) | March 31, 2022 | December 31, 2021 | | :---------------------------- | :------------- | :---------------- | | Ingredients | $2,207 | $2,279 | | Packaging | $2,933 | $2,723 | | Finished goods | $3,509 | $3,283 | | Total inventories | $8,649 | $8,285 | Note 4 – Property, Plant and Equipment, net Provides a breakdown of property, plant, and equipment, net of accumulated depreciation Property, Plant and Equipment, Net (in thousands) | Property, Plant and Equipment (in thousands) | March 31, 2022 | December 31, 2021 | | :------------------------------------------- | :------------- | :---------------- | | Total property, plant and equipment, net | $19,822 | $20,130 | Note 5 – Goodwill and Intangible Assets Details the company's goodwill and intangible assets, including reclassification and amortization changes Goodwill and Intangible Assets Data (in thousands) | Intangible Asset Item (in thousands) | March 31, 2022 | December 31, 2021 | | :----------------------------------- | :------------- | :---------------- | | Goodwill | $11,704 | $11,704 | | Total intangible assets, net | $7,843 | $7,978 | - Effective January 1, 2022, an indefinite-lived brand name intangible asset with a net book value of $3,700 thousand was reclassified to a finite-lived asset and is now amortized over 15 years[42] Note 6 – Accrued Expenses Outlines the components of accrued expenses, including payroll and incentive compensation Accrued Expenses Data (in thousands) | Accrued Expense Item (in thousands) | March 31, 2022 | December 31, 2021 | | :---------------------------------- | :------------- | :---------------- | | Payroll and incentive compensation | $2,444 | $2,951 | | Total accrued expenses | $3,190 | $3,724 | Note 7 – Debt Details the company's debt obligations, including term loans and revolving lines of credit, and covenant compliance Debt Obligations (in thousands) | Debt Item (in thousands) | March 31, 2022 | December 31, 2021 | | :----------------------- | :------------- | :---------------- | | Term loan | $4,250 | $4,500 | | Revolving line of credit | $2,777 | $2,777 | | Total note payable, net | $4,222 | $4,470 | - Lifeway was in compliance with its fixed charge coverage ratio and minimum working capital covenants as of March 31, 2022[51][109] Note 8 – Leases Provides information on lease expenses, remaining lease terms, and weighted-average discount rates for operating leases - Total lease expense for the three months ended March 31, 2022, was $65 thousand, down from $78 thousand in 2021[55] - The weighted-average remaining lease term for operating leases was 2.4 years, with a weighted average discount rate of 12.9% as of March 31, 2022[58] Note 9 – Commitments and contingencies Discusses the company's commitments and contingencies, including legal matters - Management believes the ultimate resolution of outstanding legal matters will not have a material adverse effect on the company's business, financial condition, results of operations, or cash flows[60] Note 10 – Income taxes Presents information on income taxes, including effective tax rates and unrecognized tax benefits Income Tax Data | Income Tax Item | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------- | :-------------------------------- | :-------------------------------- | | Effective tax rate | 18.1% | 31.2% | - The company settled its one unrecognized tax benefit during Q1 2022, resulting in $0 unrecognized tax benefits at March 31, 2022[65] Note 11 – Stock-based and Other Compensation Details stock-based compensation expense and future compensation related to restricted stock awards - Total pre-tax stock-based compensation expense recognized was $63 thousand for Q1 2022, up from $36 thousand in Q1 2021[69] - Future compensation expense related to restricted stock awards was $135 thousand as of March 31, 2022, to be recognized on a weighted average basis over the next 1.12 years[69] - The 2020 CEO Award has $274 thousand in remaining unearned compensation, while the 2021 Equity Award has $516 thousand remaining, both payable in restricted stock subject to vesting[71][72] Note 12 – Products and Customers Describes the company's primary products and customer concentration - Lifeway's primary product is drinkable kefir, sold under Lifeway, Fresh Made, GlenOaks Farms, and private labels[74] Product Category Net Sales (in thousands) | Product Category (in thousands) | Q1 2022 Net Sales | Q1 2022 % of Total | Q1 2021 Net Sales | Q1 2021 % of Total | | :------------------------------ | :---------------- | :----------------- | :---------------- | :----------------- | | Drinkable Kefir (excl. ProBugs) | $26,362 | 77% | $24,203 | 82% | | Cheese | $3,024 | 9% | $3,199 | 11% | | Cream and other | $1,968 | 6% | $863 | 3% | | Drinkable yogurt | $1,551 | 5% | $0 | 0% | | ProBugs Kefir | $782 | 2% | $680 | 2% | | Other dairy | $412 | 1% | $431 | 2% | | Total Net Sales | $34,099 | 100% | $29,376 | 100% | - Two major customers accounted for approximately 21% of net sales for the three months ended March 31, 2022[76] Note 13 – Related Party Transactions Reports on transactions with related parties, including consulting agreements and royalty payments - The consulting agreement with the Chairperson of the Board was terminated effective January 17, 2022, reducing service fees from $125 thousand in Q1 2021 to $22 thousand in Q1 2022[77][78] - Royalty payments to the Chairperson remained at $150 thousand for both Q1 2022 and Q1 2021[79] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management discusses Q1 2022 financial condition, operations, and cash flows, highlighting inflation, COVID-19 impacts, and liquidity Cautionary Statement Regarding Forward-Looking Statements Highlights that forward-looking statements involve risks and uncertainties that could cause actual results to differ materially - Forward-looking statements are based on management's beliefs and assumptions and involve risks, uncertainties, and assumptions that could cause actual results to differ materially[82] Recent Developments Discusses recent events impacting the company, including the COVID-19 pandemic and inflationary cost increases COVID-19 Pandemic Impact Examines the pandemic's effects on customer demand, supply chain, labor, and increased input costs - Increased customer and consumer demand for products was observed during the pandemic, with no significant supply chain or labor shortages[85] - In 2022, costs increased primarily due to inflationary price increases of milk, other ingredients, packaging materials, and transportation[86] Results of Operations Analyzes the company's financial performance, including net sales, gross profit, and operating expenses Net Sales Details the company's net sales performance, including drivers of increases such as higher volumes and price adjustments Net Sales Data (in thousands) | Metric | Q1 2022 (in thousands) | Q1 2021 (in thousands) | Change ($) | Change (%) | | :-------- | :--------------------- | :--------------------- | :--------- | :--------- | | Net Sales | $34,099 | $29,376 | $4,723 | 16.1% | - The increase in net sales was primarily due to higher volumes of branded drinkable kefir, price increases, and the acquisition of GlenOaks Farms[89] Gross Profit Analyzes gross profit and its percentage, highlighting factors like milk pricing and increased freight costs Gross Profit Percentage | Metric | Q1 2022 | Q1 2021 | | :----------- | :------ | :------ | | Gross profit % | 16.4% | 27.4% | - The decrease in gross profit percentage was primarily due to unfavorable milk pricing and increased freight and other input costs[90] Selling Expenses Reports on selling expenses for the three months ended March 31, 2022, and 2021 Selling Expenses Data (in thousands) | Metric | Q1 2022 (in thousands) | Q1 2021 (in thousands) | Change ($) | | :-------------- | :--------------------- | :--------------------- | :--------- | | Selling expenses | $3,202 | $3,222 | $(20) | General and Administrative Expenses Details general and administrative expenses, noting increases due to legal and professional fees General and Administrative Expenses Data (in thousands) | Metric | Q1 2022 (in thousands) | Q1 2021 (in thousands) | Change ($) | | :----------------------------------- | :--------------------- | :--------------------- | :--------- | | General and administrative expenses | $3,292 | $2,891 | $401 | - The increase in G&A expenses was primarily due to increased legal and professional fees, including those related to the fiscal year 2020 Form 10-K restatement[92] Provision for Income Taxes Presents the provision for income taxes and the effective tax rate for Q1 2022 and Q1 2021 Provision for Income Taxes Data (in thousands) | Metric | Q1 2022 (in thousands) | Q1 2021 (in thousands) | | :------------------------- | :--------------------- | :--------------------- | | Provision for income taxes | $197 | $593 | | Effective income tax rate | 18.1% | 31.2% | Liquidity and Capital Resources Assesses the company's ability to meet short-term and long-term obligations, including cash flow and debt covenants - Management believes cash flow from operations, revolving credit and term loan facility, and cash and cash equivalents will provide sufficient liquidity for working capital, capital requirements, and growth initiatives[98] - As of March 31, 2022, $2,223 thousand was available under the Revolving Credit Facility[99] Cash Flow Summarizes cash flows from operating, investing, and financing activities for Q1 2022 and Q1 2021 Cash Flow Activities (in thousands) | Cash Flow Activity (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash (used in) provided by operating activities | $(648) | $1,210 | | Net cash (used in) provided by investing activities | $(348) | $(518) | | Net cash (used in) provided by financing activities | $(250) | $0 | Operating Activities Analyzes net cash flow from operating activities, noting the impact of lower cash earnings - Net cash used in operating activities was $648 thousand in Q1 2022, compared to $1,210 thousand provided in Q1 2021, primarily due to lower cash earnings from input and freight cost inflation[104] Investing Activities Examines net cash flow from investing activities, primarily driven by capital spending - Net cash used in investing activities decreased to $348 thousand in Q1 2022 from $518 thousand in Q1 2021, driven by lower capital spending[106] Financing Activities Details net cash flow from financing activities, including term loan principal payments - Net cash used in financing activities was $250 thousand in Q1 2022, compared to $0 in Q1 2021, due to term loan principal payments[107] Debt Obligations Outlines the company's debt structure, including revolving line of credit and note payable balances Debt Obligations Summary (in thousands) | Debt Obligation (in thousands) | Amount Outstanding (March 31, 2022) | | :----------------------------- | :---------------------------------- | | Revolving line of credit | $2,777 | | Note payable, net | $4,222 | | Available under Revolving Credit Facility | $2,223 | - The company's interest rate on outstanding debt under the revolving line of credit and note payable was 2.15% as of March 31, 2022[108] Recent Accounting Pronouncements Refers to Note 2 for information on recently issued accounting pronouncements and their potential impact - Information regarding recent accounting pronouncements is provided in Note 2 – Summary of Significant Accounting Policies[110] Critical Accounting Policies and Estimates Discusses critical accounting policies and estimates, noting changes to intangible asset useful life - No material changes to critical accounting policies and estimates occurred, except for the change in the estimated useful life of a brand name intangible asset (Note 5)[111] Item 3. Quantitative and Qualitative Disclosures About Market Risk. The company states that this item is not applicable for the reporting period Item 4. Controls and Procedures. Details evaluation of disclosure controls and procedures and changes in internal control over financial reporting, including material weakness remediation Evaluation of Disclosure Controls and Procedures Reports on the effectiveness of the company's disclosure controls and procedures as of March 31, 2022 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2022[114] Changes in Internal Control over Financial Reporting Details ongoing remediation efforts for a previously identified material weakness in internal control over financial reporting - Remediation efforts for a previously identified material weakness in internal control over financial reporting, related to income tax accounting, were ongoing during Q1 2022[115][116] PART II – OTHER INFORMATION Item 1. Legal Proceedings. Refers to Note 9 for legal proceedings, indicating no material individual or aggregate accruals for outstanding legal matters Item 1A. Risk Factors. States no material changes from risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Reports no unregistered sales of equity securities or use of proceeds during the period Item 3. Defaults Upon Senior Securities. Reports no defaults upon senior securities during the period Item 5. Other Information. States that there is no other information to report under this item Item 6. Exhibits. Lists exhibits filed or furnished with the Form 10-Q, including certifications and a press release Exhibits Filed or Furnished | No. | Description | Filing Type | | :----- | :----------------------------------------------------------------------- | :---------------- | | 31.1 | Rule 13a-14(a)/15d-14(a) Certification of Julie Smolyansky | Filed Herewith | | 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Eric Hanson | Filed Herewith | | 32.1 | Section 1350 Certification of Julie Smolyansky* | Furnished Herewith| | 32.2 | Section 1350 Certification of Eric Hanson* | Furnished Herewith| | 99.1 | Press release dated August 26, 2022 reporting Lifeway's financial results for the three months ended March 31, 2022.* | Furnished Herewith| Signatures. Contains required signatures from the CEO, President, Director, and CFO, certifying the report on August 26, 2022 - The report was signed by Julie Smolyansky, Chief Executive Officer, President, and Director, and Eric Hanson, Chief Financial & Accounting Officer, on August 26, 2022[130]