UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
For the quarterly period ended:
For the transition period from __________ to __________
Commission File Number:
(Exact name of registrant as specified in its charter)
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices, zip code)
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Securities registered under Section 12(g) of the Exchange Act:
None
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
| Large accelerated Filer ☐ | Accelerated Filer ☐ | |
| Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Number of shares of Common Stock, no par value, outstanding as of November 9, 2022: .
TABLE OF CONTENTS
| PART I – FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements. | 3 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 20 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 27 |
| Item 4. | Controls and Procedures. | 27 |
| PART II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings. | 29 |
| Item 1A. | Risk Factors. | 29 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 29 |
| Item 3. | Defaults Upon Senior Securities. | 29 |
| Item 5. | Other Information. | 29 |
| Item 6. | Exhibits. | 30 |
| Signatures. | 31 | |
| 2 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2022 and December 31, 2021
(In thousands)
| September 30, 2022 | December 31, | |||||||
| Unaudited | 2021 | |||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $ | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Refundable income taxes | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Operating lease right-of-use asset | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Current liabilities | ||||||||
| Current portion of note payable | $ | $ | ||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Accrued income taxes | ||||||||
| Total current liabilities | ||||||||
| Line of credit | ||||||||
| Note payable | ||||||||
| Operating lease liabilities | ||||||||
| Deferred income taxes, net | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders' equity | ||||||||
| Preferred stock, par value; shares authorized; shares issued or outstanding at September 30, 2022 and December 31, 2021 | ||||||||
| Common stock, par value; shares authorized; shares issued; and outstanding at September 30, 2022 and December 31, 2021, respectively | ||||||||
| Paid-in capital | ||||||||
| Treasury stock, at cost | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
See accompanying notes to consolidated financial statements
| 3 |
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the three and nine months ended September 30, 2022 and 2021
(Unaudited)
(In thousands, except per share data)
Three Months Ended September 30, | Nine months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Depreciation expense | ||||||||||||||||
| Total cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Selling expenses | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Amortization expense | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income from operations | ||||||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on investments | ||||||||||||||||
| Loss on sale of property and equipment | ( | ) | ( | ) | ||||||||||||
| Other (expense) income, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income before provision (benefit) for income taxes | ||||||||||||||||
| Provision (benefit) for income taxes | ( | ) | ||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Earnings (loss) per common share: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| Weighted average common shares: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes to consolidated financial statements
| 4 |
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands)
| Common Stock | ||||||||||||||||||||||||||||
| Issued | In treasury | Paid-In | Retained | Total | ||||||||||||||||||||||||
| Shares | $ | Shares | $ | Capital | Earnings | Equity | ||||||||||||||||||||||
| Balance, January 1, 2021 | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
| Stock-based compensation | – | – | ||||||||||||||||||||||||||
| Net income | – | – | ||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
| Issuance of common stock in connection with stock-based compensation | – | ( | ) | ( | ) | |||||||||||||||||||||||
| Stock-based compensation | – | – | ||||||||||||||||||||||||||
| Net income | – | – | ||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
| Issuance of common stock in connection with stock-based compensation | – | ( | ) | |||||||||||||||||||||||||
| Treasury stock purchased | – | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Stock-based compensation | – | – | ||||||||||||||||||||||||||
| Net income | – | – | ||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
| 5 |
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands)
| Common Stock | ||||||||||||||||||||||||||||||
| Issued | In treasury | Paid-In | Retained | Total | ||||||||||||||||||||||||||
| Shares | $ | Shares | $ | Capital | Earnings | Equity | ||||||||||||||||||||||||
| Balance, January 1, 2022 | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||
| Stock-based compensation | – | – | ||||||||||||||||||||||||||||
| Net loss | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||
| Issuance of common stock in connection with stock-based compensation | – | ( | ) | ( | ) | |||||||||||||||||||||||||
| Stock-based compensation | – | – | ||||||||||||||||||||||||||||
| Net income | – | – | ||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||
| Issuance of common stock in connection with stock-based compensation | – | ( | ) | |||||||||||||||||||||||||||
| Treasury stock purchased | – | – | - | |||||||||||||||||||||||||||
| Stock-based compensation | – | – | ||||||||||||||||||||||||||||
| Net income | – | – | ||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||
See accompanying notes to consolidated financial statements
| 6 |
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
| Nine months ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to operating cash flow: | ||||||||
| Depreciation and amortization | ||||||||
| Non-cash interest expense | ||||||||
| Non-cash rent expense | ||||||||
| Bad debt expense | ||||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Stock-based compensation | ||||||||
| Loss on sale of property and equipment | ||||||||
| (Increase) decrease in operating assets: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Refundable income taxes | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Increase (decrease) in operating liabilities: | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Accrued income taxes | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Acquisition, net of cash acquired | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Purchase of treasury stock | ( | ) | ||||||
| Payment of deferred financing cost | ( | ) | ||||||
| Proceeds from note payable | ||||||||
| Repayment of note payable | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ||||||
| Net (decrease) increase in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at the beginning of the period | ||||||||
| Cash and cash equivalents at the end of the period | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Cash paid for income taxes, net | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Non-cash investing activities | ||||||||
| Increase (decrease) in right-of-use assets and operating lease obligations | $ | $ | ||||||
See accompanying notes to consolidated financial statements
| 7 |
LIFEWAY FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(In thousands, except per share data)
Note 1 – Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) for interim financial information, and do not include certain information and footnote disclosures required for complete, audited financial statements. In the opinion of management, these statements include all adjustments necessary for a fair presentation of the results of all interim periods reported herein. The consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Results of operations for any interim period are not necessarily indicative of future or annual results.
Principles of consolidation
The consolidated financial statements include the accounts of Lifeway Foods, Inc. and all its wholly owned subsidiaries (collectively “Lifeway” or the “Company”). All significant intercompany accounts and transactions have been eliminated.
Restatement of Previously Issued Consolidated Financial Statements
As previously disclosed in Note 1 to the Company’s consolidated financial statements included in the 2021 Form 10-K, the Company identified past errors in the accounting for deferred income tax liabilities and goodwill that resulted from a 2009 acquisition when preparing the 2021 consolidated financial statements. In the 2021 Form 10-K, the Company restated its historical consolidated financial statements to properly reflect the impact of the 2009 acquisition, which resulted in adjustments to goodwill and deferred income tax liabilities in the affected periods. The consolidated financial statements for the three and nine months ended September 30, 2021 included in this Quarterly Report on Form 10-Q have been similarly restated to reflect the correction of these errors and should be read in conjunction with Notes 1 and 17 to the Company’s consolidated financial statements included in the 2021 Form 10-K.
Reclassification
Certain amounts have been reclassified from cash flows from investing to cash flows from operations on the consolidated statement of cash flows for the nine months ended September 31, 2021. This reclassification had no impact on the consolidated statements of operations, consolidated balance sheets, or consolidated statements of stockholders’ equity. The Company determined the reclassification to be immaterial to the previously filed consolidated financial statements.
Note 2 – Summary of Significant Accounting Policies
A detailed description of our significant accounting policies can be found in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
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.
Cash and cash equivalents
The Company has $
| 8 |
Advertising and promotional costs
Lifeway expenses advertising costs as incurred
and is reported in Selling expense in the Company’s consolidated statement of operations. Total advertising expense was $
Segments
The Company is managed as a single reportable segment. The Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), reviews financial information on an aggregate basis for purposes of allocating resources and assessing financial performance, as well as for making strategic operational decisions and managing the organization. Substantially all of Lifeway’s consolidated revenues relate to the sale of cultured dairy products that it produces using the same processes and materials and are sold to consumers through a common network of distributors and retailers in the United States.
Recent accounting pronouncements
Issued by not yet effective
In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new guidance provides a single comprehensive accounting model on revenue recognition for contracts with customers and requires that the acquirer in a business combination recognize and measure contract assets and liabilities acquired in a business combination in accordance with Topic 606 (Revenue from Contracts with Customers). The amendments in this ASU are effective for fiscal years beginning after December 15, 2022. Early adoption is permitted, including adoption in an interim period. With early adoption, the amendments are applied retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of adoption and prospectively to all business combinations that occur on or after the date of initial application. Management is evaluating the impact of the new guidance and does not currently expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In March 2020, the FASB issued 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 U.S. 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 evaluating the impact of the new guidance and does not currently expect the adoption of this ASU to have a material impact on its consolidated financial statements.
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 and does not currently expect the adoption of this ASU to have a material impact on its consolidated financial statements.
| 9 |
Note 3 – Inventories, net
Inventories consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Ingredients | $ | $ | ||||||
| Packaging | ||||||||
| Finished goods | ||||||||
| Total inventories | $ | $ | ||||||
Note 4 – Property, Plant and Equipment, net
Property, plant and equipment consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Land | $ | $ | ||||||
| Buildings and improvements | ||||||||
| Machinery and equipment | ||||||||
| Vehicles | ||||||||
| Office equipment | ||||||||
| Construction in process | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Total property, plant and equipment, net | $ | $ | ||||||
Note 5 – Goodwill and Intangible Assets
Goodwill
Goodwill consisted of the following:
| Total | ||||
| Balance at December 31, 2021, before accumulated impairment loses | $ | |||
| Accumulated impairment losses | ( | ) | ||
| Balance at December 31, 2021 | $ | |||
| Balance at September 30, 2022 | $ | |||
| 10 |
Intangible Assets
Other intangible assets, net consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||
| Gross | Net | Gross | Net | |||||||||||||||||||||
| Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | |||||||||||||||||||
| Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||
| Intangible assets with finite lives: | ||||||||||||||||||||||||
| Recipes | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Customer lists and other customer related intangibles | ( | ) | ( | ) | ||||||||||||||||||||
| Customer relationship | ( | ) | ( | ) | ||||||||||||||||||||
| Brand names | ( | ) | ( | ) | ||||||||||||||||||||
| Formula | ( | ) | ( | ) | ||||||||||||||||||||
| Total finite lived intangible assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Intangible assets with indefinite lives: | ||||||||||||||||||||||||
| Brand names (1) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| (1) |
Estimated amortization expense on intangible assets for the next five years is as follows:
| Year | Amortization | |||
| Three months ended December 31, 2022 | $ | |||
| 2023 | $ | |||
| 2024 | $ | |||
| 2025 | $ | |||
| 2026 | $ | |||
Note 6 – Accrued Expenses
Accrued expenses consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Payroll and incentive compensation | $ | $ | ||||||
| Real estate taxes | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Other | ||||||||
| Total accrued expenses | $ | $ | ||||||
| 11 |
Note 7 – Debt
Note payable consisted of the following:
September 30, 2022 | December 31, 2021 | |||||||
| Term loan due August 18, 2026. Interest (4.94% at September 30, 2022) payable monthly. | $ | $ | ||||||
| Unamortized deferred financing costs | ( | ) | ( | ) | ||||
| Total note payable | ||||||||
| Less current portion | ( | ) | ( | ) | ||||
| Total long-term portion | $ | $ | ||||||
The scheduled maturities of the term loan, excluding deferred financing costs, at September 30, 2022 are as follows:
| Three months ended December 31, 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total term loan | $ |
Credit Agreement
On August 18, 2021, Lifeway entered into the Fourth
Modification (the “Fourth Modification”) to the Amended and Restated Loan and Security Agreement (as amended and modified
from time to time, the “Credit Agreement” and, as amended and modified by the Fourth Modification, the “Modified Credit
Agreement”) with its existing lender and certain of its subsidiaries. The Fourth Modification amends the Credit Agreement to provide
for, among other things, a $5 million term loan by the existing lender to the borrowers to be repaid in quarterly installments of principal
and interest over a term of five years (the “Term Loan”). The termination date of the Term Loan is August 18, 2026, unless
earlier terminated. 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
As amended, all outstanding amounts under the
revolving line of credit and term loan bear interest, at Lifeway’s election, at either the lender Base Rate (the Prime Rate minus
The Modified Credit Agreement includes customary representations, warranties, and covenants, including financial covenants requiring the Company to maintain a fixed charge coverage ratio of no less than 1.25 to 1.00, and a minimum working capital financial covenant, as defined, of no less than $11.25 million, in each of the fiscal quarters ending through the expiration date. The Modified Credit Agreement 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 Credit Agreement may be accelerated. The loans and all other amounts due and owed under the Credit Agreement and related documents are secured by substantially all of the Company’s assets.
Lifeway was in compliance with the fixed charge coverage ratio and minimum working capital covenants at September 30, 2022.
| 12 |
Revolving Credit Facility
As of September 30, 2022, the Company had $
Note 8 – Leases
The Company leases 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 one year to five years. Some of its 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. Lifeway does not currently have leases which meet the finance lease classification as defined under ASC 842.
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, it directs the use of the asset and obtain substantially all the economic benefits of the asset.
The Company does 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 $
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. Lifeway has elected the practical expedient to combine lease and non-lease components into a single component for all of its leases. When the Company is unable to determine an implicit interest rate, it uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments for those leases. Lifeway includes 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 it 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 | |||
| Three months ended December 31, 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total lease payments | ||||
| Less: Interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
The weighted-average remaining lease term for
its operating leases was
| 13 |
Note 9 – Commitments and contingencies
Litigation
Lifeway is involved in various legal proceedings, claims, disputes, regulatory matters, audits, and proceedings arising in the ordinary course of, or incidental to the Company’s business, including commercial disputes, product liabilities, intellectual property matters and employment-related matters.
Lifeway records provisions in the consolidated financial statements for pending legal matters when it believes it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated. The Company evaluates, 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, it does not establish an accrued liability. Currently, none of its accruals for outstanding legal matters are material individually or in the aggregate to its 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 its business, financial condition, results of operations, or cash flows. However, if the Company is ultimately required to make payments in connection with an adverse outcome, it is possible that such contingency could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
Note 10 – Income taxes
Income taxes were recognized at effective rates
of (
The Company has historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year income, excluding unusual or infrequently occurring discrete items, for the reporting period. In accordance with the authoritative guidance, the Company used a discrete effective tax rate method to calculate income taxes for the quarter and year to date periods ended March 31, 2022 and June 30, 2022 because small changes in the estimated level and mix of annual income or loss by jurisdiction would result in significant changes in the estimated annual effective tax rate making the historical method unreliable. During the quarter and year to date period ended September 30, 2022, the Company utilized an estimate of the annual effective tax rate for the full fiscal year income, excluding unusual or infrequently occurring discrete items, as small changes in the estimated level and mix of annual income or loss by jurisdiction would not result in significant changes in the estimated annual effective tax rate.
The Company’s effective tax rate may change from period to period based on recurring and non-recurring factors including the relative mix of pre-tax earnings (or losses), the jurisdictional mix of earnings, enacted tax legislation, state income taxes, the impact of non-deductible items, changes in valuation allowances, settlement of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits. The Company records discrete income tax items such as enacted tax rate changes and completed tax audits in the period in which they occur. The Company consistently reflects non-deductible officer compensation expense, non-deductible compensation expense related to equity incentive awards and separate state tax rates from period to period. Although similar items were reflected in 2022, the percentage effect is different due to the difference in pre-tax (loss) income in 2022 compared to 2021.
Unrecognized tax benefits were $
Omnibus Incentive Plan
In December 2015, Lifeway stockholders approved the 2015 Omnibus Incentive Plan, which authorized the issuance of an aggregate of 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 September 30, 2022, no shares remain available for award under the 2015 Omnibus Incentive Plan as it was terminated on August 31, 2022. However, any outstanding awards under the 2015 Omnibus Incentive Plan are unaffected by the termination of the 2015 Omnibus Incentive Plan or by the approval of the 2022 Omnibus Incentive Plan (the “2022 Plan”) as described below.
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On August 31, 2022, Lifeway stockholders approved the 2022 Plan. Under the 2022 Plan, the Compensation Committee of the Board of Directors may grant awards of various types of compensation, including, nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, cash-based awards and other stock-based awards. The maximum number of shares authorized to be awarded under the 2022 Plan is shares of common stock, which includes shares that remained available under the now terminated 2015 Omnibus Incentive Plan.
Awards granted under the 2022 Plan are generally subject to a minimum vesting period of at least one year. Awards may be subject to cliff-vesting or graded-vesting conditions, with graded vesting starting no earlier than one year after the grant date. The Plan Administrator may provide for shorter vesting periods in an award agreement for no more than five percent of the maximum number of shares authorized for issuance under the 2022 Plan. As of September 30, 2022, shares remain available to award under the 2022 Plan.
Stock Options
The following table summarizes stock option activity during the nine months ended September 30, 2022:
| Options | Weighted average exercise price | Weighted average remaining contractual life | Aggregate intrinsic value | |||||||||||||
| Outstanding at December 31, 2021 | $ | $ | ||||||||||||||
| Granted | – | – | ||||||||||||||
| Exercised | – | – | ||||||||||||||
| Forfeited | – | – | ||||||||||||||
| Outstanding at September 30, 2022 | $ | $ | ||||||||||||||
| Exercisable at September 30, 2022 | $ | $ | ||||||||||||||
As of December 31, 2019, all outstanding options were vested and there was no remaining unearned compensation expense.
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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 determined by the Company’s closing stock price on the grant date. Lifeway expenses RSAs over the vesting period. The following table summarizes RSA activity during the nine months ended September 30, 2022.
| Restricted Stock Awards | Weighted Average Grant Date Fair Value | |||||||
| Outstanding at December 31, 2021 | $ | |||||||
| Granted | ||||||||
| Shares issued upon vesting | ( | ) | ||||||
| Forfeited | ||||||||
| Outstanding at September 30, 2022 | $ | |||||||
| Vested and deferred at September 30, 2022 | $ | |||||||
For the nine months ended September 30, 2022
and 2021 total pre-tax stock-based compensation expense recognized in the consolidated statements of operations was $
and $,
respectively. For the nine months ended September 30, 2022 and 2021 tax-related benefits of $
Long-Term Incentive Plan Compensation
Lifeway has established long-term incentive-based compensation programs for certain senior executives and key employees pursuant to the terms of its incentive plans.
2020 CEO Incentive Award
During the fourth quarter 2020, Lifeway awarded
a long-term equity-based incentive of $
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2021 Equity Award
The 2021 long-term equity incentive plan
compensation is based on Lifeway’s achievement of adjusted EBITDA performance versus the respective target established by the
Board for 2021. Under the 2021 plan, collectively the participants earned equity-based incentive compensation of $
2022 Equity Award
Under the 2022 long-term incentive plan, participants can earn a specified number of target level Performance Share Units (“PSUs”) contingent upon the achievement of strategic milestones during the three-year Measurement Period, which is fiscal year 2022 to 2024. The strategic milestones are 1) 3-year cumulative net revenue, and 2) 3-year cumulative adjusted EBITDA. The target number of PSU awards are weighted 50% on net revenue and 50% on adjusted EBITDA. Collectively, the participants can earn 125,066 PSUs at the target level. Participants may earn more or less than the target number of shares based on actual results, however the minimum and maximum number of shares that can be earned are bound by minimum and maximum thresholds of net revenue and adjusted EBITDA. The PSU awards will be earned and will vest, if at all, after the end of the three-year measurement period based on achievement of the milestones. The PSU awards do not vest during the three-year measurement period. The PSUs have a grant date fair value of $6.25 dollars per share. For the nine months ended September 30, 2022 and 2021, $and $was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. For the three months ended September 30, 2022 and 2021, $and $was expensed as stock-based compensation expense in the consolidated statements of operations, respectively.
The 2022 long-term incentive plan also granted restricted stock unit awards that contain only a service condition and vest on the passage of time in three equal installments on each of the first three anniversaries of the August 31, 2022 grant date. The stock based compensation expense for these awards is included in the Restricted Stock Award section above.
Non-Employee Director Plan
On August 31, 2022, Lifeway stockholders approved the 2022 Non-Employee Director Equity and Deferred Compensation Plan (the “2022 Director Plan”), which authorizes the grant of restricted stock units (“RSUs”), which will vest on such schedule as the Company, in its sole discretion, shall determine. Each non-employee director of the Company is eligible to be a participant in the 2022 Director Plan until they no longer serve as a non-employee director. As of the date of each annual shareholder meeting, the Company may grant each director a number of RSUs for such year and set the vesting schedule for the RSUs granted. Whether and how many RSUs the Company will grant to directors in any year is subject to the sole discretion of the Company and shall in any event be subject to the 2022 Director Plan’s overall share limits. The maximum aggregate number of shares of common stock that may be issued under the 2022 Directors Plan is 500 thousand shares. As of September 30, 2022, thousand shares remain available to award under the 2022 Director Plan. The aggregate fair market value of shares underlying RSU compensation that may be issued as RSU compensation to a director in any year shall not exceed $170. In addition to the grant of RSUs, the 2022 Director Plan also provides for the deferral by electing participants of all or part of their cash compensation (in 10% increments) into a deferred cash account, and they may defer all or part of their cash and/or RSU compensation (in 10% increments) into a deferred RSU account. Deferred benefits are paid in a lump sum upon the applicable director’s departure from the Board of Directors.
Retirement Benefits
Lifeway has a defined contribution plan which
is available to substantially all full-time employees. Under the terms of the plan, the Company matches employee contributions under a
prescribed formula. For the nine months ended September 30, 2022 and 2021 total contribution expense recognized in the consolidated statements
of operations was $
Note 12 – Products and Customers
Lifeway’s primary product is drinkable kefir. The Company manufactures (directly or through a co-manufacturer) and markets products under the Lifeway, Fresh Made, and GlenOaks Farms brand names, as well as under private labels on behalf of certain customers.
The Company’s product categories are:
| · | Drinkable Kefir, a cultured dairy product 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 primarily consists of cream, a byproduct of raw milk processing. | |
| · | Drinkable Yogurt, sold in a variety of sizes and flavors. | |
| · | ProBugs, a line of kefir products designed for children. | |
| · | Other Dairy, which primarily consists of Fresh Made butter and sour cream. |
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Net sales by product category were as follows for the nine months ended September 30:
| 2022 | 2021 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
| Drinkable Kefir other than ProBugs | $ | $ | ||||||||||||||
| Cheese | ||||||||||||||||
| Cream and other | ||||||||||||||||
| Drinkable yogurt | ||||||||||||||||
| ProBugs Kefir | ||||||||||||||||
| Other dairy | ||||||||||||||||
| Net Sales | $ | $ | ||||||||||||||
Net sales of products by category were as follows for the three months ended September 30:
| 2022 | 2021 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
| Drinkable Kefir other than ProBugs | $ | $ | ||||||||||||||
| Cheese | ||||||||||||||||
| Cream and other | ||||||||||||||||
| Drinkable yogurt | ||||||||||||||||
| ProBugs Kefir | ||||||||||||||||
| Other dairy | ||||||||||||||||
| Net Sales | $ | $ | ||||||||||||||
Significant Customers – Sales
are predominately to companies in the retail food industry located within the United States. Two major customers accounted for approximately
Note 13 – Related Party Transactions
Lifeway obtains consulting services from Ludmila Smolyansky, a member of the Company’s Board of Directors and former Chairperson of its Board of Directors. On December 28, 2020, Lifeway entered into an amended and restated consulting agreement (the “Agreement”), effective as of December 31, 2020, with Ms. Smolyansky. Under the terms and conditions of the Agreement, Ms. Smolyansky will continue to provide consulting services with respect to, among other things, the Company’s business strategy, international expansion and product management and expansion. For the services, the Company will pay an annual service fee of $500, and Ms. Smolyansky will also be eligible for an annual performance fee target of $500 based on the achievement of specified performance criteria. The 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.
On January 4, 2022, the Company notified Ms. Smolyansky
that it was terminating the Agreement effective January 17, 2022. Service fees earned are included in general and administrative expenses
in the accompanying consolidated statements of operations and were $
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Lifeway is also a party to an endorsement agreement, dated as March 14, 2016, by and between the Company and Ludmila Smolyansky, a member of the Company’s Board of Directors and former Chairperson of its Board of Directors (the “Endorsement Agreement”) under which it pays the Chairperson a royalty based on the sale of certain Lifeway products, not to exceed $50 in any fiscal month.
On September 6, 2022, the Company entered into an agreement (the “Termination Agreement”) with Ms. Smolyansky that terminated the Endorsement Agreement as of September 6, 2022.
Pursuant to the Termination Agreement, the Company and Ms. Smolyansky have agreed, among other things, that (i) the Company will pay Ms. Smolyansky a lump sum payment of $400,000, (ii) Ms. Smolyansky will no longer have any further claims against the Company under the Endorsement Agreement, and (iii) the Endorsement Agreement was terminated and of no further force or effect except for the provisions thereof that expressly survive termination.
Royalties earned are included in selling expenses
in the accompanying consolidated statements of operations and were $
Note 14 – Subsequent Events
On November 7, 2022, the Company entered into a Stock Purchase Agreement with Ludmila Smolyansky (“Ms. Smolyansky”), to purchase 850,340 shares of Lifeway common stock from Ms. Smolyansky.
Pursuant to the Stock Purchase Agreement, the Company and Ms. Smolyansky have agreed, among other things, that (i) Ms. Smolyansky will sell the shares at a purchase price of $4.70 per share, which represents a twenty percent (20.0%) discount to the average closing price of the common stock on Nasdaq over the five (5) trading day period ended on the trading day immediately preceding the date of the Stock Purchase Agreement and (ii) Ms. Smolyansky will use a portion of the proceeds to satisfy in full certain obligations of Ms. Smolyansky, which are secured by previously disclosed pledges of common stock, causing all such pledges to be released. The purchased shares will be held in treasury by the Company.
As a closing condition to the Stock Purchase Agreement, Ms. Smolyansky and Mr. Smolyansky will deliver an executed amendment (the “Amendment”) to that certain Settlement Agreement dated as of July 27, 2022 (the “Settlement Agreement”), between the Company and Ms. Smolyansky and Mr. Smolyansky. Pursuant to the Amendment, Ms. Smolyansky and Mr. Smolyansky each agree, among other things, to (i) grant the Company a right of first refusal, subject to Danone North America Public Benefit Corporation’s (“Danone”) right of first refusal, on substantially similar terms as Danone (ii) extend the standstill and all related terms under the Proxy Settlement Agreement through the date of the 2024 annual meeting of the Company’s shareholders (the “Standstill”); and (iii) to appear in person or by proxy and vote their respective remaining shares of common stock beneficially owned, individually or otherwise, and controlled by either of them and over which they have power and authority to vote during the Standstill (a) in accordance with the recommendations of the Board at any special meeting or annual meeting of the shareholders with respect to any proposal(s) not related to the sale of the Company or all or substantially all of the assets of the Company; and (b) in proportion to the vote of the other shareholders with respect to any proposal relating to any vote on the sale of the Company or all or substantially all of the assets of the Company.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in this Form 10-Q is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements, the accompanying notes, and the MD&A included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “Form 10-K”). Unless otherwise specified, any description of “our”, “we”, and “us” in this MD&A refer to Lifeway Foods, Inc. and our subsidiaries.
Cautionary Statement Regarding Forward-Looking Statements
In addition to historical information, this quarterly report contains “forward-looking” statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words such as “anticipate,” “from time to time,” “intend,” “plan,” “ongoing,” “realize,” “should,” “may,” “could," "believe," "future," "depend," "expect," "will," "result," "can," "remain," "assurance," "subject to," "require," "limit," "impose," "guarantee," "restrict," "continue," "become," "predict," "likely," "opportunities," "effect," "change," "predict," and "estimate,” and similar terms or terminology, or the negative of such terms or other comparable terminology. Examples of forward-looking statements include, among others, statements we make regarding:
| · | Expectations of the effect on our financial condition of claims, litigation, environmental costs, contingent liabilities and governmental and regulatory investigations and proceedings; | |
| · | Strategy for acquisitions, customer retention, growth, product development, market position, financial results and reserves; Estimates of the amounts of sales allowances and discounts to our customers and consumers; | |
| · | Our belief that we will maintain compliance with our loan agreements and have sufficient liquidity to fund our business operations. |
Forward looking statements are based on management’s beliefs, assumptions, estimates and observations of future events based on information available to our management at the time the statements are made and include any statements that do not relate to any historical or current fact. These statements are not guarantees of future performance and they involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, implied or forecast by our forward-looking statements due in part to the risks, uncertainties, and assumptions that include:
| · | The actions of our competitors and customers, including those related to price competition; | |
| · | The decisions of customers or consumers; | |
| · | Our ability to successfully implement our business strategy; | |
| · | Changes in the pricing of commodities; | |
| · | The effects of government regulation; | |
| · | The impact of the COVID-19 outbreak on our business, suppliers, consumers, customers, and employees; | |
| · | Disruptions to our supply chain, or our manufacturing and distribution capabilities, including those due to cybersecurity threats and the COVD-19 outbreak; and | |
| · | Such other factors as discussed throughout Part I, Item 1 “Business”; Part I, Item 1A “Risk Factors”; and Part II, Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2021 and that are described from time to time in our filings with the SEC. |
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These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors could also have material adverse effects on future results. The Company intends these forward-looking statements to speak only at the date made. Except as otherwise required to be disclosed in periodic reports required to be filed by public companies with the SEC pursuant to the SEC's rules, Lifeway has no duty to update these statements, and it undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Recent Developments
COVID-19 Pandemic Impact
We have seen increased customer and consumer demand for our products during the pandemic as consumers increased their food purchases for in-home consumption. We have not experienced significant supply chain disruptions or labor supply shortages and have continued to satisfy customer and consumer demand for our products. Management continues to proactively manage the supply and transportation of materials used to make and package our products, staffing, and transportation of our products to customers. This proactive planning has allowed the Company to avoid disruption to its manufacturing facilities and production, transportation, and sales and to meet the increased demand. The Company has maintained full production capacity available at all locations and does not anticipate manufacturing or staffing disruptions in the near term.
However, the COVID-19 pandemic, or any future pandemic, may limit the availability of, or increase the cost of, employees, ingredients, packaging and other inputs necessary to produce our products, and our operations may be negatively impacted. In 2022, our costs increased primarily due to inflationary price increases of milk, other ingredients, packaging materials, and transportation to our customers. However, because of market conditions or for competitive reasons, our pricing actions may sometimes lag input cost changes, or we may not be able to pass along the full effect of increases in raw materials and other input costs as we incur them.
During 2022, social distancing, shelter-in-place and work-from-home mandates and recommendations have continued to be reduced or eliminated. The increased customer demand for our products as consumers increased their at-home consumption and e-commerce purchasing during the COVID-19 pandemic may change or decrease due to the decrease in social distancing and stay-at-home and work-from-home mandates and recommendations. We are unable to predict the nature and timing of when such change may occur, if at all.
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Results of Operations
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
The following table presents certain information concerning our financial results, including information presented as a percentage of consolidated net sales:
| Three Months Ended September 30, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
| Net sales | 38,140 | 100.0% | 29,553 | 100.0% | ||||||||||||
| Cost of goods sold | 29,962 | 78.6% | 21,915 | 74.1% | ||||||||||||
| Depreciation expense | 590 | 1.5% | 645 | 2.2% | ||||||||||||
| Total cost of goods sold | 30,552 | 80.1% | 22,560 | 76.3% | ||||||||||||
| Gross profit | 7,588 | 19.9% | 6,993 | 23.7% | ||||||||||||
| Selling expenses | 2,843 | 7.4% | 2,722 | 9.2% | ||||||||||||
| General & administrative expenses | 3,415 | 9.0% | 3,194 | 10.9% | ||||||||||||
| Amortization expense | 135 | 0.4% | 33 | 0.1% | ||||||||||||
| Total operating expenses | 6,393 | 16.8% | 5,949 | 20.2% | ||||||||||||
| Income from operations | 1,195 | 3.1% | 1,044 | 3.5% | ||||||||||||
| Other (expense) income: | ||||||||||||||||
| Interest expense | (77 | ) | (0.2% | ) | (30 | ) | (0.1% | ) | ||||||||
| Loss on sales or property and equipment | – | 0.0% | (5 | ) | 0.0% | |||||||||||
| Other (expense) income, net | (5 | ) | 0.0% | (2 | ) | 0.0% | ||||||||||
| Total other (expense) income | (82 | ) | (0.2% | ) | (37 | ) | (0.1% | ) | ||||||||
| Income before provision for income taxes | 1,113 | 2.9% | 1,007 | 3.4% | ||||||||||||
| Provision for income taxes | 130 | 0.3% | 527 | 1.8% | ||||||||||||
| Net income | 983 | 2.6% | 480 | 1.6% | ||||||||||||
Net Sales
Net sales finished at $38,140 for the three-month period ended September 30, 2022, an increase of $8,587 or 29.1% versus prior year. The net sales increase was primarily driven by higher volumes of our branded drinkable kefir and the impact of price increases implemented during the first quarter of 2022, and to a lesser extent the favorable impact of our acquisition of GlenOaks Farms during the third quarter of 2021.
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Gross Profit
Gross profit as a percentage of net sales was 19.9% during the three-month period ended September 30, 2022. Gross profit percentage was 23.7% in the prior year. The decrease versus the prior year was primarily due to the unfavorable impact of milk pricing, and to a lesser extent the increased pricing of freight and other inputs, partially offset by the decrease in depreciation expense. We expect to see continued pressure in milk pricing and other input costs during the fourth quarter of 2022.
Selling Expenses
Selling expenses increased by $121 to $2,843 during the three-month period ended September 30, 2022 from $2,722 during the same period in 2021.
General and Administrative Expenses
General and administrative expenses increased $221 to $3,415 during the three-month period ended September 30, 2022 from $3,194 during the same period in 2021. The increase is primarily a result of increased legal and professional fees, which includes expense related to the fiscal year 2020 Form 10-K restatement, and incentive compensation, partially offset by lower consulting expense to our former Chairperson of the Board of Directors.
Provision for Income Taxes
The provision for income taxes was $130 and $527 during the three months ended September 30, 2022 and 2021, respectively.
The effective income tax rate for the three months ended September 30, 2022 was 11.7% compared to 52.3% in the same period last year. The statutory Federal and state tax rates remained consistent from 2021 to 2022. The Company has items that are nondeductible or are discrete adjustments to tax expense. The Company consistently reflects non-deductible officer compensation expense, non-deductible compensation expense related to equity incentive awards and separate state tax rates from period to period. Although similar items were reflected in 2022, the percentage effect is different due to the difference in pre-tax (loss) income in 2022 compared to 2021.
The Company’s effective tax rate may change from period to period based on recurring and non-recurring factors including the relative mix of pre-tax earnings (or losses), the jurisdictional mix of earnings, enacted tax legislation, state income taxes, the impact of non-deductible items, changes in valuation allowances, settlement of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits. The Company records discrete income tax items such as enacted tax rate changes and completed tax audits in the period in which they occur.
Income taxes are discussed in Note 10 in the Notes to the Consolidated Financial Statements.
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Nine months Ended September 30, 2022 Compared to Nine months Ended September 30, 2021
The following table presents certain information concerning our financial results, including information presented as a percentage of consolidated net sales:
| Nine months Ended September 30, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
| Net sales | 105,730 | 100.0% | 88,091 | 100.0% | ||||||||||||
| Cost of goods sold | 85,032 | 80.4% | 63,273 | 71.8% | ||||||||||||
| Depreciation expense | 1,833 | 1.7% | 2,099 | 2.4% | ||||||||||||
| Total cost of goods sold | 86,865 | 82.2% | 65,372 | 74.2% | ||||||||||||
| Gross profit | 18,865 | 17.8% | 22,719 | 25.8% | ||||||||||||
| Selling expenses | 8,527 | 8.1% | 8,510 | 9.7% | ||||||||||||
| General & administrative expenses | 9,546 | 9.0% | 8,702 | 9.9% | ||||||||||||
| Amortization expense | 405 | 0.4% | 33 | 0.0% | ||||||||||||
| Total operating expenses | 18,478 | 17.5% | 17,245 | 19.6% | ||||||||||||
| Income from operations | 387 | 0.4% | 5,474 | 6.2% | ||||||||||||
| Other (expense) income: | ||||||||||||||||
| Interest expense | (171 | ) | (0.2% | ) | (72 | ) | (0.1% | ) | ||||||||
| Gain on investment | – | 2 | 0.0% | |||||||||||||
| Loss on sales or property and equipment | – | 0.0% | (88 | ) | (0.1% | ) | ||||||||||
| Other (expense) income, net | (10 | ) | 0.0% | (61 | ) | 0.0% | ||||||||||
| Total other (expense) income | (181 | ) | (0.2% | ) | (219 | ) | (0.2% | ) | ||||||||
| Income before (benefit) provision for income taxes | 206 | 0.2% | 5,255 | 6.0% | ||||||||||||
| (Benefit) provision for income taxes | (2 | ) | 0.0% | 1,851 | 2.1% | |||||||||||
| Net income | 208 | 0.2% | 3,404 | 3.9% | ||||||||||||
Net Sales
Net sales finished at $105,730 for the nine-month period ended September 30, 2022, an increase of $17,639 or 20.0% versus prior year. The net sales increase was primarily driven by higher volumes of our branded drinkable kefir and the impact of price increases implemented during the quarter, and to a lesser extent the favorable impact of our acquisition of GlenOaks Farms during the third quarter of 2021.
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Gross Profit
Gross profit as a percentage of net sales was 17.8% during the nine-month period ended September 30, 2022. Gross profit percentage was 25.8% in the prior year. The decrease versus the prior year was primarily due to the unfavorable impact of milk pricing, and to a lesser extent the increased pricing of freight and other inputs, partially offset by the decrease in depreciation expense. We expect to see continued pressure in milk pricing and other input costs during the fiscal year 2022.
Selling Expenses
Selling expenses increased $17 to $8,527 during the nine-month period ended September 30, 2022 from $8,510 during the same period in 2021.
General and Administrative Expenses
General and administrative expenses increased $844 to $9,546 during the nine-month period ended September 30, 2022 from $8,702 during the same period in 2021. The increase is primarily a result of increased legal and professional fees, which includes expense related to the fiscal year 2020 Form 10-K restatement, and incentive compensation, partially offset by lower consulting expense to our former Chairperson of the Board of Directors.
Provision for Income Taxes
The provision for income taxes was $(2) and $1,851 during the nine months ended September 30, 2022 and 2021, respectively.
The effective income tax rate for the nine months ended September 30, 2022 was (0.8)% compared to 35.2% in the same period last year. The statutory Federal and state tax rates remained consistent from 2021 to 2022. The Company has items that are nondeductible or are discrete adjustments to tax expense. The Company consistently reflects non-deductible officer compensation expense, non-deductible compensation expense related to equity incentive awards and separate state tax rates from period to period. Although similar items were reflected in 2022, the percentage effect is different due to the difference in pre-tax (loss) income in 2022 compared to 2021.
The Company’s effective tax rate may change from period to period based on recurring and non-recurring factors including the relative mix of pre-tax earnings (or losses), the jurisdictional mix of earnings, enacted tax legislation, state income taxes, the impact of non-deductible items, changes in valuation allowances, settlement of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits. The Company records discrete income tax items such as enacted tax rate changes and completed tax audits in the period in which they occur.
Income taxes are discussed in Note 10 in the Notes to the Consolidated Financial Statements.
Liquidity and Capital Resources
Management assesses the Company's liquidity in terms of its ability to generate cash to fund its operating, investing, and financing activities. The Company remains in a strong financial position, and while it has been impacted by the macroeconomic challenges with commodity inflation and other input cost increases, the Company believes that its cash flow from operations, revolving credit and term loan facility, and cash and cash equivalents will continue to provide sufficient liquidity for its working capital needs, capital resource requirements, and growth initiatives and to ensure the continuation of the Company as a going concern.
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If additional borrowings are needed, $2,223 was available under the Revolving Credit Facility as of September 30, 2022 (see Note 7, Debt). We are in compliance with the terms of the Credit Agreement and expect to meet foreseeable financial requirements. The success of our business and financing strategies will continue to provide us with the financial flexibility to take advantage of various opportunities as they arise. To date, we have been successful in generating cash and obtaining financing as needed. However, in connection with the COVID-19 pandemic or other circumstances, if a serious economic or credit market crisis ensues, it could have a negative effect on our liquidity, results of operations and financial condition.
The Company’ most significant ongoing short-term cash requirements relate primarily to funding operations (including expenditures for raw materials, labor, manufacturing and distribution, trade and promotions, advertising and marketing, and income tax liabilities) as well as expenditures for property, plant and equipment.
Long-term cash requirements primarily relate to funding long-term debt repayments (see Note 7, Debt) and deferred income taxes (see Note 10, Income Taxes, in our Annual Report on Form 10-K).
Given the dynamic nature of COVID-19, we will continue to assess our liquidity needs while continuing to manage our discretionary spending and investment strategies. 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.
Cash Flow
The following table is derived from our Consolidated Statement of Cash Flows:
| Nine months Ended September 30, |
||||||||
| 2022 | 2021 | |||||||
| Net cash provided by operating activities | $ | 3,639 | $ | 5,855 | ||||
| Net cash used in investing activities | $ | (3,189 | ) | $ | (6,905 | ) | ||
| Net cash (used in) provided by financing activities | $ | (750 | ) | $ | 3,142 | |||
Operating Activities
Net cash provided by operating activities was $3,639 during the nine-month period ended September 30, 2022 compared to $5,855 in the same period in 2021. The decrease was primarily due to lower cash earnings, which reflect the impact of input and freight cost inflation in 2022, and the change in working capital.
Investing Activities
Net cash used in investing activities was $3,189 during the nine-month period ended September 30, 2022 compared to $6,905 in the same period in 2021. The decrease in cash used reflects the August 2021 acquisition of GlenOaks Farms, Inc., partially offset by increased capital spending. Our capital spending is focused in three core areas: growth, cost reduction, and facility improvements. Growth capital spending supports new product innovation and enhancements. Cost reduction and facility improvements support manufacturing efficiency, safety, and productivity.
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Financing Activities
Net cash used in financing activities was $750 during the nine-month period ended September 30, 2022 compared to net cash provided by financing activities of $3,142 in the same period in 2021. The decrease in cash used relates to the term loan entered into during August 2021 in connection with the acquisition of GlenOaks Farms, Inc., partially offset by the quarterly principal payments under the term loan.
Debt Obligations
As of September 30, 2022, the Company had $2,777 outstanding and $2,223 available for future borrowings under the revolving line of credit. Under the credit agreement, the Revolving Credit facility matures on June 30, 2025. The were no letters of credit issued or outstanding as of September 30, 2022.
The Company had $3,725 outstanding under the note payable, net of $25 of unamortized deferred financing fees, as of September 30, 2022.
The Company’s interest rate on debt outstanding under the revolving line of credit and note payable as of September 30, 2022 was 4.61% and 4.94%, respectively.
The Company is in compliance with all applicable financial debt covenants as of September 30, 2022. See Note 7 to our Consolidated Financial Statements for additional information regarding our indebtedness and related agreements.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is provided in Note 2 – Summary of Significant Accounting Policies.
Critical Accounting Policies and Estimates
A description of the Company's critical accounting policies and estimates is contained in its Annual Report on Form 10-K for the year ended December 31, 2021. There were no material changes to the Company’s critical accounting policies and estimates in the nine months ended September 30, 2022, except for the change in estimated useful life of one brand name intangible asset which is disclosed in Note 5 – Goodwill and Intangible assets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
The Company has established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”), and such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. Management, together with our CEO and CFO, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2022. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2022.
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Changes in Internal Control over Financial Reporting
As previously disclosed under “Item 9A—Controls and Procedures” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, we concluded that our internal control over financial reporting was not effective based on the material weakness identified.
Our remediation efforts were ongoing during the three months ended September 30, 2022. Remediation generally requires making changes to how controls are designed and implemented and then adhering to those changes for a sufficient period of time such that the effectiveness of those changes is demonstrated with an appropriate amount of consistency. We have continued to emphasize the importance of, and monitor the sustained compliance with, the execution of our internal controls over financial reporting. The Company has continued to work with its third-party service provider to ensure that our accounting and reporting for income taxes is accurate. If not remediated the deficiency could result in material misstatements to our consolidated financial statements.
Other than as described in the preceding paragraph, there have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended September 30, 2022 that has materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Information regarding legal preceding is available in Note 9, Commitment and Contingencies.
ITEM 1A. RISK FACTORS.
There have been no material changes from the risk factors disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 5. OTHER INFORMATION.
None.
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ITEM 6. EXHIBITS.
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101). |
* The exhibits deemed furnished with this Form 10-Q and are not deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall they be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act., whether made before or after the date of the filing of this Form 10-Q and irrespective of any general incorporation language contained in such filing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| LIFEWAY FOODS, INC. | ||
| Date: November 14, 2022 | By: | /s/ Julie Smolyansky |
| Julie Smolyansky | ||
| Chief Executive Officer, President, and Director | ||
| (Principal Executive Officer) | ||
| Date: November 14, 2022 | By: | /s/ Eric Hanson |
| Eric Hanson | ||
| Chief Financial & Accounting Officer | ||
| (Principal Financial and Accounting Officer) | ||
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