10-Q 1 lifeway_i10q-093023.htm FORM 10-Q FOR SEPT 2023
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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

       QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: September 30, 2023

 

       TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number: 000-17363

 

LIFEWAY FOODS, INC.

(Exact name of registrant as specified in its charter)

 

Illinois 36-3442829

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

6431 West Oakton, Morton Grove, IL 60053

(Address of principal executive offices, zip code)

 

(847) 967-1010

(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
Common Stock, No Par Value LWAY Nasdaq Global Market

 

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. Yes ☒ No ☐

 

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 such files). Yes ☒ No ☐

 

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 ☐
  Non-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 ☐ No

 

Number of shares of Common Stock, no par value, outstanding as of Nov 10, 2023: 14,690,987.

 

   

 

 

 

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. 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 24
Item 4. Controls and Procedures. 24
   
PART II – OTHER INFORMATION  
Item 1. Legal Proceedings. 25
Item 1A. Risk Factors. 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 25
Item 3. Defaults Upon Senior Securities. 25
Item 5. Other Information. 25
Item 6. Exhibits. 25
  Signatures. 26

 

 

 

 

 

 

 

 

 

 

 2 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

LIFEWAY FOODS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

September 30, 2023 and December 31, 2022

(In thousands)

         
  

September 30,

2023

   December 31, 
   (Unaudited)   2022 
Current assets          
Cash and cash equivalents  $12,632   $4,444 
Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $1,430 and $1,820 at September 30, 2023 and December 31, 2022 respectively   13,095    11,414 
Inventories, net   9,321    9,631 
Prepaid expenses and other current assets   1,621    1,445 
Refundable income taxes   260    44 
Total current assets   36,929    26,978 
           
Property, plant and equipment, net   22,285    20,905 
Operating lease right-of-use asset   203    174 
Goodwill   11,704    11,704 
Intangible assets, net   7,033    7,438 
Other assets   1,900    1,800 
Total assets  $80,054   $68,999 
           
Current liabilities          
Current portion of note payable  $1,250   $1,250 
Accounts payable   9,102    7,979 
Accrued expenses   5,555    3,813 
Accrued income taxes   500     
Total current liabilities   16,407    13,042 
Line of credit   2,777    2,777 
Note payable   1,731    2,477 
Operating lease liabilities   130    104 
Deferred income taxes, net   3,029    3,029 
Total liabilities   24,074    21,429 
           
Commitments and contingencies (Note 9)        
           
Stockholders’ equity          
Preferred stock, no par value; 2,500 shares authorized; no shares issued or outstanding at September 30, 2023 and December 31, 2022        
Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 14,691 and 14,645 outstanding at September 30, 2023 and December 31, 2022, respectively   6,509    6,509 
Paid-in capital   4,338    3,624 
Treasury stock, at cost   (16,695)   (16,993)
Retained earnings   61,828    54,430 
Total stockholders' equity   55,980    47,570 
           
Total liabilities and stockholders' equity  $80,054   $68,999 

 

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, 2023 and 2022

(Unaudited)

(In thousands, except per share data)

 

                 
  

Three Months Ended

September 30,

  

Nine months Ended

September 30,

 
   2023   2022   2023   2022 
                 
Net sales  $40,896   $38,140   $118,030   $105,730 
                     
Cost of goods sold   29,099    29,962    85,428    85,032 
Depreciation expense   654    590    1,953    1,833 
Total cost of goods sold   29,753    30,552    87,381    86,865 
                     
Gross profit   11,143    7,588    30,649    18,865 
                     
Selling expenses   2,884    2,843    8,974    8,527 
General and administrative   3,085    3,415    10,028    9,546 
Amortization expense   135    135    405    405 
Total operating expenses   6,104    6,393    19,407    18,478 
                     
Income from operations   5,039    1,195    11,242    387 
                     
Other income (expense):                    
Interest expense   (109)   (77)   (322)   (171)
Gain on sale of property and equipment           33     
Other (expense) income, net   (1)   (5)   (1)   (10)
Total other income (expense)   (110)   (82)   (290)   (181)
                     
Income before provision for income taxes   4,929    1,113    10,952    206 
                     
Provision (benefit) for income taxes   1,517    130    3,554    (2)
                     
Net income  $3,412   $983   $7,398   $208 
                     
Earnings per common share:                    
Basic  $0.23   $0.06   $0.50   $0.01 
Diluted  $0.23   $0.06   $0.49   $0.01 
                     
Weighted average common shares:                    
Basic   14,677    15,490    14,659    15,462 
Diluted   15,101    15,848    15,063    15,759 

 

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, 2022   17,274   $6,509    (1,839)  $(13,436)  $2,552   $53,506   $49,131 
                                    
Stock-based compensation                   109        109 
                                    
Net loss                       (895)   (895)
                                    
Balance, March 31, 2022   17,274   $6,509    (1,839)  $(13,436)  $2,661   $52,611   $48,345 
                                    
Issuance of common stock in connection with stock-based compensation           38    280    (399)       (119)
                                    
Stock-based compensation                   746        746 
                                    
Net income                       120    120 
                                    
Balance, June 30, 2022   17,274   $6,509    (1,801)  $(13,156)  $3,008   $52,731   $49,092 
                                    
Issuance of common stock in connection with stock-based compensation           22    159    (159)        
                                    
Stock-based compensation                   422        422 
                                    
Net income                       983    983 
                                    
Balance, September 30, 2022   17,274   $6,509    (1,779)  $(12,997)  $3,271   $53,714   $50,497 

 

 

 

 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, 2023   17,274   $6,509    (2,629)  $(16,993)  $3,624   $54,430   $47,570 
                                    
Stock-based compensation                   343        343 
                                    
Net income                       830    830 
                                    
Balance, March 31, 2023   17,274   $6,509    (2,629)  $(16,993)  $3,967   $55,260   $48,743 
                                    
Issuance of common stock in connection with stock-based compensation           11    73    (112)       (39)
                                    
Stock-based compensation                   312        312 
                                    
Net income                       3,156    3,156 
                                    
Balance, June 30, 2023   17,274   $6,509    (2,618)  $(16,920)  $4,167   $58,416   $52,172 
                                    
Issuance of common stock in connection with stock-based compensation           35    225    (252)       (27)
                                    
Stock-based compensation                   423        423 
                                    
Net income                       3,412    3,412 
                                    
Balance, September 30, 2023   17,274   $6,509    (2,583)  $(16,695)  $4,338   $61,828   $55,980 

 

 

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, 
   2023   2022 
Cash flows from operating activities:          
Net income  $7,398   $208 
Adjustments to reconcile net income to operating cash flow:          
Depreciation and amortization   2,358    2,238 
Stock-based compensation   1,078    755 
Non-cash interest expense   5    5 
Bad debt expense   2     
Deferred revenue       (23)
Gain on sale of equipment   (33)    
(Increase) decrease in operating assets:          
Accounts receivable   (1,683)   (1,576)
Inventories   310    (907)
Refundable income taxes   (216   (309)
Prepaid expenses and other current assets   (176)   (115)
Increase (decrease) in operating liabilities:          
Accounts payable   928    3,085 
Accrued expenses   1,673    1,003 
Accrued income taxes   500    (725)
Net cash provided by operating activities   12,144    3,639 
           
Cash flows from investing activities:          
Purchases of property and equipment   (3,146)   (2,609)
Proceeds from sales of equipment   40     
Acquisition, net of cash acquired       (580)
Purchase of investments   (100)    
Net cash used in investing activities   (3,206)   (3,189)
           
Cash flows from financing activities:          
Repayment of note payable   (750)   (750)
Net cash used in financing activities   (750)   (750)
           
Net increase (decrease) in cash and cash equivalents   8,188    (300)
           
Cash and cash equivalents at the beginning of the period   4,444    9,233 
           
Cash and cash equivalents at the end of the period  $12,632   $8,933 
           
Supplemental cash flow information:          
Cash paid for income taxes, net  $3,270   $640 
Cash paid for interest  $343   $158 
           
Non-cash investing activities          
Accrued purchase of property and equipment  $194   $250 
Increase in right-of-use assets and operating lease obligations  $86   $19 

 

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, 2022. 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.

 

Note 2 – Summary of Significant Accounting Policies

 

Our significant accounting policies, which are summarized in detail in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, have not materially changed. The following is a description of certain of our significant accounting policies.

 

Use of estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing the consolidated financial statements include the reserve for promotional allowances, the valuation of goodwill and intangible assets, stock-based and incentive compensation, and deferred income taxes.

 

Cash and cash equivalents

 

Lifeway considers cash and all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates or equals fair value due to their short-term nature.

 

Lifeway from time to time may have bank deposits in excess of insurance limits of the Federal Deposit Insurance Corporation. The Company places its cash and cash equivalents with high credit quality financial institutions. Lifeway has not experienced any losses in such accounts and believes the financial risks associated with these financial instruments are minimal.

 

Customer concentration

 

Sales are predominately to companies in the retail food industry located within the United States. Two major customers accounted for approximately 23% and 22% of net sales for the nine months ended September 30, 2023 and 2022, respectively. Two major customers accounted for approximately 24% and 23% of net sales for the three months ended September 30, 2023 and 2022, respectively.

 

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 $2,884 and $2,585 for the nine months ended September 30, 2023 and 2022, respectively. Total advertising expense was $878 and $848 for the three months ended September 30, 2023 and 2022, respectively.

 

 

 8 

 

 

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

 

Adopted

 

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. The Company adopted this standard during the first quarter of 2023. The adoption did not have a material impact on the Company’s 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. The ASU was effective upon issuance and allowed companies to adopt the amendments on a prospective basis through December 31, 2024.

 

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. The Company adopted this standard during the first quarter of 2023. The adoption did not have a material impact on the Company’s financial statements.

 

Note 3 – Inventories, net

 

Inventories consisted of the following:

        
   September 30,
2023
   December 31,
2022
 
Ingredients  $2,711   $2,859 
Packaging   3,048    3,233 
Finished goods   3,562    3,539 
Total inventories, net  $9,321   $9,631 

 

 

 

 

 9 

 

 

Note 4 – Property, Plant and Equipment, net

 

Property, plant and equipment consisted of the following:

        
   September 30,
2023
   December 31,
2022
 
Land  $1,565   $1,565 
Buildings and improvements   19,463    19,341 
Machinery and equipment   33,574    32,786 
Vehicles   705    640 
Office equipment   1,059    979 
Construction in process   3,393    1,180 
    59,759    56,491 
Less accumulated depreciation   (37,474)   (35,586)
Total property, plant and equipment, net  $22,285   $20,905 

 

Note 5 – Goodwill and Intangible Assets

 

Goodwill

 

Goodwill consisted of the following:

    
   Total 
Balance at December 31, 2022, before accumulated impairment loses  $12,948 
Accumulated impairment losses   (1,244)
Balance at December 31, 2022  $11,704 
Balance at September 30, 2023  $11,704 

 

Intangible Assets

 

Other intangible assets, net consisted of the following:

                        
   September 30, 2023   December 31, 2022 
   Gross       Net   Gross       Net 
   Carrying   Accumulated   Carrying   Carrying   Accumulated   Carrying 
   Amount   Amortization   Amount   Amount   Amortization   Amount 
                         
Recipes  $44   $(44)  $   $44   $(44)  $ 
Customer lists and other customer related intangibles   4,529    (4,529)       4,529    (4,529)    
Customer relationship   3,385    (1,332)   2,053    3,385    (1,212)   2,173 
Brand names   7,948    (2,968)   4,980    7,948    (2,683)   5,265 
Formula   438    (438)       438    (438)    
Total intangible assets, net  $16,344   $(9,311)  $7,033   $16,344   $(8,906)  $7,438 

 

Estimated amortization expense on intangible assets for the next five years is as follows:

    
Year  Amortization 
Three months ended December 31, 2023  $135 
2024  $540 
2025  $540 
2026  $540 
2027  $540 

  

 

 10 

 

 

Note 6 – Accrued Expenses

 

Accrued expenses consisted of the following:

        
   September 30,
2023
  

December 31,

2022

 
Payroll and incentive compensation  $4,381   $2,925 
Real estate taxes   556    394 
Utilities   174    121 
Current portion of operating lease liabilities   73    70 
Other   371    303 
Total accrued expenses  $5,555   $3,813 

 

Note 7 – Debt

 

Note payable consisted of the following:

        
  

September 30,

2023

  

December 31,

2022

 
Term loan due August 18, 2026. Interest (7.40% at September 30, 2023) payable monthly.  $3,000   $3,750 
Unamortized deferred financing costs   (19)   (23)
Total note payable   2,981    3,727 
Less current portion   (1,250)   (1,250)
Total long-term portion  $1,731   $2,477 

 

The scheduled maturities of the term loan, excluding deferred financing costs, at September 30, 2023 are as follows: 

    
Three months ended December 31, 2023  $500 
2024   1,000 
2025   1,000 
2026   500 
Total term loan  $3,000 

 

Credit Agreement

 

The Company is party to an Amended and Restated Loan and Security Agreement (as amended and modified from time to time, the “Credit Agreement”) with its existing lender and certain of its subsidiaries. The Credit Agreement provides for, among other things, a $5 million term loan to be repaid in quarterly installments of principal and interest over a term of five years, a revolving line of credit up to a maximum of $5 million (the “Revolving Credit Facility”) and an incremental facility not to exceed $5 million. The termination date of the term loan is August 18, 2026, unless earlier terminated. The termination date of the revolving line of credit is June 30, 2025, unless earlier terminated.

 

All outstanding amounts under the Credit Agreement bear interest at the Secured Overnight Financing Rate (“SOFR”), plus 2.07%. Interest is payable monthly in arrears.

 

As of September 30, 2023, the Company had $2,777 outstanding under the Revolving Credit Facility. The Company had $2,223 available for future borrowings under the Revolving Credit Facility as of September 30, 2023. Lifeway’s interest rate on debt outstanding under the Revolving Credit Facility as of September 30, 2023 was 7.34%.

 

 

 

 

 11 

 

 

 

The 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 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 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, 2023.

 

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 six years. The Company includes lease extension options, if applicable and reasonably certain to be exercised, in the 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 obtains substantially all the economic benefits of the asset.

 

Right-of-use assets and lease liabilities are measured and recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. 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.

 

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 $102 and $191 (including short term leases) for the nine months ended September 30, 2023 and 2022, respectively. Total lease expense was $41 and $44 (including short term leases) for the three months ended September 30, 2023 and 2022, respectively.

 

Future maturities of lease liabilities were as follows:

    
Year  Operating Leases 
Three months ended December 31, 2023  $22 
2024   86 
2025   52 
2026   29 
2027   21 
Thereafter    
Total lease payments   210 
Less: Interest   (7)
Present value of lease liabilities  $203 

 

 

 12 

 

 

The weighted-average remaining lease term for its operating leases was 3.50 years as of September 30, 2023. The weighted average discount rate of its operating leases was 10.08% as of September 30, 2023. Cash paid for amounts included in the measurement of lease liabilities was $70 and $121 for the nine months ended September 30, 2023 and 2022, respectively. Cash paid for amounts included in the measurement of lease liabilities was $24 and $35 for the three months ended September 30, 2023 and 2022, respectively.

 

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 32.5% and (0.8)% for the nine months ended September 30, 2023 and 2022, respectively. Income taxes were recognized at effective rates of 30.8% and 11.7% for the three months ended September 30, 2023 and 2022, respectively.

 

The Company calculates the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full year, excluding unusual or infrequently occurring discrete items, and applies that rate to income (loss) before provision for income taxes for the period.

 

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 2023, the percentage effect is different due to the difference in pre-tax income in 2023 compared to 2022.

 

Unrecognized tax benefits were $0 at September 30, 2023 and 2022, respectively. The Company does not expect material changes to its unrecognized tax benefits during the next twelve months.

 

Note 11 – Stock-based and Other Compensation

 

Omnibus Incentive Plan

 

In December 2015, Lifeway stockholders approved the 2015 Omnibus Incentive Plan, which authorized the issuance of an aggregate of 3.5 million shares to satisfy awards of stock options, stock appreciation rights, unrestricted stock, restricted stock, restricted stock units, performance shares and performance units to qualifying employees. Under the 2015 Omnibus Incentive Plan, the Board of Directors 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, 2023, 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.

 

 

 13 

 

 

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 3.25 million 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, 2023, 2.77 million 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, 2023:

                
   Options   Weighted
average
exercise price
   Weighted
average
remaining contractual life
   Aggregate
intrinsic value
 
Outstanding at December 31, 2022   41   $10.42    3.22   $ 
Granted                
Exercised                
Forfeited                
Outstanding at September 30, 2023   41   $10.42    2.47   $ 
Exercisable at September 30, 2023   41   $10.42    2.47   $ 

 

Restricted Stock Units

 

A Restricted Stock Unit (“RSU”) represents the right to receive one share of common stock in the future. RSUs 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 RSUs over the vesting period. The following table summarizes RSU activity during the nine months ended September 30, 2023.

        
   Restricted Stock Units   Weighted Average Grant Date Fair Value 
Outstanding at December 31, 2022   164   $5.69 
Granted   85    8.14 
Shares issued upon vesting   (37)   4.57 
Forfeited   (5)   6.25 
Outstanding at September 30, 2023   207   $6.89 
Vested and deferred at September 30, 2023   54   $5.78 

 

For the nine months ended September 30, 2023 and 2022 total pre-tax stock-based compensation expense recognized in the consolidated statements of operations was $356 and $175, respectively. For the nine months ended September 30,2023 and 2022 tax-related benefits of $100 and $49, respectively, were also recognized. For the three months ended September 30, 2023 and 2022 total pre-tax stock-based compensation expense recognized in the consolidated statements of operations was $154 and $48, respectively. For the three months ended September 30, 2023 and 2022 tax-related benefits of $43 and $14, respectively, were also recognized. Future compensation expense related to restricted stock units was $832 as of September 30, 2023 and will be recognized on a weighted average basis over the next 1.44 years.

 

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.

 

 

 14 

 

 

2020 CEO Incentive Award 

 

During the fourth quarter 2020, Lifeway awarded a long-term equity-based incentive of $750 to its Chief Executive Officer (the “2020 CEO Award”) depending on Lifeway’s 2020 performance levels compared to the respective targets. The equity-based incentive compensation is payable in restricted stock that vests one-third in April 2022, one-third in April 2023, and one-third in April 2024. The issuance of vested equity awards is subject to approval under the Stock Purchase Agreement dated October 1, 1999. For the nine months ended September 30, 2023 and 2022, $87 and $186 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. For the three months ended September 30, 2023 and 2022, $18 and $44 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. As of September 30, 2023, the total remaining unearned compensation was $42, of which $18 will be recognized in 2023, and $24 in 2024, respectively, subject to vesting.

 

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 of Directors for 2021. Under the 2021 plan, collectively the participants earned equity-based incentive compensation of $1,069 based on Lifeway’s achievement of the respective financial target. The equity-based incentive compensation is payable in restricted stock that vests one-third in April 2022, one-third in April 2023, and one-third in April 2024. For the nine months ended September 30, 2023 and 2022, $161 and $364 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. For the three months ended September 30, 2023 and 2022, $33 and $85 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. As of September 30, 2023, the total remaining unearned compensation was $73, of which $33 will be recognized in 2023, $40 in 2024, respectively, subject to vesting.

 

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, 2023 and 2022, $356 and $31 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. For the three months ended September 30, 2023 and 2022, $116 and $31 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 Units section above.

 

2023 Equity Award

 

Under the 2023 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 2023 to 2025. 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 115,622 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 $6.88 dollars per share. For the nine months ended September 30, 2023 and 2022, $118 and $0 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. For the three months ended September 30, 2023 and 2022, $102 and $0 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively.

 

 

 15 

 

 

The 2023 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 June 16, 2023 grant date. The stock-based compensation expense for these awards is included in the Restricted Stock Units 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 Director Plan is 500 thousand shares. As of September 30, 2023, 438 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, 2023 and 2022 total contribution expense recognized in the consolidated statements of operations was $364 and $328, respectively. For the three months ended September 30, 2023 and 2022, total contribution expense recognized in the consolidated statements of operations was $106 and $97, respectively.

 

Note 12 - Earnings Per Share

 

The following table summarizes the effects of the share-based compensation awards on the weighted average number of shares outstanding used in calculating diluted earnings (loss) per share: 

                
   Three Months Ended   Nine months Ended 
   September 30,   September 30, 
   2023   2022   2023   2022 
   (In thousands) 
Weighted average common shares outstanding   14,677    15,490    14,659    15,462 
Assumed exercise/vesting of equity awards   424    358    404    297 
Weighted average diluted common shares outstanding   15,101    15,848    15,063    15,759 

 

Note 13 – Related Party Transactions

 

Consulting Services

 

Lifeway obtained consulting services from Ludmila Smolyansky, a member of the Company’s Board of Directors and former Chairperson of its Board of Directors. On January 4, 2022, the Company notified Ms. Smolyansky that it was terminating the amended and restated consultancy agreement effective January 17, 2022. Service fees earned are included in general and administrative expenses in the accompanying consolidated statements of operations and were $0 and $22 during each of the nine months ended September 30, 2023 and 2022, respectively. Service fees earned are included in general and administrative expenses in the accompanying consolidated statements of operations and were $0 during each of the three months ended September 30, 2023 and 2022.

 

 

 16 

 

 

Endorsement Agreement

 

Lifeway was 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 paid 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 paid Ms. Smolyansky a lump sum payment of $400, (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 were $0 and $400 during each of the nine months ended September 30, 2023 and 2022, respectively. Royalties earned were $0 and $100 during each of the three months ended September 30, 2023 and 2022, respectively.

 

Note 14 – Subsequent Event

 

On October 6, 2023, the Company paid the outstanding line of credit balance of $2,777 in full. There were no amounts outstanding under the line of credit after October 6, 2023, through the date of filing of these financial statements.

 

 

 

 17 

 

 

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, 2022 (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:

 

  · Changes in the pricing of commodities;
  · The actions and decisions of our competitors and customers, including those related to price competition;
  · Our ability to successfully implement our business strategy;
  · The effects of government regulation;
  · Disruptions to our supply chain, or our manufacturing and distribution capabilities, including those due to cybersecurity threats; 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, 2022 and that are described from time to time in our filings with the SEC.

 

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.

 

Business Overview

 

Lifeway was founded in 1986 by Michael Smolyansky a refugee from the former USSR who emigrated from Eastern Europe to the United States in 1976 with his wife and young daughter. Lifeway was the first to successfully introduce kefir to the U.S. consumer on a commercial scale, initially catering to ethnic consumers in the Chicago, Illinois metropolitan area.

 

The Company’s primary product is drinkable kefir, a cultured dairy product. Lifeway Kefir is a probiotic beverage that is tart and tangy, high in protein, calcium and vitamin D. 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.

 

 

 18 

 

 

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.

 

Recent Developments

 

Current Macroeconomic Environment and Inflation Impact

 

Since 2022, we have been experiencing inflationary and cost pressures due to volatility and disruption in the global economy which have increased our production and distribution costs. We have begun to see some moderation of inflationary pressures and have experienced pricing declines in certain of our input costs, such as milk. We expect inflationary pressures to persist throughout 2023, although at lower levels than experienced in 2022. In response to these persistent inflationary and cost pressures, we instituted price increases in 2022 on many of our products. We expect that these inflation-justified price increases will continue to help mitigate a portion of our increased costs.

 

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 at all locations and does not anticipate manufacturing or staffing disruptions in the near term.

 

Results of Operations

 

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

 

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, 
   2023   2022 
   $   %   $   % 
Net sales   40,896    100.0%    38,140    100.0% 
Cost of goods sold   29,099    71.2%    29,962    78.6% 
Depreciation expense   654    1.6%    590    1.5% 
Total cost of goods sold   29,753    72.8%    30,552    80.1% 
Gross profit   11,143    27.2%    7,588    19.9% 
Selling expenses   2,884    7.1%    2,843    7.4% 
General & administrative expense   3,085    7.5%    3,415    9.0% 
Amortization expense   135    0.3%    135    0.4% 
Total operating expenses   6,104    14.9%    6,393    16.8% 
Income from operations   5,039    12.3%    1,195    3.1% 
Other (expense) income:                    
Interest expense   (109)   (0.3%)   (77)   (0.2%)
Gain on sales of property and equipment       0.0%        0.0% 
Other (expense) income, net   (1)   0.0%    (5)   0.0% 
Total other (expense) income   (110)   (0.3%)   (82)   (0.2%)
Income before provision for income taxes   4,929    12.0%    1,113    2.9% 
Provision for income taxes   1,517    3.7%    130    0.3% 
Net income   3,412    8.3%    983    2.6% 

 

 

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Net Sales

 

Net sales finished at $40,896 for the three-month period ended September 30, 2023, an increase of $2,756 or 7.2% versus prior year. The net sales increase was primarily driven by higher volumes of our branded drinkable kefir, and to a lesser extent the impact of price increases implemented during the fourth quarter of 2022.

 

Net sales by product category were as follows for the three months ended September 30:

 

   2023   2022 
   $   %   $   % 
Drinkable Kefir excluding ProBugs  $33,035    81%   $30,297    79% 
Cheese   3,353    8%    3,211    9% 
Cream and other   1,811    4%    1,874    4% 
Drinkable yogurt   1,485    4%    1,482    5% 
ProBugs Kefir   820    2%    882    2% 
Other dairy   392    1%    394    1% 
Net Sales  $40,896    100%   $38,140    100% 

 

Gross Profit

 

Gross profit as a percentage of net sales was 27.2% during the three-month period ended September 30, 2023. Gross profit percentage was 19.9% in the prior year. The increase versus the prior year was primarily due to the higher volumes of our branded products and the favorable impact of milk pricing, and to a lesser extent the price increases implemented during the fourth quarter of 2022 and decreased transportation costs.

 

Selling Expenses

 

Selling expenses increased by $41 to $2,884 during the three-month period ended September 30, 2023 from $2,843 during the same period in 2022.

 

General and Administrative Expenses

 

General and administrative expenses decreased $330 to $3,085 during the three-month period ended September 30, 2023 from $3,415 during the same period in 2022. The decrease is primarily driven by the termination of the endorsement agreement in September 2022.

 

Provision for Income Taxes

 

The provision for income taxes was $1,517 and $130 during the three months ended September 30, 2023 and 2022, respectively.

 

The effective income tax rate for the three months ended September 30, 2023 was 30.8% compared to 11.7% in the same period last year. The statutory Federal and state tax rates remained consistent from 2022 to 2023. 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 2023, the percentage effect is different due to the difference in pre-tax income in 2023 compared to 2022.

 

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.

 

 

 20 

 

 

Nine months Ended September 30, 2023 Compared to Nine months Ended September 30, 2022

 

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, 
   2023   2022 
   $   %   $   % 
Net sales   118,030    100.0%    105,730    100.0% 
Cost of goods sold   85,428    72.4%    85,032    80.4% 
Depreciation expense   1,953    1.7%    1,833    1.7% 
Total cost of goods sold   87,381    74.1%    86,865    82.2% 
Gross profit   30,649    25.9%    18,865    17.8% 
Selling expenses   8,974    7.6%    8,527    8.1% 
General & administrative expense   10,028    8.5%    9,546    9.0% 
Amortization expense   405    0.3%    405    0.4% 
Total operating expenses   19,407    16.4%    18,478    17.5% 
Income from operations   11,242    9.5%    387    0.4% 
Other (expense) income:                    
Interest expense   (322)   (0.3%)   (171)   (0.2%)
Gain on sales of property and equipment   33    0.0%        0.0% 
Other (expense) income, net   (1)   0.0%    (10)   0.0% 
Total other (expense) income   (290)   (0.3%)   (181)   (0.2%)
Income before provision for income taxes   10,952    9.2%    206    0.2% 
Provision (benefit) for income taxes   3,554    3.0%    (2)   0.0% 
Net income   7,398    6.2%    208    0.2% 

 

Net Sales

 

Net sales finished at $118,030 for the nine-month period ended September 30, 2023, an increase of $12,300 or 11.6% versus prior year. The net sales increase was primarily driven by higher volumes of our branded drinkable kefir, and to a lesser extent the impact of price increases implemented during the fourth quarter of 2022.

 

Net sales by product category were as follows for the nine months ended September 30:

 

   2023   2022 
   $   %   $   % 
Drinkable Kefir excluding ProBugs  $94,174    80%   $82,779    78% 
Cheese   10,074    9%    9,233    9% 
Cream and other   5,362    4%    5,438    5% 
Drinkable yogurt   4,760    4%    4,559    5% 
ProBugs Kefir   2,490    2%    2,481    2% 
Other dairy   1,170    1%    1,240    1% 
Net Sales  $118,030    100%   $105,730    100% 

 

Gross Profit

 

Gross profit as a percentage of net sales was 25.9% during the nine-month period ended September 30, 2023. Gross profit percentage was 17.8% in the prior year. The increase versus the prior year was primarily due to the higher volumes of our branded products and the favorable impact of milk pricing, and to a lesser extent the price increases implemented during the fourth quarter of 2022 and decreased transportation costs.

 

 

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Selling Expenses

 

Selling expenses increased by $447 to $8,974 during the nine-month period ended September 30, 2023 from $8,527 during the same period in 2022. The increase is primarily due to increased compensation expense, partially offset by the reduction in royalty expense resulting from the termination of the endorsement agreement in September 2022.

 

General and Administrative Expenses

 

General and administrative expenses increased $482 to $10,028 during the nine-month period ended September 30, 2023 from $9,546 during the same period in 2022. The increase is primarily driven by incentive compensation and to a lesser extent expenses related to non-routine stockholder action, partially offset by the termination of the endorsement agreement in September 2022.

 

Provision (Benefit) for Income Taxes

 

The provision (benefit) for income taxes was $3,554 and $(2) during the nine months ended September 30, 2023 and 2022, respectively.

 

The effective income tax rate for the nine months ended September 30, 2023 was 32.5% compared to (0.8)% in the same period last year. The statutory Federal and state tax rates remained consistent from 2022 to 2023. 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 2023, the percentage effect is different due to the difference in pre-tax income in 2023 compared to 2022.

 

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.

 

If additional borrowings are needed, $2,223 was available under the Revolving Credit Facility as of September 30, 2023 (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, if a serious economic or credit market crisis ensues, it could have a negative effect on our liquidity, results of operations and financial condition.

 

As discussed in Note 14, Subsequent Events, the Company paid the outstanding line of credit balance of $2,777 in full on October 6, 2023.

 

The Company’s 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).

 

 

 

 22 

 

 

Cash Flow

 

The following table is derived from our Consolidated Statement of Cash Flows:

 

   Nine months Ended
September 30,
 
Net Cash Flows Provided By (Used In):  2023   2022 
Operating activities  $12,144   $3,639 
Investing activities  $(3,206)  $(3,189)
Financing activities  $(750)  $(750)

 

Operating Activities

 

Net cash provided by operating activities was $12,144 during the nine-month period ended September 30, 2023 compared to $3,639 in the same period in 2022. The increase was primarily due to higher cash earnings driven by increased product volumes and declines in certain input costs, and the change in working capital.

 

Investing Activities

 

Net cash used in investing activities was $3,206 during the nine-month period ended September 30, 2023 compared to $3,189 in the same period in 2022. The increase in cash used reflects our planned capital spending increase during 2023 compared to 2022. 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.

 

Financing Activities

 

Net cash used in financing activities was $750 during the nine-month period ended September 30, 2023 and 2022, respectively. The cash used represents the quarterly principal payments under the term loan.

 

Debt Obligations

 

As of September 30, 2023, 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, 2023. The Company had $2,981 outstanding under the note payable, net of $19 of unamortized deferred financing fees, as of September 30, 2023.

 

The Company’s interest rate on debt outstanding under the revolving line of credit and note payable as of September 30, 2023 was 7.34% and 7.40%, respectively.

 

The Company is in compliance with all applicable financial debt covenants as of September 30, 2023. See Note 7 to our Consolidated Financial Statements for additional information regarding our indebtedness and related agreements.

 

As discussed in Note 14, Subsequent Events, the Company paid the outstanding line of credit balance of $2,777 in full on October 6, 2023.

 

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, 2022. There were no material changes to the Company’s critical accounting policies and estimates in the nine months ended September 30, 2023.

 

 

 23 

 

 

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, 2023. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2023.

 

Changes in Internal Control over Financial Reporting

 

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, 2023 that has materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

 

 

 

 

 24 

 

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

On August 3, 2023, the Circuit Court of Cook County, Illinois granted the Company’s motion to file a Verified Second Amended Complaint (“Complaint”) in the previously disclosed lawsuit by the Company against Ludmila Smolyansky and Edward Smolyansky and transferred the matter to the Chancery Division of the Circuit Court of Cook County, Illinois for adjudication of the Company’s motion for a preliminary injunction and trial on Count I of the Complaint seeking a permanent injunction. The Complaint alleges additional violations of agreements between the Company and Edward Smolyansky by Mr. Smolyansky. Such additional ongoing activity by Mr. Smolyansky prompted the Company to request the additional relief of a preliminary injunction and permanent injunction against Mr. Smolyansky.

 

Additional information regarding legal proceedings 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, 2022.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

  

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 5. OTHER INFORMATION.

 

None.

  

ITEM 6. EXHIBITS.

 

No.   Description   Form   Period Ending   Exhibit   Filing Date
                     
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 November 13, 2023 reporting Lifeway’s financial results for the three months ended September 30, 2023*   Furnished Herewith            

 

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.

 

 

 25 

 

 

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 13, 2023 By:   /s/ Julie Smolyansky
    Julie Smolyansky
    Chief Executive Officer, President, and Director
    (Principal Executive Officer)
     
     
     
Date: November 13, 2023 By:   /s/ Eric Hanson
    Eric Hanson
    Chief Financial & Accounting Officer
    (Principal Financial and Accounting Officer)

 

 

 

 

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