Lifeway Foods, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; compared with the three months ended March 31, 2020. Balance-sheet comparisons are with December 31, 2020. Lifeway manufactures and sells cultured dairy products, principally drinkable kefir, and reports one operating segment. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $29.376 million | $25.388 million | Up 15.7% |
| Gross profit / margin | $8.049 million / 27.4% | $5.997 million / 23.6% | Margin up 3.8 percentage points |
| Operating income / margin | $1.936 million / 6.6% | $0.238 million / 0.9% | Operating income up $1.698 million |
| Net income / diluted EPS | $1.306 million / $0.08 | $0.146 million / $0.01 | Net income up $1.160 million |
| Cash provided by (used in) operating activities | $1.210 million | ($1.055 million) | Improved $2.265 million |
| Capital expenditures | $0.518 million | $0.403 million | Up $0.115 million |
Selling expense rose 25.1% to $3.222 million, with advertising expense increasing to $1.393 million from $0.536 million, primarily reflecting television and digital campaigns. General and administrative expense fell 8.1% to $2.891 million, mainly on lower compensation and professional fees. The effective tax rate was 31.2%, versus 27.5%; Q1 2020 included a CARES Act tax benefit.
Financial position and liquidity
- At March 31, 2021, cash and cash equivalents were $8.618 million, up from $7.926 million at year-end. Current assets were $26.471 million and current liabilities were $9.091 million.
- Accounts receivable increased to $9.961 million from $8.002 million; management cited working-capital movements, including the timing of sales, in its cash-flow discussion.
- Outstanding revolving-credit borrowings were $2.774 million, with $2.223 million available for future borrowing. The stated interest rate was 2.15%; the facility termination date is June 30, 2025.
- The company reported compliance with its debt covenants, including the 1.25:1.00 minimum fixed-charge coverage ratio and the working-capital covenant. Total liabilities were $13.932 million and stockholders’ equity was $48.224 million.
- Cash increased by $0.692 million during the quarter. Investing activities used $0.518 million; financing activities used no cash in Q1 2021.
Material changes and management commentary
- Sales growth was primarily driven by higher volumes of branded drinkable kefir. Drinkable kefir other than ProBugs accounted for $24.203 million, or 82%, of sales, compared with $19.857 million, or 78%, a year earlier.
- Management attributed improved gross margin primarily to operating leverage on higher sales and, to a lesser extent, favorable milk pricing. Depreciation increased as the company continued manufacturing improvements.
- About 30% of the year-over-year sales increase was attributed to the USDA Farmers to Families Food Box program, which began in mid-Q1 and was scheduled to end in May 2021.
- Management said it had maintained production and met demand without material supply-chain disruption, and had full production capacity available. It expected to meet foreseeable liquidity and capital needs through operating cash flow, cash, and the credit facility; the filing provides no specific earnings or revenue guidance.
Risks, contingencies, and unusual items
- COVID-19 effects remain uncertain. Management warned that demand could ease as pandemic restrictions change and that ingredient, packaging, or other input costs and availability could be affected. It said the financial impact could not be reasonably estimated.
- Two major customers accounted for approximately 22% of net sales in Q1 2021; the filing gives approximately 21% for the comparable 2020 period. Customer concentration is therefore material to monitor.
- The company disclosed ordinary-course litigation and claims; it said current accruals were not material and management did not expect a material adverse effect, while noting outcomes and potential losses could not be predicted or estimated with certainty.
- Related-party payments included $125,000 of quarterly consulting fees to the board chairperson, a $94,000 estimate for the chairperson’s 2021 performance fee, and $150,000 in product royalties. These amounts are disclosed as expenses.
- The company stated that there were no material changes to the risk factors in its 2020 Form 10-K. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of Q1 sales growth depended on the USDA food-box program and pandemic-related at-home demand, particularly after the program’s scheduled May 2021 end.
- Whether the higher gross margin can be sustained amid changing demand, milk prices, input costs, and increased advertising spending.
- Customer concentration and the ongoing contribution of branded drinkable kefir to sales.
- Cash conversion and working-capital trends, including the increase in receivables, alongside capital spending and available credit capacity.
- The terms, amounts, and governance oversight of related-party consulting, performance-fee, and royalty arrangements.