Lifeway Foods, Inc. - 10-Q Summary (Period Ended Sept 30, 2009)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Lifeway Foods, Inc., a smaller reporting company incorporated in Illinois. The report covers the three and nine-month periods ended September 30, 2009. The Company produces and distributes dairy products, primarily Kefir, Farmer's Cheese, and soy-based products, across the United States and Canada. A significant event during the period was the acquisition of Fresh Made, Inc. on February 6, 2009.
Key Financial Metrics
| Metric | 3 Months Ended Sept 30, 2009 | 9 Months Ended Sept 30, 2009 |
|---|---|---|
| Sales (Revenue) | $15,433,876 | $43,649,383 |
| Gross Profit | $6,253,175 | $17,795,561 |
| Net Income | $1,370,741 | $5,450,109 |
| Earnings Per Share (Basic/Diluted) | $0.08 | $0.32 |
| Operating Cash Flow | N/A | $5,504,144 |
| Total Assets | $50,515,216 | $50,515,216 |
| Total Liabilities | $18,506,032 | $18,506,032 |
| Stockholders' Equity | $32,009,184 | $32,009,184 |
| Cash and Cash Equivalents | $804,387 | $804,387 |
Debt and Liquidity: Total notes payable stood at $13,631,777, with $6,231,204 classified as current maturities. The Company holds $4,950,457 in marketable securities. Cash flow from operations for the nine-month period was positive at $5.5 million.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 37% ($4.2M) for the quarter and 29% ($9.8M) for the nine-month period compared to 2008. This growth is attributed to increased sales of the flagship Kefir line and the inclusion of Fresh Made Dairy revenues ($2.2M in Q3; $5.7M YTD).
- Profitability: Net income increased 60% for the quarter and 105% for the nine-month period. Gross margin improved significantly as the cost of conventional milk dropped approximately 30% compared to the prior year.
- Expenses: Operating expenses as a percentage of sales rose slightly due to a 111% increase in amortization expense related to the Fresh Made acquisition. Interest expense increased due to new debt financing the acquisition.
- Balance Sheet: Total assets increased by $14.1M year-over-year, driven primarily by a $10.2M increase in intangible assets (Goodwill and Brand) from the acquisition.
Guidance, Outlook, and Risks
- Outlook: Management anticipates funding foreseeable liquidity requirements internally. The Company continues to explore acquisition opportunities to boost sales and leverage its distribution system.
- Internal Controls: Management concluded that disclosure controls and procedures were not effective as of September 30, 2009, due to material weaknesses previously disclosed. The Company implemented Microsoft Business Solutions-Navision ("NAV") software on June 1, 2009, to remediate these issues but could not yet confirm full remediation.
- Risks: The Company holds significant assets in marketable securities, which are subject to market volatility. While no material investments were deemed other-than-temporarily impaired as of September 30, 2009, the portfolio includes unrealized losses of $337,871.
- Unusual Items: The nine-month period included a $55,000 pre-payment penalty on a mortgage and approximately $260,000 in non-recurring professional fees related to the Fresh Made acquisition.
Investor Verification Checklist
- Verify the integration progress and revenue contribution of the Fresh Made acquisition.
- Confirm the status of remediation for the material weaknesses in internal controls over financial reporting.
- Monitor the valuation and unrealized losses of the $4.95M marketable securities portfolio.
- Review the repayment schedule for the $6.2M in current debt maturities due in 2010.
- Assess the sustainability of the 30% reduction in milk costs and its impact on future gross margins.