Lifeway Foods, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Lifeway manufactures and sells cultured dairy products, principally drinkable kefir, and reports as a single segment. Dollar amounts below are in thousands unless stated otherwise.
Financial performance
| Metric | Three months ended June 30, 2022 | Six months ended June 30, 2022 |
|---|---|---|
| Net sales | $33,491, up 14.8% year over year | $67,590, up 15.5% |
| Gross profit / margin | $5,697 / 17.0%, versus $7,677 / 26.3% | $11,277 / 16.7%, versus $15,726 / 26.9% |
| Operating income (loss) | $241, versus $2,494 | $(808), versus $4,430 |
| Net income (loss) | $120, versus $1,618 | $(775), versus $2,924 |
| Basic and diluted EPS | $0.01, versus $0.10 | $(0.05), versus $0.19 |
| Operating cash flow | Not separately stated for the quarter | $(529), versus $3,647 provided |
Sales growth reflected higher branded drinkable kefir volumes, first-quarter price increases, and, to a lesser extent, the 2021 GlenOaks Farms acquisition. For the first half, drinkable kefir excluding ProBugs represented 78% of sales; drinkable yogurt contributed 5% versus none in the comparable 2021 period.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $6,494 at June 30, 2022, including $580 of restricted escrow cash. Current assets were $27,168 and current liabilities $11,025.
- Cash decreased $2,739 in the first half. Investing activities used $1,710, primarily for property and equipment; financing activities used $500 for term-loan principal payments.
- Debt included $2,777 outstanding on the revolving facility, with $2,223 available, and a $4,000 term loan balance ($3,973 net of financing costs). The term loan bears 3.55% interest; the revolver rate was 3.07% at period end.
- The company reported compliance with its fixed-charge-coverage and minimum-working-capital covenants. The minimum working-capital covenant is $11,250.
Material changes and notable items
- Input-cost inflation, especially milk, freight, and other inputs, materially compressed gross margin despite sales growth. Management expected continued pressure on milk and other input costs during 2022.
- First-half G&A increased $623 to $6,131, primarily from legal and professional fees, including costs related to the fiscal 2020 Form 10-K restatement; lower Chairperson consulting expense partly offset the increase.
- Comparative 2021 financial statements were restated for prior errors in accounting for deferred tax liabilities and goodwill arising from a 2009 acquisition.
- Management disclosed a previously identified material weakness in internal control over financial reporting related to income-tax accounting; remediation remained ongoing. Management nevertheless concluded disclosure controls were effective as of June 30, 2022.
- On September 6, 2022, the company agreed to terminate a director’s product endorsement agreement for a lump-sum payment of $400,000.
Outlook, risks, and contingencies
No specific revenue or earnings guidance was provided. Management said it believed cash, operating cash flow, and available borrowing capacity would be sufficient for working capital, capital requirements, and growth initiatives, while noting that serious economic or credit-market disruption could harm liquidity. Risks cited include commodity and other input-cost inflation, the ability to pass costs through pricing, changing pandemic-related demand, supply-chain or production disruption, competition, and customer or consumer decisions. The filing reported ordinary-course legal matters; management did not expect their resolution to have a material adverse effect, but noted an adverse outcome could be material.
Investor verification points
- Reconcile the six-month net loss: the consolidated statements report $(775), while the MD&A comparison table reports $(755).
- Assess whether pricing and volume can offset continuing milk, freight, packaging, and other input-cost inflation and restore gross margins.
- Track operating cash generation, capital spending, debt repayments, and covenant headroom against the reduced cash balance.
- Review progress remediating the income-tax accounting material weakness and the effects of the prior-period restatement.
- Confirm the accounting and cash-flow timing for the $400,000 endorsement termination payment, a post-quarter event.