Lifeway Foods, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS. LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Balance Sheets March 31, 2021 and December 31, 2020 (In thousands) March 31, 2021 (Unaudited) December 31, 2020 Current assets Cash and cash equivalents $ 8,618 $ 7,926 Accounts receivable, net of allowance for doubtful accounts and discounts & allowances of $1,100 and $1,350 at March 31, 2021 and December 31, 2020 respectively 9,961 8,002 Inventories, net 6,736 6,930 Prepaid expenses and other current assets 1,110 1,163 Refundable income taxes 46 31 Total current assets 26,471 24,052 Property, plant and equipment, net 20,744 21,048 Operating lease right-of-use asset 317 345 Intangible assets Goodwill and indefinite-lived intangibles 12,824 12,824 Other intangible assets, net – – Total intangible assets 12,824 12,824 Other assets 1,800 1,800 Total assets $ 62,156 $ 60,069 Current liabilities Accounts payable $ 5,289 $ 5,592 Accrued expenses 2,587 2,196 Accrued income taxes 1,215 653 Total current liabilities 9,091 8,441 Line of credit 2,774 2,768 Operating lease liabilities 143 165 Deferred income taxes, net 1,764 1,764 Other long-term liabilities 160 77 Total liabilities 13,932 13,215 Commitments and contingencies Stockholders' equity Preferred stock, no par value; 2,500 shares authorized; no shares issued or outstanding at March 31, 2021 and December 31, 2020 – – Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 15,604 outstanding at March 31, 2021 and December 31, 2020 6,509 6,509 Paid-in capital 2,664 2,600 Treasury stock, at cost (12,450 ) (12,450 ) Retained earnings 51,501 50,195 Total stockholders' equity 48,224 46,854 Total liabilities and stockholders' equity $ 62,156 $ 60,069 See accompanying notes to consolidated financial statements 3 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the three months ended March 31, 2021 and 2020 (Unaudited) (In thousands, except per share data) 2021 2020 Net Sales $ 29,376 $ 25,388 Cost of goods sold 20,512 18,624 Depreciation expense 815 767 Total cost of goods sold 21,327 19,391 Gross profit 8,049 5,997 Selling expense 3,222 2,575 General and administrative expense 2,891 3,145 Amortization expense – 39 Total operating expenses 6,113 5,759 Income from operations 1,936 238 Other income (expense): Interest expense (22 ) (39 ) (Loss) gain on sale of property and equipment (7 ) 5 Other income, net (8 ) (3 ) Total other income (expense) (37 ) (37 ) Income before provision for income taxes 1,899 201 Provision for income taxes 593 55 Net income $ 1,306 $ 146 Earnings per common share: Basic $ 0.08 $ 0.01 Diluted $ 0.08 $ 0.01 Weighted average common shares: Basic 15,604 15,623 Diluted 15,814 15,737 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, 2020 17,274 $ 6,509 (1,564 ) $ (12,601 ) $ 2,380 $ 46,963 $ 43,251 Issuance of common stock in connection with stock-based compensation – – 27 210 306 – 516 Treasury stock purchased – – (179 ) (405 ) – – (405 ) Stock-based compensation – – – – 62 – 62 Net loss – – – – – 146 146 Balance, March 31, 2020 17,274 $ 6,509 (1,716 ) $ (12,796 ) $ 2,748 $ 47,109 $ 43,570 Balance, January 1, 2021 17,274 $ 6,509 (1,669 ) $ (12,450 ) $ 2,600 $ 50,195 $ 46,854 Stock-based compensation – – – – 64 – 64 Net income – – – – – 1,306 1,306 Balance, March 31, 2021 17,274 $ 6,509 (1,669 ) $ (12,450 ) $ 2,664 $ 51,501 $ 48,224 See accompanying notes to consolidated financial statements 5 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (In thousands) Three Months Ended March 31, 2021 2020 Cash flows from operating activities: Net income $ 1,306 $ 146 Adjustments to reconcile net income (loss) to operating cash flow: Depreciation and amortization 815 806 Non-cash interest expense 6 6 Non-cash rent expense – (11 ) Bad debt expense – 1 Deferred revenue (8 ) (24 ) Stock-based compensation 153 117 Deferred income taxes – 370 Loss (gain) on sale of property and equipment 7 (5 ) (Increase) decrease in operating assets: Accounts receivable (1,959 ) (1,739 ) Inventories 193 (491 ) Refundable income taxes (15 ) (346 ) Prepaid expenses and other current assets 54 312 Increase (decrease) in operating liabilities: Accounts payable (301 ) 833 Accrued expenses 398 (981 ) Operating lease asset amortization/liability – (11 ) Accrued income taxes 561 (38 ) Net cash provided by (used in) operating activities 1,210 (1,055 ) Cash flows from investing activities: Purchases of property and equipment (518 ) (403 ) Proceeds from sale of property and equipment – 5 Net cash used in investing activities (518 ) (398 ) Cash flows from financing activities: Purchase of treasury stock – (405 ) Net cash used in financing activities – (405 ) Net increase (decrease) in cash and cash equivalents 692 (1,858 ) Cash and cash equivalents at the beginning of the period 7,926 3,836 Cash and cash equivalents at the end of the period $ 8,618 $ 1,978 Supplemental cash flow information: Cash paid for income taxes, net of (refunds) $ 47 $ 65 Cash paid for interest $ 16 $ 35 Non-cash investing activities Increase (decrease) in right-of-use assets and operating lease obligations $ 21 $ 113 Non-cash financing activities Issuance of common stock under equity incentive plans $ – $ 516 See accompanying notes to consolidated financial statements 6 LIFEWAY FOODS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (In thousands, except per share data) Note 1 – Basis of Presentation 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 all of the information and 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Results of operations for interim periods are not necessarily indicative of the results to be expected for other interim periods or the full year. A detailed description of our significant accounting policies can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Principles of consolidation Our 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 – 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. Revenue recognition We sell food and beverage products across select product categories to customers predominantly within the United States (see Note 12, Segments, Products and Customers). We also sell bulk cream, a byproduct of our fluid milk manufacturing process. In accordance with ASC 606, Revenue from Contracts with Customers, we recognize revenue when control over the products transfers to our customers, which generally occurs upon delivery to our customers or their common carriers. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, using the five-step method required by ASC 606. For the Company, the contract is the approved sales order, which may also be supplemented by other agreements that formalize various terms and conditions with customers. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer. Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer, which is the delivery of food products which provide immediate benefit to the customer. 7 We account for product shipping and handling as fulfillment activities with revenues for these activities recorded within net revenue and costs recorded within cost of goods sold. Any taxes collected on behalf of government authorities are excluded from net revenues. Variable consideration, which typically includes volume-based rebates, known or expected pricing or revenue adjustments, such as trade discounts, allowances for non-saleable products, product returns, trade incentives and coupon redemption, is estimated utilizing the most likely amount method. Key sales terms, such as pricing and quantities ordered, are established on a frequent basis such that most customer arrangements and related incentives have a one year or shorter duration. As such, we do not capitalize contract inception costs and we capitalize product fulfillment costs in accordance with U.S. GAAP and our inventory policies. We do not have any significant deferred revenue or unbilled receivables at the end of a period. We generally do not receive noncash consideration for the sale of goods, nor do we grant payment financing terms greater than one year. Advertising and promotional costs Lifeway expenses advertising costs as incurred. For the three months ended March 31, 2021 and 2020 total advertising expenses were $1,393 and $536 respectively. Recent accounting pronouncements Adopted In December 2019, the FASB issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new guidance is intended to enhance and simplify various aspects of the accounting for income taxes. The new guidance eliminates certain exceptions to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes. The Company adopted this guidance on January 1, 2021. The adoption of this standard did not have a material impact on our consolidated financial statements and disclosures. Issued but not yet effective In March 2020, the FASB issued Accounting Standards Update (“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 generally accepted accounting principles (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 currently evaluating the impact that the new guidance will have on the 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 will have on the consolidated financial statements. Note 3 – Inventories, net Inventories consisted of the following: March 31, 2021 December 31, 2020 Ingredients $ 1,684 $ 1,725 Packaging 2,114 2,234 Finished goods 2,938 2,971 Total inventories $ 6,736 $ 6,930 8 Note 4 – Property, Plant and Equipment, net Property, plant and equipment consisted of the following: March 31, 2021 December 31, 2020 Land $ 1,565 $ 1,565 Buildings and improvements 17,182 17,834 Machinery and equipment 31,716 31,707 Vehicles 778 778 Office equipment 862 857 Construction in process 587 228 52,690 52,969 Less accumulated depreciation (31,946 ) (31,921 ) Total property, plant and equipment, net $ 20,744 $ 21,048 Note 5 – Goodwill and Intangible Assets Goodwill and indefinite-lived intangible assets consisted of the following: March 31, 2021 December 31, 2020 Gross goodwill $ 10,368 $ 10,368 Accumulated impairment losses (1,244 ) (1,244 ) Goodwill 9,124 9,124 Brand names 3,700 3,700 Goodwill and indefinite-lived intangible assets $ 12,824 $ 12,824 Finite-lived Intangible Assets Other intangible assets, net consisted of the following: March 31, 2021 December 31, 2020 Recipes $ 44 $ 44 Customer lists and other customer related intangibles 4,529 4,529 Customer relationship 985 985 Trade names 2,248 2,248 Formula 438 438 8,244 8,244 Accumulated amortization (8,244 ) (8,244 ) Other intangible assets, net $ – $ – 9 Note 6 – Accrued Expenses Accrued expenses consisted of the following: March 31, 2021 December 31, 2020 Payroll and incentive compensation $ 1,825 $ 1,366 Real estate taxes 271 341 Current portion of operating lease liabilities 174 179 Other 317 310 Total accrued expenses $ 2,587 $ 2,196 Note 7 – Debt Line of Credit On May 7, 2018, Lifeway entered into an Amended and Restated Loan and Security Agreement (the “Revolving Credit Facility”) with its existing lender. On April 10, 2019, effective March 31, 2019, Lifeway entered into the First Modification to the Amended and Restated Loan and Security Agreement (the “Modified Revolving Credit Facility”) with its existing lender. Under the amendment, the Modified Revolving Credit Facility provides for a revolving line of credit up to a maximum of $9 million (the “Revolving Loan”) with an incremental facility not to exceed $5 million (the “Incremental Facility” and together with the Revolving Loan, the “Loans”). On December 10, 2019, Lifeway entered into the Second Modification to the Amended and Restated Loan and Security Agreement, as amended, (the “Second Modification”) with its existing lender. The Second Modification amends the Amended and Restated Loan and Security Agreement, as amended, by redefining the “Borrowing Base” and further clarifying the definitions of “Eligible Accounts” and “Eligible Inventory.” The “Borrowing Base” under this amendment means, generally, an amount equal to the sum of (a) 85% of the unpaid amount of all eligible accounts receivable, plus (b) 50% of the value of all eligible inventory. The Second Modification also addresses the calculation of interest after the potential discontinuance of LIBOR and its replacement with a replacement benchmark interest rate. On September 30, 2020, Lifeway entered into the Third Modification to the Amended and Restated Loan and Security Agreement, as amended, (the “Third Modification”) with its existing lender. The Third Modification amends the Amended and Restated Loan and Security Agreement, as amended, by removing the monthly borrowing base reporting requirement effective September 30, 2020, including a covenant to maintain a quarterly minimum working capital financial covenant, as defined, of no less than $11.25 million each of the fiscal quarters commencing the fiscal quarter ending December 31, 2020 through the expiration date, and eliminating the tier interest pricing structure. 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 June 30, 2025, unless earlier terminated. Except as described above, as amended, the Modified Revolving Credit Facility remains substantively unchanged and in full force and effect, including customary representations, warranties, and covenants on the part of Lifeway, including financial covenants requiring us to maintain a fixed charge coverage ratio of no less than 1.25 to 1.00 each of the fiscal quarters ending through the expiration date. The Modified Revolving Credit Facility 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 Revolving Credit Facility may be accelerated. The loans and all other amounts due and owed under the Revolving Credit Facility and related documents are secured by substantially all of our assets. As of March 31, 2021, we had $2,774 net of $3 of unamortized deferred financing costs, outstanding under the Revolving Credit Facility. We had $2,223 available for future borrowings as of March 31, 2021. 10 As amended, all outstanding amounts under the Loans bear interest, at Lifeway’s election, at either the lender Base Rate (the Prime Rate minus 1.00%) or the LIBOR plus 1.95%, payable monthly in arrears. Lifeway is also required to pay a quarterly unused line fee of 0.20% and, in conjunction with the issuance of any letters of credit, a letter of credit fee of 0.20%. Lifeway’s interest rate on debt outstanding under our Revolving Credit Facility as of March 31, 2021 was 2.15%. We were in compliance with the fixed charge coverage ratio and minimum working capital covenants at March 31, 2021. Note 8 – Leases Lifeway has operating leases for two retail stores for its Lifeway Kefir Shop subsidiary which includes fixed base rent payments as well as variable rent payments to reimburse the landlord for operating expenses and taxes. The Company terminated its office space leases in June 2020. The Company also lease 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 1 year to 4 years. Some of our 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. We do not currently have leases which meet the finance lease classification as defined under ASC 842. We do 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 $78 and $179 (including short term leases) for the three months ended March 31, 2021 and 2020, respectively. 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, we direct the use of the asset and obtain 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. We have elected the practical expedient to combine lease and non-lease components into a single component for all of its leases. For many of our leases such as real estate leases, we are unable to determine an implicit rate; therefore, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments for those leases. We include 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 we 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 Nine months ended December 31, 2021 $ 147 2022 158 2023 23 2024 7 2025 5 Thereafter 2 Total lease payments 342 Less: Interest (26 ) Present value of lease liabilities $ 316 The weighted-average remaining lease term for our operating leases was 2.05 years as of March 31, 2021. The weighted average discount rate of our operating leases was 7.85% as of March 31, 2021. Cash paid for amounts included in the measurement of lease liabilities was $55 and $142 for the three months ended March 31, 2021 and 2020, respectively. 11 Note 9 – Commitments and contingencies Litigation Lifeway is engaged in various legal actions, claims, audits, and proceedings arising in the normal course of business, including commercial disputes, product liabilities, intellectual property matters and employment-related matters resulting from our business activities. We record accruals for outstanding legal matters when we believe it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated. We evaluate, 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, we do not establish an accrued liability. Currently, none of our accruals for outstanding legal matters are material individually or in the aggregate to our 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 our business, financial condition, results of operations, or cash flows. However, if we ultimately are required to make payments in connection with an adverse outcome, it is possible that it could have a material adverse effect on our business, financial condition, results of operations or cash flows. Lifeway’s contingencies are subject to substantial uncertainties, including for each such contingency the following, among other factors: (i) the procedural status of the case; (ii) whether the case has or may be certified as a class action suit; (iii) the outcome of preliminary motions; (iv) the impact of discovery; (v) whether there are significant factual issues to be determined or resolved; (vi) whether the proceedings involve a large number of parties and/or parties and claims in multiple jurisdictions or jurisdictions in which the relevant laws are complex or unclear; (vii) the extent of potential damages, which are often unspecified or indeterminate; and (viii) the status of settlement discussions, if any, and the settlement posture of the parties. Consequently, Lifeway cannot predict with any reasonable certainty the timing or outcome of such contingencies, and we are unable to estimate a possible loss or range of loss. Note 10 – Income taxes For each interim period, Lifeway estimates the effective tax rate expected to be applicable for the full year and applies that rate to income before provision for income taxes for the period. The effective tax rate for the three months ended March 31, 2021 was 31.2% compared to 27.5% for the three months ended March 31, 2020. Our 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 underlying income tax rates applicable to various state and local taxing jurisdictions, enacted tax legislation, the impact of non-deductible items, changes in valuation allowances, and the expiration of the statute of limitations in relation to unrecognized tax benefits. We record discrete income tax items such as enacted tax rate changes and completed tax audits in the period in which they occur. On March 27, 2020, the “Coronavirus Aid, Relief, and Economic Security Act” (the CARES Act) was enacted. The CARES act features several tax provisions and other measures that assist businesses impacted by the economic effects of the COVID-19 pandemic. The significant tax provisions include an increase in the limitation of the tax deduction for interest expense from 30% to 50% of adjusted earnings in 2019 and 2020, a five-year carryback allowance for net operating losses generated in tax years 2018-2020, increased charitable contribution limitations to 25% of taxable income in 2020, and a retroactive technical correction to the 2017 Tax Cuts and Jobs Act that makes qualified improvement property placed in service after December 31, 2017 eligible for bonus depreciation. The Company has recorded a $245 income tax benefit related to the net operating loss carryback provisions of the CARES Act for the three months ended March 31, 2020. Unrecognized tax benefits were $96 and $90 at March 31, 2021 and 2020, respectively. We do not expect material changes to our unrecognized tax benefits during the next twelve months. The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If a tax audit is resolved in a manner inconsistent with its expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. We do not expect material changes to our unrecognized tax benefits during the next twelve months. 12 Note 11 – Stock-based and Other Compensation 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 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 March 31, 2021, 3.317 million shares remain available under the Omnibus Incentive Plan. While we plan to continue to issue awards pursuant to the Plan at least annually, we may choose to suspend the issuance of new awards in the future and may grant additional awards at any time including issuing special grants of restricted stock, restricted stock units, and stock options to attract and retain new and existing executives. Stock Options The following table summarizes stock option activity during the three months ended March 31, 2021: Options Weighted average exercise price Weighted average remaining contractual life Aggregate intrinsic value Outstanding at December 31, 2020 41 $ 10.42 5.22 $ – Granted – – – – Exercised – – – – Forfeited – – – – Outstanding at March 31, 2021 41 $ 10.42 4.97 $ – Exercisable at March 31, 2021 41 $ 10.42 – $ – As of December 31, 2019, all outstanding options were vested and there was no remaining unearned compensation expense. 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 equal to our closing stock price on the grant date. The following table summarizes RSA activity during the three months ended March 31, 2021. RSA’s Outstanding at December 31, 2020 78 Granted 4 Shares issued upon vesting – Forfeited – Outstanding at March 31, 2021 82 Weighted average grant date fair value per share outstanding $ 3.04 We expense RSA’s over the service period. For the three months ended March 31, 2021 and 2020 total pre-tax stock-based compensation expense recognized in the consolidated statements of operations was $36 and $5, respectively. For the three months ended March 31, 2021 and 2020 tax-related benefits of $11 and $1, respectively, were also recognized. As of March 31, 2021, the total remaining unearned compensation related to non-vested RSA’s was $108, which is expected to be amortized over the weighted-average remaining service period of 1.22 years. 13 Long-Term Incentive Plan Compensation Lifeway established long-term incentive-based compensation programs for fiscal year 2017 (the “2017 Plan”) and for fiscal year 2019 (the “2019 Plan”) for certain senior executives and key employees (the “participants”). Under both the 2017 Plan, long-term incentive compensation is based on Lifeway’s achievement of certain sales and adjusted EBITDA performance levels versus respective targets established by the Board for each fiscal year. Under the 2019 Plan, long-term equity incentive compensation is based on Lifeway’s achievement of four strategic milestones over a three-year period from Fiscal 2019 through Fiscal 2021. 2017 Plan Under the 2017 Plan, collectively the participants had the opportunity to earn cash and equity-based incentive compensation in amounts ranging from $0 to $11,025 depending on Lifeway’s performance levels compared to the respective targets and the participants performance compared to their individual objectives. The equity portion of the incentive compensation is payable in restricted stock that vests one-third in each of the three years from the 2017 grant dates. For the three months ended March 31, 2021 and 2020, $0 and $49 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. As of March 31, 2021, there was no remaining expense. 2019 Plan Under the 2019 Plan, collectively the participants can earn equity-based incentive compensation in amounts ranging from $0 to $1,776 depending on Lifeway’s performance levels compared to the respective targets. The equity-based incentive compensation is payable in restricted stock that vests 50% of unvested shares in year one, 50% of unvested shares in year two, and 100% of remaining unvested shares in year three from the 2019 grant date. For the three months ended March 31, 2021 and 2020, $19 and $13 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. 2019 Retention Award During Q1 2019, we awarded a special retention grant (the “2019 Retention Award”) of restricted stock to certain senior executives and key employees (the “participants”). The equity-based incentive compensation is payable in restricted stock that vests one-third in March 2019, one-third in March 2020 and one-third in March 2021. For the three months ended March 31, 2021 and 2020, $8 and $43 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. As of March 31, 2021, there was no remaining expense. 2020 CEO Incentive Award During the fourth quarter 2020, we awarded a long-term equity-based incentive of $750 to our Chief Executive Officer (the “2020 CEO Award”) depending on Lifeways 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 three months ended March 31, 2021 and 2020, $90 and $0 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. As of March 31, 2021, the total remaining unearned compensation was $610, of which $274 will be recognized in 2021, $221 in 2022, $98 in 2023, and $17 in 2024, respectively, subject to vesting. Retirement Benefits Lifeway has a defined contribution plan which is available to substantially all full-time employees. Under the terms of the plan, we match employee contributions under a prescribed formula. For the three months ended March 31, 2021 and 2020 total contribution expense recognized in the consolidated statements of operations was $113 and $118, respectively. 14 Note 12 – Segments, Products and Customers Lifeway’s primary product is drinkable kefir, a cultured dairy product. Lifeway Kefir is tart and tangy, high in protein, calcium and vitamin D. Thanks to our exclusive blend of kefir cultures, each cup of kefir contains 12 live and active cultures and 25 to 30 billion beneficial CFU (Colony Forming Units) at the time of manufacture. We manufacture (directly or through co-packers) and market products under the Lifeway and Fresh Made brand names, as well as under private labels on behalf of certain customers. Our product categories are: · Drinkable Kefir, sold in a variety of organic and non-organic sizes, flavors, and types, including low-fat, non-fat, whole milk, protein, and BioKefir (a 3.5 oz. kefir with additional probiotic cultures). · European-style soft cheeses, including farmer cheese, white cheese, and Sweet Kiss. · Cream and other, which consists primarily of cream, a byproduct of making our kefir. · ProBugs, a line of kefir products designed for children. · Other Dairy, which includes Cupped Kefir and Icelandic Skyr, a line of strained kefir and yogurt products in resealable cups. · Frozen Kefir, available in soft serve and pint-size containers. Lifeway has determined that it has one reportable segment based on how our chief operating decision maker manages the business and in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing our performance, has been identified collectively as the Chief Financial Officer, the Chief Operating Officer, the Chief Executive Officer, and Chairperson of the board of directors. Substantially all of our consolidated revenues relate to the sale of cultured dairy products that we produce using the same processes and materials and are sold to consumers through a common network of distributors and retailers in the United States. Net sales of products by category were as follows for the three months ended March 31: 2021 2020 $ % $ % Drinkable Kefir other than ProBugs $ 24,203 82% $ 19,857 78% Cheese 3,199 11% 3,260 13% Cream and other 863 3% 781 3% ProBugs Kefir 680 2% 860 3% Other dairy 384 1% 371 2% Frozen Kefir (a) 47 1% 259 1% Net Sales $ 29,376 100% $ 25,388 100% (a) Includes Lifeway Kefir Shop sales Significant Customers – Sales are predominately to companies in the retail food industry located within the United States. Two major customers accounted for approximately 22% and 21% of net sales for the three months ended March 31, 2021 and 2020, respectively. 15 Note 13 – Related Party Transactions Lifeway obtains consulting services from the 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 the Chairperson. Under the terms and conditions of the Agreement, the Chairperson will continue to provide consulting services with respect to, among other things, our business strategy, international expansion and product management and expansion. For the services, the Company will pay an annual service fee of $500. The Chairperson will also be eligible for an annual performance fee target of $500 based on the achievement of specified performance criteria. The Chairpersons 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. Service fees earned are included in general and administrative expenses in the accompanying consolidated statements of operations and were $125 and $250 during each of the three months ended March 31, 2021 and 2020, respectively. During the three months ended March 31, 2021, the Company recorded $94 related to estimated earnings under the fiscal year 2021 annual performance fee target. This amount is included in general and administrative expenses in the accompanying consolidated statements of operations. Lifeway is also a party to a royalty agreement with the Chairperson of its board of directors under which we pay the Chairperson a royalty based on the sale of certain Lifeway products, not to exceed $50 in any fiscal month. Royalties earned are included in selling expenses in the accompanying consolidated statements of operations and were $150 during each of the three months ended March 31, 2021 and 2020. Note 14 – COVID-19 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. To date we have seen increased customer and consumer demand for our products as consumers initially began pantry loading and have increased their at-home consumption as a result of social distancing and stay-at-home and work-from-home mandates and recommendations. However, this increased customer and consumer demand may decrease in the coming months if and when the need for social distancing and stay-at-home and work-from-home mandates and recommendations decrease, and we are unable to predict the nature and timing of when that impact may occur, if at all. Although to date we have not experienced supply chain constraints, and we have continued to be able to fully satisfy customer and consumer demand for our products, the continued unprecedented demand for food and other consumer packaged goods products as a result of the COVID-19 pandemic or any future pandemic may limit the availability of, or increase the cost of, ingredients, packaging and other raw materials necessary to produce our products, and our operations may be negatively impacted. Additionally, pandemics or disease outbreaks could result in a widespread health crisis that could adversely affect economies and financial markets, consumer spending and confidence levels resulting in an economic downturn that could affect customer and consumer demand for our products. Our efforts to manage and mitigate these factors may be unsuccessful, and the effectiveness of these efforts depends on factors beyond our control, including the duration and severity of any pandemic or disease outbreak, as well as third party actions taken to contain its spread and mitigate public health effects. The ultimate impact of the COVID-19 pandemic on our business will depend on many factors, including, among others, the duration of social distancing and stay-at-home and work-from-home mandates and recommendations and whether additional waves of COVID-19 or different variants of COVID-19 will affect the United States and other markets, our ability and the ability of our suppliers to continue to operate our and their manufacturing facilities and maintain the supply chain without material disruption and procure ingredients, packaging and other raw materials when needed despite unprecedented demand in the food industry, and the extent to which macroeconomic conditions resulting from the pandemic and the pace of the subsequent recovery may impact consumer eating and shopping habits. We cannot predict the duration or scope of the disruption. Therefore, the financial impact cannot be reasonably estimated at this time. 16 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, 2019 (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, 2020 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. We intend 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, we have no duty to update these statements, and we undertake 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 In December 2019, a novel coronavirus disease ("COVID-19") was first reported and subsequently characterized by the World Health Organization ("WHO") as a pandemic in March 2020. In an effort to reduce the global transmission of COVID-19, various policies and initiatives have been implemented by governments around the world, including orders to close businesses not deemed "essential", shelter-in-place orders enacted by state and local governments, and the practice of social distancing measures when engaging in essential activities. Lifeway has seen increased orders from retail customers in response to increased consumer demand for food at home in response to government mandated social distancing and shelter in place orders in the United States and the immune boosting quality of our products. 17 Local, state, and national governments continue to emphasize the importance of food supply during this pandemic and asked that food manufacturers and retailers remain open to meet the needs of our communities. The health and safety of our employees throughout this pandemic is paramount, and we have taken numerous steps to keep our employees safe including enhanced sanitation protocols, implementation of social distancing measures at our manufacturing operations, masks and personal protective equipment for employees across our facilities, preventative temperature screenings across all manufacturing locations, the rollout of new benefits that help support our employees and their families, and remote work arrangements for administrative support functions to comply with shelter-in-place orders. In addition, a cross-functional task force has been established to monitor and coordinate the Company's response to COVID-19. During the first quarter of 2020, Management, anticipating the spread of COVID-19 and its effects, implemented a plan to mitigate effects of COVID-19 on supply and transportation of materials used to make and package our products, staffing, and transportation of our products to customers. Management’s proactive planning allowed the Company to avoid disruption to its manufacturing facilities and production, transportation, and sales and to meet the increased demand without delay. The Company has full production capacity available at all locations at this time and does not anticipate manufacturing or staffing disruptions in the near term. Results of Operations Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020 March 31, Change 2021 2020 $ % Net sales $ 29,376 $ 25,388 $ 3,988 15.7 % Cost of goods sold $ 20,512 $ 18,624 $ (1,888 ) Depreciation expense 815 767 (48 ) Total cost of goods sold $ 21,327 $ 19,391 $ (1,936 ) (10.0 %) Gross profit $ 8,049 $ 5,997 $ 2,052 34.2 % Gross Profit % to net sales 27.4 % 23.6 % Selling expenses $ 3,222 $ 2,575 $ (647 ) (25.1 %) Selling expenses % to net sales 11.0 % 10.1 % General and administrative expenses $ 2,891 $ 3,145 $ 254 8.1 % General and administrative % to net sales 9.8 % 12.4 % Amortization expense $ – $ 39 $ 39 100.0 % Total operating expenses $ 6,113 $ 5,759 $ (354 ) (6.1 %) Total operating expense % to net sales 20.8 % 22.7 % Income from operations $ 1,936 $ 238 $ 1,698 713.4 % Income from operations % to net sales 6.6 % 0.9 % Total other income (expense) $ (37 ) $ (37 ) $ – 0.0 % Total other income (expense) % to net sales (0.1 %) (0.1 %) Income before provision for income taxes $ 1,899 $ 201 $ 1,698 844.8 % Income before provision for income taxes % to net sales 6.5 % 0.8 % Provision for income taxes $ 593 $ 55 $ (538 ) (978.2 %) Provision for income taxes % to net sales 2.0 % 0.2 % Net income $ 1,306 $ 146 $ 1,160 794.5 % Net income % to net sales 4.5 % 0.6 % 18 Net Sales Net sales finished at $29,376 for the three-month period ended March 31, 2021, an increase of $3,988 or 15.7% versus prior year. The net sales increase was primarily driven by higher volumes of our branded drinkable kefir. Approximately 30% of the increase results from the Farmers to Families Food Box program with the United States Department of Agriculture (“USDA”) which began during the middle of the first quarter of 2021. The program is scheduled to end in May 2021. Gross Profit Gross profit as a percentage of net sales was 27.4% during the three-month period ended March 31, 2021. Gross profit percentage was 23.6% in the prior year. The increase versus the prior year was primarily due to the favorable impact of operating leverage that arises from higher net sales relative to fixed costs, and to a lesser extent favorable milk pricing. Additionally, depreciation expense increased reflecting our continued investment in manufacturing improvements. Selling Expenses Selling expenses increased by $647 or 25.1% to $3,222 during the three-month period ended March 31, 2021 from $2,575 during the same period in 2020. The increase versus prior year primarily reflects an increase in advertising expense related to a television and digital advertising campaigns in the first quarter of 2021, partially offset by lower compensation expense. Selling expenses as a percentage of net sales were 11.0% during the three-month period ended March 31, 2021 compared to 10.1% for the same period in 2020. General and Administrative Expenses General and administrative expenses decreased 254 or 8.1% to $2,891 during the three-month period ended March 31, 2021 from $3,145 during the same period in 2020. The decrease is primarily a result of lower compensation expense due to organizational changes made in 2020 and lower professional fees. Provision for Income Taxes The provision for income taxes includes federal, state and local income taxes. The provision for income taxes was $593 and $55 during the three months ended March 31, 2021 and 2020, respectively. Our effective income tax rate for the three months ended March 31, 2021 was 31.2% compared to 27.5% in the same period last year. During the first quarter of 2020, the company’s effective tax rate was reduced due to provisions of the CARES Act. That law provided for the carryback of certain net operating losses to years in which the tax rates were significantly higher. The tax benefit was recorded as a discrete item in the first quarter of 2020. The statutory Federal and state tax rates remained consistent from 2020 to 2021. The Company has a number of items that are nondeductible or are discrete adjustments to tax expense. Although similar items were reflected in 2021, the percentage effect is lower due to the increase in pre-tax income in 2021 compared to 2020. Our 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 underlying income tax rates applicable to various state and local taxing jurisdictions, enacted tax legislation, the impact of non-deductible items, changes in valuation allowances, and the expiration of the statute of limitations in relation to unrecognized tax benefits. We record discrete income tax items such as enacted tax rate changes and completed tax audits in the period in which they occur. 19 Section 162(m) of the Internal Revenue Code (the “Code”) limits the deductibility of compensation paid to certain of our executives. Under the Tax Cuts and Jobs Act (the “Act”) amendments to Section 162(m), no tax deduction in taxable years beginning after December 31, 2017 is allowed for compensation paid to any covered employee to the extent that the total compensation for that covered employee exceeds $1,000,000 in any taxable year. Although the Act eliminated the prior tax deduction under Section 162(m) for performance-based executive compensation, it included a transition rule under which the changes to Section 162(m) will not apply to awards made to our covered employees who had the right to participate in our 2015 Omnibus Incentive Plan pursuant to written binding contracts in effect as of November 2, 2017, as long as those contracts have not subsequently been modified in any material respect. Accordingly, subject to further guidance from the Treasury Department and the Internal Revenue Service (“IRS”), the performance-based compensation paid to our executives under our Omnibus Plan remained eligible for the Section 162(m) exemption through 2019. Beginning in 2020, compensation exceeding the threshold for covered employees is non-deductible for income tax purposes. Income taxes are discussed in Note 10 in the Notes to the Consolidated Financial Statements. Net Income We reported net income of $1,306 or $ 0.08 per basic and diluted common share for the three months ended March 31, 2021 compared to net income of $146 or $0.01 per basic and diluted common share in the same period in 2020. Liquidity and Capital Resources 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. To date we have seen increased customer and consumer demand for our products as consumers initially began pantry loading and have increased their at-home consumption as a result of social distancing and stay-at-home and work-from-home mandates and recommendations. However, this increased customer and consumer demand may decrease in the coming months if and when the need for social distancing and stay-at-home and work-from-home mandates and recommendations decrease, and we are unable to predict the nature and timing of when that impact may occur, if at all. Although to date we have not experienced supply chain constraints, and we have continued to be able to fully satisfy customer and consumer demand for our products, the continued unprecedented demand for food and other consumer packaged goods products as a result of the COVID-19 pandemic or any future pandemic may limit the availability of, or increase the cost of, ingredients, packaging and other raw materials necessary to produce our products, and our operations may be negatively impacted. Additionally, pandemics or disease outbreaks could result in a widespread health crisis that could adversely affect economies and financial markets, consumer spending and confidence levels resulting in an economic downturn that could affect customer and consumer demand for our products. Our efforts to manage and mitigate these factors may be unsuccessful, and the effectiveness of these efforts depends on factors beyond our control, including the duration and severity of any pandemic or disease outbreak, as well as third party actions taken to contain its spread and mitigate public health effects. The ultimate impact of the COVID-19 pandemic on our business will depend on many factors, including, among others, the duration of social distancing and stay-at-home and work-from-home mandates and recommendations and whether additional waves of COVID-19 or different variants of COVID-19 will affect the United States and other markets, our ability and the ability of our suppliers to continue to operate our and their manufacturing facilities and maintain the supply chain without material disruption and procure ingredients, packaging and other raw materials when needed despite unprecedented demand in the food industry, and the extent to which macroeconomic conditions resulting from the pandemic and the pace of the subsequent recovery may impact consumer eating and shopping habits. We cannot predict the duration or scope of the disruption. Therefore, the financial impact cannot be reasonably estimated at this time. 20 To date, our manufacturing facilities have not been significantly impacted. We have full production capacity available at all locations at this time. On March 16, 2020, the food industry, including grocery stores and their suppliers, and transportation were classified by the U.S. federal government as critical infrastructure industry. As a result, our employees and facilities, as well as the retailers and distributors that sell our products, will be able to remain in operation. During the first quarter of 2020, Management, anticipating the spread of Covid-19 and its effects, implemented a plan to mitigate effects of Covid-19 on supply and transportation of materials used to make and package our products, staffing, and transportation of our products to customers. While the situation is fluid, we have evaluated all manufacturing locations and do not anticipate any staffing shortages or interruption of our production, transportation and sale of products in the near term. Cash Flow At this time, the COVID-19 pandemic has not materially impacted on our operations. We expect to meet our foreseeable liquidity and capital resource requirements through anticipated cash flows from operations; our revolving credit facility; and cash and cash equivalents to ensure the continuation of the Company as a going concern. 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. 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. Sources and Uses of Cash Lifeway had a net increase in cash and cash equivalents of $692 during the three-month period ended March 31, 2021 compared to a net decrease in cash and cash equivalents of $1,858 in the same period in 2020. The drivers of the year over year change are as follows: Net cash provided in operating activities was $1,210 during the three-month period ended March 31, 2021 compared to net cash used by operating activities of $1,055 in the same period in 2020. The increase in cash provided by operating activities is primarily due to the increase in cash generated through higher revenues and reduced expenses in 2021, and the change in working capital. Working capital consumption was higher in 2020 due to increased revenue in March 2020 as consumers anticipated the shelter in place directives that ultimately occurred as a result of the COVID-19 pandemic. Net cash used in investing activities was $518 during the three-month period ended March 31, 2021 compared to net cash used in investing activities of $398 in the same period in 2020. The increase in net cash used in investing activities in 2021 reflects higher capital spending. Capital spending was $518 during the three-month period ended March 31, 2021 compared to $403 in 2020. 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. Net cash used in financing activities was $0 during the three-month period ended March 31, 2021 compared to net cash used in financing activities of $405 in the same period in 2020. On November 1, 2017, Lifeway’s Board approved an increase in the aggregate amount under our previously announced 2015 stock repurchase program (the “2017 Repurchase Plan Amendment”), by adding to (i.e., exclusive of the shares previously authorized under the 2015 stock repurchase program) the authorization the lesser of $5,185 or 625 shares. We repurchased approximately 178 shares of common stock at a cost of $405 during the three-month period ended March 31, 2020 under the 2017 Repurchase Plan Amendment. As of March 31, 2021, there were no shares of common stock that remained available to be purchased under the 2017 Repurchase Plan Amendment. We intend to hold repurchased shares in treasury for general corporate purposes, including issuances under our 2015 Omnibus Incentive Plan. Treasury shares are accounted for using the cost method. Debt Obligations On September 30, 2020, Lifeway entered into the Third Modification to the Amended and Restated Loan and Security Agreement, as amended, (the “Third Modification”) with its existing lender. The Third Modification amends the Amended and Restated Loan and Security Agreement, as amended, by removing the monthly borrowing base reporting requirement effective September 30, 2020, including a covenant to maintain a quarterly minimum working capital financial covenant, as defined, of no less than $11.25 million each of the fiscal quarters commencing the fiscal quarter ended December 31, 2020 through the expiration date, and eliminating the tier interest pricing structure. 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 June 30, 2025, unless earlier terminated. 21 Except as described above, amended, the Modified Revolving Credit Facility remains substantively unchanged and in full force and effect, including customary representations, warranties, and covenants on the part of Lifeway, including financial covenants requiring us to maintain a fixed charge coverage ratio of no less than 1.25 to 1.00 each of the fiscal quarters ending through the expiration date. The Modified Revolving Credit Facility 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 Revolving Credit Facility may be accelerated. As of March 31, 2021, we had $2,774 net of $3 of unamortized deferred financing costs, outstanding under the Revolving Credit Facility. We had $2,223 available for future borrowings as of March 31, 2021. As amended, all outstanding amounts under the Loans bear interest, at Lifeway’s election, at either the lender Base Rate (the Prime Rate minus 1.00%) or the LIBOR plus 1.95%, payable monthly in arrears. Lifeway is also required to pay a quarterly unused line fee of 0.20% and, in conjunction with the issuance of any letters of credit, a letter of credit fee of 0.20%. Lifeway’s interest rate on debt outstanding under our Revolving Credit Facility as of March 31, 2021 was 2.15%. We are in compliance with all applicable financial debt covenants as of March 31, 2021. See Note 7 to our Consolidated Financial Statements for additional information regarding our indebtedness and related agreements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable.