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Item 2. Management’s Discussion and Analysis

2021-11-15 compared with 2021-08-16 · 191 added, 210 removed, 154 unchanged (72% of the section changed)

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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

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, 2020 (the “Form 10-K”).

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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.

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

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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,

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;

Such other factors as discussed throughout Part I, Item 1 “Business”;

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

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;

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.

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

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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.

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.

Local, state, and national governments continue

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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.

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

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Results of Operations

Three Months Ended June 30, 2021 Compared to Three Months Ended

June 30, 2020

Three Months Ended September 30, 2021 Compared to Three Months

Ended September 30, 2020

The following table presents certain information concerning our financial

results, including information presented as a percentage of consolidated net sales:

Three Months Ended June 30,

Three Months Ended September 30,

Cost of goods sold

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Net sales finished at $29,553 for the three-month

period ended June 30, 2021, an increase of $4,148 or 16.6% versus prior year.

The net sales increase was primarily driven by higher volumes

of our branded drinkable kefir.

Approximately 50% 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 and ended during May

period ended September 30, 2021, an increase of $3,514 or 13.5% versus prior year.

The net sales increase was primarily driven by higher

volumes of our branded drinkable kefir, and to a lesser extent the favorable impact of our acquisition of Glen Oaks Farms during the third

quarter of 2021.

Gross profit as a percentage of net sales was

26.3% during the three-month period ended June 30, 2021.

23.7% during the three-month period ended September 30, 2021.

Gross profit percentage was 29.1% in the prior year.

The decrease versus the

prior year was primarily due to the unfavorable impact of milk pricing, and to a lesser extent the increased pricing of other inputs,

partially offset by the decrease in depreciation expense.

The decrease versus

the prior year was primarily due to the unfavorable impact of milk pricing, and to a lesser extent the increased pricing of freight and

other inputs, partially offset by the decrease in depreciation expense.

Selling Expenses

Selling expenses decreased by $154 to $2,566 during

the three-month period ended June 30, 2021 from $2,720 during the same period in 2020.

The decrease versus prior year was primarily due

to favorable compensation expense.

Selling expenses increased by $606 to $2,722 during

the three-month period ended September 30, 2021 from $2,116 during the same period in 2020.

The increase from prior year is due to increased

investment in advertising and marketing programs.

General and Administrative Expenses

General and administrative expenses decreased

$114 to $2,617 during the three-month period ended June 30, 2021 from $2,731 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.

General and administrative expenses increased

$389 to $3,194 during the three-month period ended September 30, 2021 from $2,805 during the same period in 2020.

The increase is primarily

a result of incentive compensation expense.

Provision for Income Taxes

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state and local income taxes.

The provision for income taxes was $731 and $404 during the three months ended June 30, 2021 and 2020, respectively.

The provision for income taxes was $527 and $764 during the three months ended September 30, 2021 and 2020,

respectively.

Our effective income tax rate for the three months

ended June 30, 2021 was 31.1% compared to 29.8% 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.

ended September 30, 2021 was 52.3% compared to 29.5% in the same period last year.

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 during

Although similar items were reflected in 2021, the percentage increased due to nondeductible compensation expense under Section

Section 162(m) of the Internal Revenue Code (the

“Code”) limits the deductibility of compensation paid to certain of our executives.

Under 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.

Our effective tax rate may change from period

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income tax items such as enacted tax rate changes and completed tax audits in the period in which they occur.

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.

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.

Six Months Ended June 30, 2021 Compared to Six Months Ended June

Income taxes are discussed in Note 10 in the

Notes to the Consolidated Financial Statements.

Nine Months Ended September 30, 2021 Compared to Nine Months

Ended September 30, 2020

The following table presents certain information concerning our financial

results, including information presented as a percentage of consolidated net sales:

Six Months Ended June 30,

Nine Months Ended September 30,

Cost of goods sold

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Provision for income taxes

Net sales finished at $58,538 for the six-month

period ended June 30, 2021, an increase of $8,136 or 16.1% versus prior year.

The net sales increase was primarily driven by higher volumes

of our branded drinkable kefir.

Approximately 42% 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 and ended during May

Gross profit as a percentage of net sales increased

to 26.9% during the six-month period ended June 30, 2021 from 25.6% during the same period in 2020.

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.

Net sales finished at $88,091 for the nine-month

period ended September 30, 2021, an increase of $11,649 or 15.2% versus prior year.

The net sales increase was primarily driven by higher

volumes of our branded drinkable kefir.

Approximately 29% of the net sales 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 and ended

during May 2021.

Approximately 7% of the net sales increase results from our acquisition of Glen Oaks Farms during the third quarter of

Gross profit as a percentage of net sales decreased

to 25.8% during the nine-month period ended September 30, 2021 from 26.8% during the same period in 2020.

The decrease versus the prior

year was primarily due to the unfavorable impact of milk pricing, and to a lesser extent the increased pricing of freight and other inputs,

partially offset by the decrease in depreciation expense.

Selling Expenses

Selling expenses increased by $493 to $5,788 during

the six-month period ended June 30, 2021 from $5,295 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 increased by $1,099 to $8,510

during the nine-month period ended September 30, 2021 from $7,411,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 and

increased in person selling and marketing events, partially offset by lower compensation expense.

General and Administrative Expenses

General and administrative expenses decreased $368 to $5,508 during

the six-month period ended June 30, 2021 from $5,876 during the same period in 2020.

The decrease is primarily a result of lower compensation

expense, lower professional fees, and reduced office lease expense

General and administrative expenses increased

$21 to $8,702 during the nine-month period ended September 30, 2021 from $8,681 during the same period in 2020.

The increase is primarily

a result of incentive compensation expense, partially offset by lower office lease and professional fee expense.

Provision for Income Taxes

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state and local income taxes.

The provision for income taxes was $1,324 and $459 during the six months ended June 30, 2021 and 2020, respectively.

Our effective income tax rate for the six months

ended June 30, 2021 was 31.2% compared to 29.0% in the same period last year.

During the first quarter of 2020, the company’s effective

tax rate was reduced due to the provisions of the Cares Act.

The law provided for the carry back of certain net operating losses to years

in which the tax rates were significantly higher.

The provision for income taxes was $1,851 and $1,223 during the nine months ended September 30, 2021 and

2020, respectively.

Our effective income tax rate for the nine months

ended September 30, 2021 was 35.2% compared to 29.5% in the same period last year.

During the first quarter of 2020, the company’s

effective tax rate was reduced due to the provisions of the Cares Act.

The law provided for the carry back 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 taxes 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.

The statutory Federal and state taxes 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 increased due to nondeductible

compensation expense under Section 162(m).