What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-05-15 compared with 2022-11-14 · 143 added, 186 removed, 97 unchanged (77% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS.

Management’s Discussion

29 unchanged sentences

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 actions and decisions of our competitors and customers, including those related to price competition;

Our ability to successfully implement our business strategy;

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;

Disruptions to our supply chain, or our manufacturing and distribution capabilities, including those due

to cybersecurity threats;

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, 2021 and that are described from time to time in our filings with the SEC.

Part I, Item 1A “Risk

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, 2022 and that are described from time to time in our filings with the

These factors are not necessarily all of the important

7 unchanged sentences

update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Business Overview

Lifeway was founded in 1986 by Michael Smolyansky

shortly after he and his wife, Ludmila Smolyansky, emigrated from Eastern Europe to the United States.

Lifeway was the first to successfully

introduce kefir to the U.S.

consumer on a commercial scale, initially catering to ethnic consumers in the Chicago, Illinois metropolitan

In the years that have followed, Lifeway has grown to become the largest producer and marketer of kefir in the U.S.

and an important

player in the broader market spaces of probiotic-based products and natural, “better for you” foods.

The Company’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.

The Company manufactures (directly or through a co-manufacturer)

and markets products under the Lifeway, Fresh Made, and GlenOaks Farms brand names, as well as under private labels on behalf of certain

The Company’s product categories are:

Drinkable Kefir, a cultured dairy product sold in a variety of organic and non-organic sizes, flavors, and types.

European-style soft cheeses, including farmer cheese, white cheese, and Sweet Kiss.

Cream and other, which primarily consists of cream, a byproduct of raw milk processing.

Drinkable Yogurt, sold in a variety of sizes and flavors.

ProBugs, a line of kefir products designed for children.

Other Dairy, which primarily consists of Fresh Made butter and sour cream.

Recent Developments

COVID-19 Pandemic Impact

We have seen increased customer and consumer demand

for our products during the pandemic as consumers increased their food purchases for in-home consumption.

We have not experienced significant

supply chain disruptions or labor supply shortages and have continued to satisfy customer and consumer demand for our products.

continues to proactively manage the supply and transportation of materials used to make and package our products, staffing, and transportation

of our products to customers.

This proactive planning has allowed the Company to avoid disruption to its manufacturing facilities and

production, transportation, and sales and to meet the increased demand.

The Company has maintained full production capacity available

at all locations and does not anticipate manufacturing or staffing disruptions in the near term.

COVID-19 pandemic, or any future pandemic, may limit the availability of, or increase the cost of, employees, ingredients, packaging and

other inputs necessary to produce our products, and our operations may be negatively impacted.

In 2022, our costs increased primarily

due to inflationary price increases of milk, other ingredients, packaging materials, and transportation to our customers.

However, because

of market conditions or for competitive reasons, our pricing actions may sometimes lag input cost changes, or we may not be able to pass

along the full effect of increases in raw materials and other input costs as we incur them.

During 2022, social distancing, shelter-in-place

and work-from-home mandates and recommendations have continued to be reduced or eliminated.

The increased customer demand for our products

as consumers increased their at-home consumption and e-commerce purchasing during the COVID-19 pandemic may change or decrease due to

the decrease in social distancing and stay-at-home and work-from-home mandates and recommendations.

We are unable to predict the nature

and timing of when such change may occur, if at all.

Current Macroeconomic Environment and Inflation Impact

we have been experiencing inflationary and cost pressures due to volatility and disruption in the global economy which have increased

our production and distribution costs.

Specifically, the cost of milk, other ingredients, packaging materials, and transportation to our

customers has increased, and continue to unfavorably affect our profitability and operating cash flows.

We expect inflationary pressures

to persist throughout 2023, although at lower levels than experienced in 2022.

In response to these persistent inflationary and cost pressures,

we instituted price increases in 2022 on many of our products.

We expect that these inflation-justified price increases will continue

to help mitigate our increased costs.

We have not experienced significant supply chain

disruptions or labor supply shortages and have continued to satisfy customer and consumer demand for our products.

Management continues

to proactively manage the supply and transportation of materials used to make and package our products, staffing, and transportation of

our products to customers.

This proactive planning has allowed the Company to avoid disruption to its manufacturing facilities and production,

transportation, and sales and to meet the increased demand.

The Company has maintained full production at all locations and does not anticipate

manufacturing or staffing disruptions in the near term.

Results of Operations

Three Months Ended September 30, 2022 Compared to Three Months

Ended September 30, 2021

The following table presents certain information

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

Three Months Ended September 30,

Three Months Ended March 31, 2023 Compared to Three Months Ended

March 31, 2022

The following table presents certain information concerning

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

Three Months Ended March 31,

Cost of goods sold

2 unchanged sentences

Selling expenses

General & administrative expenses

General & administrative expense

Amortization expense

Total operating expenses

Income from operations

Income (loss) from operations

Other (expense) income:

Interest expense

Loss on sales or property and equipment

Other (expense) income, net

Total other (expense) income

Income before provision for income taxes

Provision for income taxes

Income (loss) before provision for income taxes

Provision (benefit) for income taxes

Net income (loss)

Net sales finished at $37,904 for the three-month

period ended September 30, 2022, an increase of $8,587 or 29.1% versus prior year.

The net sales increase was primarily driven by higher

volumes of our branded drinkable kefir and the impact of price increases implemented during the first quarter of 2022, and to a lesser

extent the favorable impact of our acquisition of GlenOaks Farms during the third quarter of 2021.

period ended March 31, 2023, an increase of $3,805 or 11.2% versus prior year.

The net sales increase was primarily driven by higher volumes

of our branded drinkable kefir and the impact of price increases implemented during the fourth quarter of 2022.

Net sales by product category were as follows for

the three months ended March 31:

Drinkable Kefir excluding ProBugs

Cream and other

Drinkable yogurt

ProBugs Kefir

Gross profit as a percentage of net sales was

19.9% during the three-month period ended September 30, 2022.

21.7% during the three-month period ended March 31, 2023.

Gross profit percentage was 16.4% 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 freight and

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

We expect to see continued pressure in milk pricing and other

input costs during the fourth quarter of 2022.

The increase versus the

prior year was primarily due to the impact of price increases implemented during the fourth quarter of 2022 and higher volumes of our

branded products, and to a lesser extent the favorable impact of milk pricing and favorable transportation costs.

Selling Expenses

Selling expenses increased by $317 to $3,519 during

the three-month period ended September 30, 2022 from $2,722 during the same period in 2021.

the three-month period ended March 31, 2023 from $3,202 during the same period in 2022.

The increase is primarily due to increased investment

in advertising and marketing programs, and increased compensation expense, partially offset by the reduction in royalty expense resulting

from the termination of the endorsement agreement in September 2022.

General and Administrative Expenses

General and administrative expenses increased

$221 to $3,415 during the three-month period ended September 30, 2022 from $3,194 during the same period in 2021.

The increase is primarily

a result of increased legal and professional fees, which includes expense related to the fiscal year 2020 Form 10-K restatement, and incentive

compensation, partially offset by lower consulting expense to our former Chairperson of the Board of Directors.

Provision for Income Taxes

The provision for income taxes was $130 and $527

during the three months ended September 30, 2022 and 2021, respectively.

General and administrative expenses decreased

$157 to $3,135 during the three-month period ended March 31, 2023 from $3,292 during the same period in 2022.

Provision (Benefit) for Income Taxes

The provision (benefit) for income taxes was $508

and $(197) during the three months ended March 31, 2023 and 2022, respectively.

The effective income tax rate for the three months

ended September 30, 2022 was 11.7% compared to 52.3% in the same period last year.

The statutory Federal and state tax rates remained

consistent from 2021 to 2022.

The Company has items that are nondeductible or are discrete adjustments to tax expense.

The Company consistently

reflects non-deductible officer compensation expense, non-deductible compensation expense related to equity incentive awards and separate

state tax rates from period to period.

Although similar items were reflected in 2022, the percentage effect is different due to the difference

in pre-tax (loss) income in 2022 compared to 2021.

The Company’s 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 jurisdictional

mix of earnings, enacted tax legislation, state income taxes, the impact of non-deductible items, changes in valuation allowances, settlement

of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits.

The Company records discrete

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

Income taxes are discussed in Note 10 in the Notes

to the Consolidated Financial Statements.

Nine months Ended September 30, 2022 Compared to Nine months

Ended September 30, 2021

The following table presents certain information

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

Nine months Ended September 30,

Cost of goods sold

Depreciation expense

Total cost of goods sold

Selling expenses

General & administrative expenses

Amortization expense

Total operating expenses

Income from operations

Other (expense) income:

Interest expense

Gain on investment

Loss on sales or property and equipment

Other (expense) income, net

Total other (expense) income

Income before (benefit) provision for income taxes

(Benefit) provision for income taxes

Net sales finished at $105,730 for the nine-month

period ended September 30, 2022, an increase of $17,639 or 20.0% versus prior year.

The net sales increase was primarily driven by higher

volumes of our branded drinkable kefir and the impact of price increases implemented during the quarter, and to a lesser extent the favorable

impact of our acquisition of GlenOaks Farms during the third quarter of 2021.

Gross profit as a percentage of net sales was

17.8% during the nine-month period ended September 30, 2022.

Gross profit percentage was 25.8% 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 freight and

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

We expect to see continued pressure in milk pricing and other

input costs during the fiscal year 2022.

Selling Expenses

Selling expenses increased $17 to $8,527 during

the nine-month period ended September 30, 2022 from $8,510 during the same period in 2021.

General and Administrative Expenses

General and administrative expenses increased

$844 to $9,546 during the nine-month period ended September 30, 2022 from $8,702 during the same period in 2021.

The increase is primarily

a result of increased legal and professional fees, which includes expense related to the fiscal year 2020 Form 10-K restatement, and incentive

compensation, partially offset by lower consulting expense to our former Chairperson of the Board of Directors.

Provision for Income Taxes

The provision for income taxes was $(2) and $1,851

during the nine months ended September 30, 2022 and 2021, respectively.

The effective income tax rate for the nine months

ended September 30, 2022 was (0.8)% compared to 35.2% in the same period last year.

The statutory Federal and state tax rates remained

consistent from 2021 to 2022.

ended March 31, 2023 was 37.9% compared to 18.1% in the same period last year.

The statutory Federal and state tax rates remained consistent

from 2022 to 2023.

The Company has items that are nondeductible or are discrete adjustments to tax expense.

The Company consistently

reflects non-deductible officer compensation expense, non-deductible compensation expense related to equity incentive awards and separate

state tax rates from period to period.

The Company consistently reflects

non-deductible officer compensation expense, non-deductible compensation expense related to equity incentive awards and separate state

tax rates from period to period.

Although similar items were reflected in 2023, the percentage effect is different due to the difference

9 unchanged sentences

Liquidity and Capital Resources

assesses the Company's liquidity in terms of its ability to generate cash to fund its operating, investing, and financing activities.

The Company remains in a strong financial position, and while it has been impacted by the macroeconomic challenges with commodity inflation

and other input cost increases, the Company believes that its cash flow from operations, revolving credit and term loan facility, and

cash and cash equivalents will continue to provide sufficient liquidity for its working capital needs, capital resource requirements,

and growth initiatives and to ensure the continuation of the Company as a going concern.

If additional

borrowings are needed, $2,223 was available under the Revolving Credit Facility as of September 30, 2022 (see Note 7, Debt).

compliance with the terms of the Credit Agreement and expect to meet foreseeable financial requirements.

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.

To date, we have been successful in generating cash and obtaining financing as needed.

However, in connection with the COVID-19 pandemic

or other circumstances, if a serious economic or credit market crisis ensues, it could have a negative effect on our liquidity, results

of operations and financial condition.

most significant ongoing short-term cash requirements relate primarily to funding operations (including expenditures for raw materials,

labor, manufacturing and distribution, trade and promotions, advertising and marketing, and income tax liabilities) as well as expenditures

for property, plant and equipment.

Management assesses

the Company's liquidity in terms of its ability to generate cash to fund its operating, investing, and financing activities.

remains in a strong financial position, and while it has been impacted by the macroeconomic challenges with commodity inflation and other

input cost increases, the Company believes that its cash flow from operations, revolving credit and term loan facility, and cash and cash

equivalents will continue to provide sufficient liquidity for its working capital needs, capital resource requirements, and growth initiatives

and to ensure the continuation of the Company as a going concern.

If additional borrowings

are needed, $2,223 was available under the Revolving Credit Facility as of March 31, 2023 (see Note 7, Debt).

We are in compliance with

the terms of the Credit Agreement and expect to meet foreseeable financial requirements.

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.

To date, we have

been successful in generating cash and obtaining financing as needed.

However, in connection with the COVID-19 pandemic or other circumstances,

if a serious economic or credit market crisis ensues, it could have a negative effect on our liquidity, results of operations and financial

The Company’s most significant

ongoing short-term cash requirements relate primarily to funding operations (including expenditures for raw materials, labor, manufacturing

and distribution, trade and promotions, advertising and marketing, and income tax liabilities) as well as expenditures for property, plant

and equipment.

Long-term cash

1 unchanged sentence

in our Annual Report on Form 10-K).

Given the dynamic

nature of COVID-19, we will continue to assess our liquidity needs while continuing to manage our discretionary spending and investment

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.

The following table is derived from our Consolidated

Statement of Cash Flows:

Nine months Ended

September 30,

Net cash provided by operating activities

Net cash used in investing activities

Net cash (used in) provided by financing activities

Three months Ended

Net Cash Flows Provided By (Used In):

Operating activities

Investing activities

Financing activities

Operating Activities

Net cash provided by operating activities was

$3,639 during the nine-month period ended September 30, 2022 compared to $5,855 in the same period in 2021.

The decrease was primarily

due to lower cash earnings, which reflect the impact of input and freight cost inflation in 2022, and the change in working capital.

$3,027 during the three-month period ended March 31, 2023 compared to net cashed used of $648 in the same period in 2022.

was primarily due to higher cash earnings which reflect the impact of price increases implemented during the fourth quarter of 2022 and

the change in working capital.

Investing Activities

Net cash used in investing activities was $1,762

during the nine-month period ended September 30, 2022 compared to $6,905 in the same period in 2021.

The decrease in cash used reflects

the August 2021 acquisition of GlenOaks Farms, Inc., partially offset by increased capital spending.

Our capital spending is focused in

three core areas:

growth, cost reduction, and facility improvements.

during the three-month period ended March 31, 2023 compared to $348 in the same period in 2022.

The increase in cash used reflects our

planned capital spending increase during 2023 compared to 2022.

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.

Cost reduction and facility improvements

support manufacturing efficiency, safety, and productivity.

Financing Activities

Net cash used in financing activities was $750

during the nine-month period ended September 30, 2022 compared to net cash provided by financing activities of $3,142 in the same period

The decrease in cash used relates to the term loan entered into during August 2021 in connection with the acquisition of GlenOaks

Farms, Inc., partially offset by the quarterly principal payments under the term loan.

Net cash used in financing activities was $500 during

the three-month period ended March 31, 2023 compared to net cash used in financing activities of $250 in the same period in 2022.

increase in cash used is due to the timing of the fourth quarter 2022 quarterly principal payment under the term loan.

Debt Obligations

As of September 30, 2022, the Company had $2,777

outstanding and $2,223 available for future borrowings under the revolving line of credit.

Under the credit agreement, the Revolving Credit

facility matures on June 30, 2025.

The were no letters of credit issued or outstanding as of September 30, 2022.

The Company had $3,725 outstanding under the note

payable, net of $25 of unamortized deferred financing fees, as of September 30, 2022.

As of March 31, 2023, the Company had $2,777 outstanding

and $2,223 available for future borrowings under the revolving line of credit.

Under the Credit Agreement, the Revolving Credit facility

matures on June 30, 2025.

The were no letters of credit issued or outstanding as of March 31, 2023.

The Company had $3,228 outstanding

under the note payable, net of $22 of unamortized deferred financing fees, as of March 31, 2023.

The Company’s interest rate on debt outstanding

under the revolving line of credit and note payable as of September 30, 2022 was 4.61% and 4.94%, respectively.

The Company is in compliance with all applicable

financial debt covenants as of September 30, 2022.

See Note 7 to our Consolidated Financial Statements for additional information regarding

our indebtedness and related agreements.

under the revolving line of credit and note payable as of March 31, 2023 was 6.66% and 4.94%, respectively.

The Company is in compliance with all applicable financial

debt covenants as of March 31, 2023.

See Note 7 to our Consolidated Financial Statements for additional information regarding our indebtedness

and related agreements.

Recent Accounting Pronouncements

5 unchanged sentences

There were no material changes

to the Company’s critical accounting policies and estimates in the nine months ended September 30, 2022, except for the change in

estimated useful life of one brand name intangible asset which is disclosed in Note 5 – Goodwill and Intangible assets.

to the Company’s critical accounting policies and estimates in the three months ended March 31, 2023.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis