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Item 2. Management’s Discussion and Analysis

2023-08-14 compared with 2023-05-15 · 147 added, 89 removed, 151 unchanged (61% 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

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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;

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

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

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

These factors are not necessarily all of the important

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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.

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

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 customers.

The Company’s product categories are:

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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.

Since 2022, 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.

We have begun to see some moderation of inflationary pressures and have experienced pricing declines in certain of our input costs, such

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

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Results of Operations

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,

Three Months Ended June 30, 2023 Compared to Three Months Ended

June 30, 2022

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,

Cost of goods sold

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Total operating expenses

Income from operations

Other (expense) income:

Interest expense

Gain on sales of property and equipment

Other (expense) income, net

Total other (expense) income

Income before provision for income taxes

Provision for income taxes

Net sales finished at $39,230 for the three-month

period ended June 30, 2023, an increase of $5,739 or 17.1% versus prior year.

The net sales increase was primarily driven by higher volumes

of our branded drinkable kefir, and to a lesser extent 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 June 30:

Drinkable Kefir excluding ProBugs

Drinkable yogurt

Cream and other

ProBugs Kefir

Gross profit as a percentage of net sales was

28.7% during the three-month period ended June 30, 2023.

Gross profit percentage was 17.0% in the prior year.

The increase versus the

prior year was primarily due to the higher volumes of our branded products and the favorable impact of milk pricing, and to a lesser extent

the price increases implemented during the fourth quarter of 2022 and decreased transportation costs.

Selling Expenses

Selling expenses increased by $89 to $2,571 during

the three-month period ended June 30, 2023 from $2,482 during the same period in 2022.

General and Administrative Expenses

General and administrative expenses increased $969

to $3,808 during the three-month period ended June 30, 2023 from $2,839 during the same period in 2022.

The increase is primarily driven

by incentive compensation and to a lesser extent expenses related to non-routine stockholder action.

Provision for Income Taxes

The provision for income taxes was $1,529 and $65

during the three months ended June 30, 2023 and 2022, respectively.

The effective income tax rate for the three months

ended June 30, 2023 was 32.6% compared to 35.3% 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.

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

in pre-tax income in 2023 compared to 2022.

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.

Six Months Ended June 30, 2023 Compared to Six Months Ended June

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,

Cost of goods sold

Depreciation expense

Total cost of goods sold

Selling expenses

General & administrative expense

Amortization expense

Total operating expenses

Income (loss) from operations

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Interest expense

Gain on sales of property and equipment

Other (expense) income, net

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Net income (loss)

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

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:

Net sales finished at $77,134 for the six-month period

ended June 30, 2023, an increase of $9,544 or 14.1% versus prior year.

The net sales increase was primarily driven by higher volumes of

our branded drinkable kefir, and to a lesser extent the impact of price increases implemented during the fourth quarter of 2022.

Net sales by product category were as follows

for the six months ended June 30:

Drinkable Kefir excluding ProBugs

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Gross profit as a percentage of net sales was

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

25.3% during the six-month period ended June 30, 2023.

Gross profit percentage was 16.7% in the prior year.

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.

The increase versus the prior

year was primarily due to the higher volumes of our branded products and the favorable impact of milk pricing, and to a lesser extent

the price increases implemented during the fourth quarter of 2022 and decreased transportation costs.

Selling Expenses

Selling expenses increased by $406 to $6,090 during

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.

the six-month period ended June 30, 2023 from $5,684 during the same period in 2022.

The increase is primarily due to increased compensation

expense, partially offset by the reduction in royalty expense resulting from the termination of the endorsement agreement in September

General and Administrative Expenses

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.

General and administrative expenses increased $812

to $6,943 during the six-month period ended June 30, 2023 from $6,131 during the same period in 2022.

The increase is primarily driven

by incentive compensation and to a lesser extent expenses related to non-routine stockholder action.

Provision (Benefit) for Income Taxes

The provision (benefit) for income taxes was $2,037

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

The effective income tax rate for the three months

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

and $(132) during the six months ended June 30, 2023 and 2022, respectively.

The effective income tax rate for the six months ended

June 30, 2023 was 33.8% compared to 14.5% in the same period last year.

The statutory Federal and state tax rates remained consistent

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Liquidity and Capital Resources

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

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 June 30, 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.

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.

The Company’s most significant

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Statement of Cash Flows:

Three months Ended

Six months Ended

Net Cash Flows Provided By (Used In):

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Net cash provided by operating activities was $5,455

$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.

during the six-month period ended June 30, 2023 compared to net cashed used of $529 in the same period in 2022.

The increase was primarily

due to higher cash earnings driven by increased product volumes and declines in certain input costs, and the change in working capital.

Investing Activities

Net cash used in investing activities was $1,762

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.

Net cash used in investing activities was $1,950 during

the six-month period ended June 30, 2023 compared to $1,710 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, cost reduction, and

facility improvements.

Growth capital spending supports new product innovation and enhancements.

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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.

the six-month period ended June 30, 2023 and 2022.

The cash used represents the quarterly principal payments under the term loan.

Debt Obligations

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

As of June 30, 2023, the Company had $2,777 outstanding

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

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matures on June 30, 2025.

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

The were no letters of credit issued or outstanding as of June 30, 2023.

The Company had $3,230 outstanding

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

under the note payable, net of $20 of unamortized deferred financing fees, as of June 30, 2023.

The Company’s interest rate on debt outstanding

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.

under the revolving line of credit and note payable as of June 30, 2023 was 7.14% and 7.10%, respectively.

The Company is in compliance with all applicable

financial debt covenants as of June 30, 2023.

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

our indebtedness and related agreements.

Recent Accounting Pronouncements

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There were no material changes

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

to the Company’s critical accounting policies and estimates in the six months ended June 30, 2023.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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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