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Item 2. Management’s Discussion and Analysis

2023-11-13 compared with 2023-08-14 · 118 added, 113 removed, 185 unchanged (56% of the section changed)

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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, 2022 (the “Form 10-K”).

Unless otherwise specified,

any description of “our”, “we”, and “us” in this MD&A refer to Lifeway Foods, Inc.

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, 2022 (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.

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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

a refugee from the former USSR who emigrated from Eastern Europe to the United States in 1976 with his wife and young daughter.

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 area.

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 customers.

Lifeway Kefir is a probiotic beverage that is tart and tangy, high in protein, calcium and vitamin D.

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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We expect that these

inflation-justified price increases will continue to help mitigate our increased costs.

inflation-justified price increases will continue to help mitigate a portion of our increased costs.

We have not experienced significant supply chain

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Results of Operations

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

June 30, 2022

Three Months Ended September 30, 2023 Compared to Three Months

Ended September 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,

Three Months Ended September 30,

Cost of goods sold

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Net sales finished at $40,896 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:

period ended September 30, 2023, an increase of $2,756 or 7.2% 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

Net sales by product category were as follows

for the three months ended September 30:

Drinkable Kefir excluding ProBugs

Drinkable yogurt

Cream and other

Drinkable yogurt

ProBugs Kefir

Gross profit as a percentage of net sales was

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

27.2% during the three-month period ended September 30, 2023.

Gross profit percentage was 19.9% 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.

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 $41 to $2,884 during

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

the three-month period ended September 30, 2023 from $2,843 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.

General and administrative expenses decreased

$330 to $3,085 during the three-month period ended September 30, 2023 from $3,415 during the same period in 2022.

The decrease is primarily

driven by the termination of the endorsement agreement in September 2022.

Provision for Income Taxes

The provision for income taxes was $1,517 and

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

$130 during the three months ended September 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.

ended September 30, 2023 was 30.8% compared to 11.7% 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

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to the Consolidated Financial Statements.

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

Nine months Ended September 30, 2023 Compared to Nine months

Ended September 30, 2022

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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Total operating expenses

Income (loss) from operations

Income from operations

Other (expense) income:

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Total other (expense) income

Income (loss) before provision for income taxes

Income before provision for income taxes

Provision (benefit) for income taxes

Net income (loss)

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 finished at $118,030 for the nine-month

period ended September 30, 2023, an increase of $12,300 or 11.6% 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

Net sales by product category were as follows

for the six months ended June 30:

for the nine months ended September 30:

Drinkable Kefir excluding ProBugs

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Gross profit as a percentage of net sales was

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

25.9% during the nine-month period ended September 30, 2023.

Gross profit percentage was 17.8% 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.

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 $447 to $8,974 during

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

the nine-month period ended September 30, 2023 from $8,527 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 2022.

General and Administrative Expenses

General and administrative expenses increased

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.

$482 to $10,028 during the nine-month period ended September 30, 2023 from $9,546 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, partially offset by the termination

of the endorsement agreement in September 2022.

Provision (Benefit) for Income Taxes

The provision (benefit) for income taxes was $3,554

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

from 2022 to 2023.

and $(2) during the nine months ended September 30, 2023 and 2022, respectively.

The effective income tax rate for the nine months

ended September 30, 2023 was 32.5% compared to (0.8)% 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

in pre-tax (loss) income in 2023 compared to 2022.

in pre-tax income in 2023 compared to 2022.

The Company’s effective tax rate may change

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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 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.

Management 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, 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, if a serious economic or credit market crisis ensues, it could

have a negative effect on our liquidity, results of operations and financial condition.

As discussed in Note 14, Subsequent

Events, the Company paid the outstanding line of credit balance of $2,777 in full on October 6, 2023.

The Company’s most significant

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and equipment.

Long-term cash

requirements primarily relate to funding long-term debt repayments (see Note 7, Debt) and deferred income taxes (see Note 10, Income Taxes,

in our Annual Report on Form 10-K).

Long-term cash requirements primarily

relate to funding long-term debt repayments (see Note 7, Debt) and deferred income taxes (see Note 10, Income Taxes, in our Annual Report

on Form 10-K).

The following table is derived from our Consolidated

Statement of Cash Flows:

Six months Ended

Nine months Ended

September 30,

Net Cash Flows Provided By (Used In):

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Net cash provided by operating activities was

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

$12,144 during the nine-month period ended September 30, 2023 compared to $3,639 in the same period in 2022.

The increase was primarily

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Investing Activities

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.

Net cash used in investing activities was $3,206

during the nine-month period ended September 30, 2023 compared to $3,189 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.

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 $500 during

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

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

Net cash used in financing activities was $750

during the nine-month period ended September 30, 2023 and 2022, respectively.

The cash used represents the quarterly principal payments

under the term loan.

Debt Obligations

As of June 30, 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 June 30, 2023.

The Company had $3,230 outstanding

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

As of September 30, 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 September 30, 2023.

The Company had $2,981

outstanding under the note payable, net of $19 of unamortized deferred financing fees, as of September 30, 2023.

The Company’s interest rate on debt outstanding

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

under the revolving line of credit and note payable as of September 30, 2023 was 7.34% and 7.40%, respectively.

The Company is in compliance with all applicable

financial debt covenants as of June 30, 2023.

financial debt covenants as of September 30, 2023.

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

our indebtedness and related agreements.

As discussed in Note 14, Subsequent

Events, the Company paid the outstanding line of credit balance of $2,777 in full on October 6, 2023.

Recent Accounting Pronouncements

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There were no material changes

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

to the Company’s critical accounting policies and estimates in the nine months ended September 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