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Item 2. Management’s Discussion and Analysis

2024-05-14 compared with 2023-11-13 · 112 added, 183 removed, 120 unchanged (71% 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 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.

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, 2023 (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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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;

Expectations of the effect on our financial condition of claims, litigation, environmental costs, contingent liabilities and governmental and regulatory investigations and proceedings, if any;

Strategy for acquisitions, customer retention, growth, product development, market position, financial results and reserves;

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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.

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, 2023 , Part II, Item 1A of this Form 10-Q and that are described from time to time in our other periodic reports filed with the SEC.

These factors are not necessarily all of the important

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Lifeway was founded in 1986 by Michael Smolyansky,

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 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.

ten years after he and his family 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 area.

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.

Our primary product is drinkable kefir, a cultured

dairy product.

Lifeway Kefir 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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Current Macroeconomic Environment and Inflation Impact

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 a portion of our increased costs.

Since 2022, we experienced 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 as milk, during 2023.

We expect inflationary pressures to be moderate during 2024.

We have not experienced significant supply chain

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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.

This proactive planning has allowed the Company to meet increased demand.

Results of Operations

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 September 30,

Three Months Ended March 31, 2024 Compared to Three Months Ended

March 31, 2023

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

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Income from operations

Other (expense) income:

Other income (expense):

Interest expense

Gain on sales of property and equipment

Other (expense) income, net

Total other (expense) income

Other income (expense), net

Total other income (expense)

Income before provision for income taxes

Provision for income taxes

Net sales finished at $40,896 for the three-month

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

Cream and other

Drinkable yogurt

ProBugs Kefir

Net sales were at $44,634 for the three-month period

ended March 31, 2024, an increase of $6,731 or 17.8% versus prior year.

The net sales increase was primarily driven by higher volumes

of our branded drinkable kefir.

Gross profit as a percentage of net sales was

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.

25.8% during the three-month period ended March 31, 2024.

Gross profit percentage was 21.7% in the first quarter of the prior year.

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

to transportation costs.

Selling Expenses

Selling expenses increased by $181 to $3,700 during

the three-month period ended September 30, 2023 from $2,843 during the same period in 2022.

the three-month period ended March 31, 2024 from $3,519 during the same period in 2023.

Selling expenses as a percentage of net sales

decreased to 8.3% in the three-month period ended March 31, 2024 from 9.3% during the same period in 2023.

General and Administrative Expenses

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.

General and administrative expenses increased $1,001

to $4,136 during the three-month period ended March 31, 2024 from $3,135 during the same period in 2023.

The increase is primarily driven

by incentive compensation and non-routine stockholder action expense.

Provision for Income Taxes

The provision for income taxes was $1,082 and $508

$130 during the three months ended September 30, 2023 and 2022, respectively.

during the three months ended March 31, 2024 and 2023, respectively.

The effective income tax rate for the three months

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.

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.

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:

Nine months Ended September 30,

Cost of goods sold

Depreciation expense

Total cost of goods sold

Selling expenses

General & administrative expense

Amortization expense

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 (benefit) for income taxes

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 nine months ended September 30:

Drinkable Kefir excluding ProBugs

Cream and other

Drinkable yogurt

ProBugs Kefir

Gross profit as a percentage of net sales was

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.

Selling Expenses

Selling expenses increased by $447 to $8,974 during

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

$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 $(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.

ended March 31, 2024 was 30.8% compared to 37.9% in the same period last year.

The statutory Federal and state tax rates remained consistent

from 2024 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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If additional borrowings are needed, $5,000

$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

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

was available under the Revolving Credit Facility as of March 31, 2024 (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.

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 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

The following table is derived from our Consolidated

Statement of Cash Flows:

Nine months Ended

September 30,

Three months Ended

Net Cash Flows Provided By (Used In):

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Net cash provided by operating activities was $1,546

$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

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

during the three-month period ended March 31, 2024 compared to $3,027 in the same period in 2023.

The decrease was primarily due to the

change in working capital, partially offset by higher cash earnings driven by increased product volumes and declines in certain input

Investing Activities

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.

Net cash used in investing activities was $2,469 during

the three-month period ended March 31, 2024 compared to $1,762 in the same period in 2023.

The increase in cash used reflects our planned

capital spending increase during 2024 compared to 2023.

Our capital spending is focused in three core areas:

reduction, and facility improvements.

Growth capital spending supports new product innovation and enhancements.

Cost reduction and facility

improvements support manufacturing efficiency, safety, and productivity.

growth, cost reduction, and

facility improvements.

Growth capital spending supports capacity expansion and new product innovation and enhancements.

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, 2023 and 2022, respectively.

Net cash used in financing activities was $250 and

$500 during the three-month period ended March 31, 2024 and 2023, respectively.

The cash used represents the quarterly principal payments

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Debt Obligations

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 September 30, 2023 was 7.34% and 7.40%, respectively.

The Company is in compliance with all applicable

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.

The Company is party to an Amended and Restated Loan

and Security Agreement (as amended and modified from time to time, the “Credit Agreement”) with its existing lender and certain

of its subsidiaries.

The Credit Agreement provides for, among other things, a $5 million term loan to be repaid in quarterly installments

of principal and interest over a term of five years, a revolving line of credit up to a maximum of $5 million (the “Revolving Credit

Facility”) and an incremental facility not to exceed $5 million.

The termination date of the term loan is August 18, 2026, unless

earlier terminated.

The termination date of the revolving credit facility is June 30, 2025, unless earlier terminated.

As of March 31, 2024, the Company had $0 outstanding

under the Revolving Credit Facility and $2,485 outstanding under the note payable, net of $15 of unamortized deferred financing fees.

The Company had $5,000 available for future borrowings under the Revolving Credit Facility as of March 31, 2024.

All outstanding amounts under the loans bear interest

at the Secured Overnight Financing Rate (“SOFR”), plus 2.07%.

The Company’s interest rate on debt outstanding under

the note payable as of March 31, 2024 was 7.39%.

Interest is payable monthly in arrears.

Lifeway is also required to pay a quarterly unused

line fee of 0.20% on the Revolving Credit Facility, and in conjunction with the issuance of any letters of credit, a letter of credit

fee of 0.20%.

The Company is in compliance with all applicable financial

debt covenants as of March 31, 2024.

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 nine months ended September 30, 2023.

to the Company’s critical accounting policies and estimates in the three months ended March 31, 2024.

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