Lifeway Foods, Inc. 10-Q

LIFEWAY FOODS, INC. Form 10-Q Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2024 ☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number: 000-17363 LIFEWAY FOODS, INC. (Exact name of registrant a s specified in its charter) Illinois 36-3442829 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 6431 West Oakton , Morton Grove , IL 60053 (Address of principal executive offices, zip code) ( 847 ) 967-1010 (Registrant’s telephone number, including area code) Securities registered under Section 12(b) of the Exchange Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, No Par Value LWAY NASDAQ Global Market Securities registered under Section 12(g) of the Exchange Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one) Large accelerated Filer ☐ Accelerated Filer ☐ Non-accelerated Filer ☒ Smaller reporting company ☒ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ Number of shares of Common Stock, no par value, outstanding as of Aug 6, 2024: 14,790,747 . TABLE OF CONTENTS PART I – FINANCIAL INFORMATION Item 1. Financial Statements . 3 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations . 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk . 24 Item 4. Controls and Procedures . 24 PART II – OTHER INFORMATION Item 1. Legal Proceedings . 25 Item 1A. Risk Factors . 25 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds . 25 Item 3. Defaults Upon Senior Securities . 25 Item 5. Other Information . 25 Item 6. Exhibits . 25 Signatures . 26 2 PART I – FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Balance Sheets June 30, 2024 and December 31, 2023 (In thousands) June 30, 2024 December 31, (Unaudited) 2023 Current assets Cash and cash equivalents $ 14,633 $ 13,198 Accounts receivable, net of allowance for credit losses and discounts & allowances of $ 1,550 and $ 1,270 at June 30, 2024 and December 31, 2023 respectively 14,526 13,875 Inventories, net 8,454 9,104 Prepaid expenses and other current assets 1,488 2,019 Refundable income taxes 180 – Total current assets 39,281 38,196 Property, plant and equipment, net 25,276 22,764 Operating lease right-of-use asset 154 192 Goodwill 11,704 11,704 Intangible assets, net 6,628 6,898 Other assets 1,900 1,900 Total assets $ 84,943 $ 81,654 Current liabilities Current portion of note payable $ – $ 1,250 Accounts payable 9,370 9,976 Accrued expenses 4,487 4,916 Accrued income taxes – 474 Total current liabilities 13,857 16,616 Note payable – 1,483 Operating lease liabilities 88 118 Deferred income taxes, net 3,001 3,001 Total liabilities 16,946 21,218 Commitments and contingencies (Note 9) – – Stockholders’ equity Preferred stock, no par value; 2,500 shares authorized; no shares issued or outstanding at June 30, 2024 and December 31, 2023 – – Common stock, no par value; 40,000 shares authorized; 17,274 shares issued; 14,791 outstanding at June 30, 2024 and December 31, 2023 6,509 6,509 Paid-in capital 5,532 4,825 Treasury stock, at cost ( 16,050 ) ( 16,695 ) Retained earnings 72,006 65,797 Total stockholders' equity 67,997 60,436 Total liabilities and stockholders' equity $ 84,943 $ 81,654 See accompanying notes to consolidated financial statements 3 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the three and six months ended June 30, 2024 and 2023 (Unaudited) (In thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Net sales $ 49,157 $ 39,230 $ 93,791 $ 77,134 Cost of goods sold 35,181 27,299 67,619 56,329 Depreciation expense 701 651 1,362 1,299 Total cost of goods sold 35,882 27,950 68,981 57,628 Gross profit 13,275 11,280 24,810 19,506 Selling expense 3,577 2,571 7,277 6,090 General and administrative expense 4,177 3,808 8,313 6,943 Amortization expense 135 135 270 270 Total operating expenses 7,889 6,514 15,860 13,303 Income from operations 5,386 4,766 8,950 6,203 Other income (expense): Interest expense ( 47 ) ( 109 ) ( 98 ) ( 213 ) Gain on sale of property and equipment – 33 – 33 Other income (expense), net 20 ( 5 ) 15 – Total other income (expense) ( 27 ) ( 81 ) ( 83 ) ( 180 ) Income before provision for income taxes 5,359 4,685 8,867 6,023 Provision for income taxes 1,576 1,529 2,658 2,037 Net income $ 3,783 $ 3,156 $ 6,209 $ 3,986 Net earnings per common share: Basic $ 0.26 $ 0.22 $ 0.42 $ 0.27 Diluted $ 0.25 $ 0.21 $ 0.41 $ 0.26 Weighted average common shares outstanding: Basic 14,727 14,654 14,709 14,649 Diluted 15,197 15,084 15,176 15,058 See accompanying notes to consolidated financial statements 4 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity (Unaudited) (In thousands) Common Stock Issued In treasury Paid-In Retained Total Shares $ Shares $ Capital Earnings Equity Balance, January 1, 2023 17,274 $ 6,509 ( 2,629 ) $ ( 16,993 ) $ 3,624 $ 54,430 $ 47,570 Stock-based compensation – – – – 343 – 343 Net income – – – – – 830 830 Balance, March 31, 2023 17,274 $ 6,509 ( 2,629 ) $ ( 16,993 ) $ 3,967 $ 55,260 $ 48,743 Issuance of common stock in connection with stock-based compensation – – 11 73 ( 112 ) – ( 39 ) Stock-based compensation – – – – 312 – 312 Net income – – – – – 3,156 3,156 Balance, June 30, 2023 17,274 $ 6,509 ( 2,618 ) $ ( 16,920 ) $ 4,167 $ 58,416 $ 52,172 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity (Unaudited) (In thousands) Common Stock Issued In treasury Paid-In Retained Total Shares $ Shares $ Capital Earnings Equity Balance, January 1, 2024 17,274 $ 6,509 ( 2,583 ) $ ( 16,695 ) $ 4,825 $ 65,797 $ 60,436 Stock-based compensation – – – – 673 – 673 Net income – – – – – 2,426 2,426 Balance, March 31, 2024 17,274 $ 6,509 ( 2,583 ) $ ( 16,695 ) $ 5,498 $ 68,223 $ 63,535 Issuance of common stock in connection with stock-based compensation – – 89 575 ( 739 ) – ( 164 ) Issuance of common stock on exercise of stock options – – 11 70 36 – 106 Stock-based compensation – – – – 737 – 737 Net income – – – – – 3,783 3,783 Balance, June 30, 2024 17,274 $ 6,509 ( 2,483 ) $ ( 16,050 ) $ 5,532 $ 72,006 $ 67,997 See accompanying notes to consolidated financial statements 5 LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (In thousands) Six months ended June 30, 2024 2023 Cash flows from operating activities: Net income $ 6,209 $ 3,986 Adjustments to reconcile net income to operating cash flow: Depreciation and amortization 1,632 1,569 Stock-based compensation 1,296 655 Non-cash interest expense 17 3 Bad debt expense – 2 Gain on sale of equipment – ( 33 ) (Increase) decrease in operating assets: Accounts receivable ( 651 ) 91 Inventories 650 ( 39 ) Refundable income taxes ( 180 ) 40 Prepaid expenses and other current assets 531 232 Increase (decrease) in operating liabilities: Accounts payable ( 574 ) ( 2,526 ) Accrued expenses ( 366 ) 451 Accrued income taxes ( 474 ) 1,024 Net cash provided by operating activities 8,090 5,455 Cash flows from investing activities: Purchases of property and equipment ( 3,905 ) ( 1,990 ) Proceeds from sales or equipment – 40 Net cash used in investing activities ( 3,905 ) ( 1,950 ) Cash flows from financing activities: Repayment of note payable ( 2,750 ) ( 500 ) Net cash used in financing activities ( 2,750 ) ( 500 ) Net increase in cash and cash equivalents 1,435 3,005 Cash and cash equivalents at the beginning of the period 13,198 4,444 Cash and cash equivalents at the end of the period $ 14,633 $ 7,449 Supplemental cash flow information: Cash paid for income taxes, net of (refunds) $ 3,312 $ 973 Cash paid for interest $ 89 $ 238 Non-cash investing activities Accrued purchase of property and equipment $ 106 $ 110 See accompanying notes to consolidated financial statements 6 LIFEWAY FOODS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (In thousands, except per share data) Note 1 – Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) for interim financial information, and do not include certain information and footnote disclosures required for complete, audited financial statements. In the opinion of management, these statements include all adjustments necessary for a fair presentation of the results of all interim periods reported herein. The consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Results of operations for any interim period are not necessarily indicative of future or annual results. Principles of consolidation The consolidated financial statements include the accounts of Lifeway Foods, Inc. and all its wholly owned subsidiaries (collectively “Lifeway” or the “Company”). All significant intercompany accounts and transactions have been eliminated. Note 2 – Summary of Significant Accounting Policies Our significant accounting policies, which are summarized in detail in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, have not materially changed. The following is a description of certain of our significant accounting policies. Use of estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing the consolidated financial statements include the reserve for promotional allowances, the valuation of goodwill and intangible assets, stock-based and incentive compensation, and deferred income taxes. Cash and cash equivalents Lifeway considers cash and all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates or equals fair value due to their short-term nature. Lifeway from time to time may have bank deposits in excess of insurance limits of the Federal Deposit Insurance Corporation. The Company places its cash and cash equivalents with high credit quality financial institutions. Lifeway has not experienced any losses in such accounts and believes the financial risks associated with these financial instruments are minimal. Advertising and promotional costs Advertising costs are expensed as incurred and reported in Selling expense in the Company’s consolidated statement of operations. Total advertising expense was $ 2,531 and $ 2,006 for the six months ended June 30, 2024 and 2023, respectively. Total advertising expense was $ 1,159 and $ 543 for the three months ended June 30, 2024 and 2023, respectively. 7 Segments The Company is managed as a single reportable segment. The Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), reviews financial information on an aggregate basis for purposes of allocating resources and assessing financial performance, as well as for making strategic operational decisions and managing the organization. Substantially all of Lifeway’s consolidated revenues relate to the sale of cultured dairy products that it produces using the same processes and materials and are sold to consumers through a common network of distributors and retailers in the United States. Recent accounting pronouncements Issued but not yet effective In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07: Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The new guidance requires entities to report incremental information about significant segment expenses included in a segment’s profit or loss measure as well as the name and title of the chief operating decision maker. The guidance also requires interim disclosures related to reportable segment profit or loss and assets that had previously only been disclosed annually. The new standard is effective for our annual period ending December 31, 2024 and our interim periods during the fiscal year ending December 31, 2025. The guidance does not affect recognition or measurement in the Company’s consolidated financial statements. In December 2023, the FASB issued ASU No. 2023-09: Income Taxes (Topic 740): Improvements to Income Tax Disclosures that requires entities to disclose additional information about federal, state, and foreign income taxes primarily related to the income tax rate reconciliation and income taxes paid. The new standard also eliminates certain existing disclosure requirements related to uncertain tax positions and unrecognized deferred tax liabilities. The guidance is effective for our fiscal year ending December 31, 2024. The guidance does not affect recognition or measurement in the Company’s consolidated financial statements. Note 3 – Inventories, net Inventories consisted of the following: Schedule of inventories June 30, 2024 December 31, 2023 Ingredients $ 1,944 $ 2,929 Packaging 3,150 3,014 Finished goods 3,360 3,161 Total inventories, net $ 8,454 $ 9,104 Note 4 – Property, Plant and Equipment, net Property, plant and equipment consisted of the following: Schedule of property, plant and equipment June 30, 2024 December 31, 2023 Land $ 1,565 $ 1,565 Buildings and improvements 22,110 21,661 Machinery and equipment 35,217 33,573 Vehicles 705 705 Office equipment 1,072 1,072 Construction in process 3,774 2,154 64,443 60,730 Less accumulated depreciation ( 39,167 ) ( 37,966 ) Total property, plant and equipment, net $ 25,276 $ 22,764 8 Note 5 – Goodwill and Intangible Assets Goodwill Goodwill consisted of the following: Schedule of goodwill Total Balance at December 31, 2023 Goodwill $ 12,948 Accumulated impairment losses ( 1,244 ) $ 11,704 Balance at June 30, 2024 Goodwill $ 12,948 Accumulated impairment losses ( 1,244 ) $ 11,704 Intangible Assets Other intangible assets, net consisted of the following: Schedule of finite-lived intangible assets June 30, 2024 December 31, 2023 Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount Recipes $ 44 $ ( 44 ) $ – $ 44 $ ( 44 ) $ – Customer lists and other customer related intangibles 4,529 ( 4,529 ) – 4,529 ( 4,529 ) – Customer relationships 3,385 ( 1,452 ) 1,933 3,385 ( 1,372 ) 2,013 Brand names 7,948 ( 3,253 ) 4,695 7,948 ( 3,063 ) 4,885 Formula 438 ( 438 ) – 438 ( 438 ) – Total intangible assets, net $ 16,344 $ ( 9,716 ) $ 6,628 $ 16,344 $ ( 9,446 ) $ 6,898 Estimated amortization expense on intangible assets for the next five years is as follows: Schedule of estimated amortization expense on intangible assets Year Amortization Six months ended December 31, 2024 $ 270 2024 $ 540 2025 $ 540 2026 $ 540 2027 $ 540 The weighted-average remaining amortization expense period for the customer relationship and brand name intangible assets is 12.1 and 12.4 years, respectively, as of June 30, 2024. The weighted-average remaining amortization expense period for total intangible assets is 12.3 years as of June 30, 2024. 9 Note 6 – Accrued Expenses Accrued expenses consisted of the following: Schedule of accrued expenses June 30, 2024 December 31, 2023 Payroll and incentive compensation $ 3,309 $ 3,853 Real estate taxes 479 442 Utilities 394 241 Current portion of operating lease liabilities 66 74 Other 239 306 Total accrued expenses $ 4,487 $ 4,916 Note 7 – Debt Note payable consisted of the following: Schedule of debt June 30, 2024 December 31, 2023 Term loan due August 18, 2026. Interest payable monthly. $ – $ 2,750 Unamortized deferred financing costs – ( 17 ) Total note payable – 2,733 Less current portion – ( 1,250 ) Total long-term portion $ – $ 1,483 The Company paid the outstanding term loan balance of $ 2,250 in full during the second quarter of 2024 and expensed the remaining unamortized deferred financing costs. Credit Agreement 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. All outstanding amounts under the Credit Agreement bear interest at the Secured Overnight Financing Rate (“SOFR”), plus 2.07%. Interest is payable monthly in arrears. Lifeway is also required to pay a quarterly unused revolving line of credit fee of 0.20 % and, in conjunction with the issuance of any letters of credit, a letter of credit fee of 0.20 %. The Credit Agreement includes customary representations, warranties, and covenants, including financial covenants requiring the Company to maintain a fixed charge coverage ratio of no less than 1.25 to 1.00, and a minimum working capital financial covenant, as defined, of no less than $11.25 million, in each of the fiscal quarters ending through the expiration date. The Credit Agreement provides for events of default, including failure to repay principal and interest when due and failure to perform or violation of the provisions or covenants of the agreement, as a result of which amounts due under the Credit Agreement may be accelerated. The loans and all other amounts due and owed under the Credit Agreement and related documents are secured by substantially all of the Company’s assets. Lifeway was in compliance with the fixed charge coverage ratio and minimum working capital covenants at June 30, 2024. Revolving Credit Facility As of June 30, 2024, the Company had $ 0 outstanding under the Revolving Credit Facility. The Company had $ 5,000 available for future borrowings under the Revolving Credit Facility as of June 30, 2024. 10 Note 8 – Leases The Company leases certain machinery and equipment with fixed base rent payments and variable costs based on usage. Remaining lease terms for these leases range from less than one year to six years. The Company includes lease extension options, if applicable and reasonably certain to be exercised, in the calculation of the right-of-use asset and lease liabilities. Lifeway includes only fixed payments for lease components in the measurement of the right-of-use asset and lease liability. Variable lease payments are those that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time. There are no residual value guarantees. Lifeway does not currently have leases which meet the finance lease classification as defined under ASC 842. Lifeway treats contracts as a lease when the contract conveys the right to use a physically distinct asset for a period of time in exchange for consideration, it directs the use of the asset and obtains substantially all the economic benefits of the asset. Right-of-use assets and lease liabilities are measured and recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Lifeway has elected the practical expedient to combine lease and non-lease components into a single component for all of its leases. When the Company is unable to determine an implicit interest rate, it uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments for those leases. Lifeway includes options to extend or terminate the lease in the measurement of the right-of-use asset and lease liability when it is reasonably certain that it will exercise such options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company does not record leases with an initial term of 12 months or less on the balance sheet. Expense for these short-term leases is recorded on a straight-line basis over the lease term. Total lease expense was $ 77 and $ 61 (including short term leases) for the six months ended June 30, 2024 and 2023, respectively. Total lease expense was $ 42 and $ 30 (including short term leases) for the three months ended June 30, 2024 and 2023, respectively. Future maturities of lease liabilities were as follows: Schedule of future maturities of lease liabilities Year Operating Leases Six months ended December 31, 2024 $ 42 2025 55 2026 31 2027 21 2028 17 Thereafter 10 Total lease payments 176 Less: Interest ( 22 ) Present value of lease liabilities $ 154 The weighted-average remaining lease term for its operating leases was 3.4 years as of June 30, 2024. The weighted average discount rate of its operating leases was 9.25 % as of June 30, 2024. Cash paid for amounts included in the measurement of lease liabilities was $ 46 for the six months ended June 30, 2024 and 2023. Cash paid for amounts included in the measurement of lease liabilities was $ 22 and $ 21 for the three months ended June 30, 2024 and 2023, respectively. Note 9 – Commitments and contingencies Litigation Lifeway is involved in various legal proceedings, claims, disputes, regulatory matters, audits, and proceedings arising in the ordinary course of, or incidental, to the Company’s business, including commercial disputes, product liabilities, intellectual property matters and employment-related matters. 11 Lifeway records provisions in the consolidated financial statements for pending legal matters when it believes it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated. The Company evaluates, on a periodic basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable, it does not establish an accrued liability. Currently, none of its accruals for outstanding legal matters are material individually or in the aggregate to its financial position and it is management’s opinion that the ultimate resolution of these outstanding legal matters will not have a material adverse effect on its business, financial condition, results of operations, or cash flows. However, if the Company is ultimately required to make payments in connection with an adverse outcome, it is possible that such contingency could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows. Note 10 – Income taxes Income taxes were recognized at effective rates of 30.0 % and 33.8 % for the six months ended June 30, 2024 and 2023, respectively. Income taxes were recognized at effective rates of 29.4 % and 32.6 % for the three months ended June 30, 2024 and 2023, respectively. The Company calculates the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full year, excluding unusual or infrequently occurring discrete items, and applies that rate to income (loss) before provision for income taxes for the period. 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. 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 2024, the percentage effect is different due to the difference in pre-tax income in 2024 compared to 2023. Unrecognized tax benefits were $ 0 at June 30, 2024 and 2023. The Company does not expect material changes to its unrecognized tax benefits during the next twelve months. Note 11 – Stock-based and Other Compensation Omnibus Incentive Plan In December 2015, Lifeway stockholders approved the 2015 Omnibus Incentive Plan, which authorized the issuance of an aggregate of 3.5 million shares to satisfy awards of stock options, stock appreciation rights, unrestricted stock, restricted stock, restricted stock units, performance shares and performance units to qualifying employees. Under the 2015 Omnibus Incentive Plan, the Board of Directors or its Compensation Committee approves stock awards to executive officers and certain senior executives, generally in the form of restricted stock or performance shares. The number of performance shares that participants may earn depends on the extent to which the corresponding performance goals have been achieved. Stock awards generally vest over a three-year performance or service period. At June 30, 2024, no shares remain available for award under the 2015 Omnibus Incentive Plan as it was terminated on August 31, 2022. However, any outstanding awards under the 2015 Omnibus Incentive Plan are unaffected by the termination of the 2015 Omnibus Incentive Plan or by the approval of the 2022 Omnibus Incentive Plan (the “2022 Plan”) as described below. On August 31, 2022, Lifeway stockholders approved the 2022 Plan. Under the 2022 Plan, the Compensation Committee of the Board of Directors may grant awards of various types of compensation, including, nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, cash-based awards and other stock-based awards. The maximum number of shares authorized to be awarded under the 2022 Plan is 3.25 million shares of common stock, which includes shares that remained available under the now terminated 2015 Omnibus Incentive Plan. 12 Awards granted under the 2022 Plan are generally subject to a minimum vesting period of at least one year. Awards may be subject to cliff-vesting or graded-vesting conditions, with graded vesting starting no earlier than one year after the grant date. The Plan Administrator may provide for shorter vesting periods in an award agreement for no more than five percent of the maximum number of shares authorized for issuance under the 2022 Plan. As of June 30, 2024, 2.64 million shares remain available to award under the 2022 Plan. Stock Options The following table summarizes stock option activity during the six months ended June 30, 2024: Schedule of stock option activity Options Weighted average exercise price Weighted average remaining contractual life Aggregate intrinsic value (In thousands) Outstanding at December 31, 2023 41 $ 10.42 2.21 $ 121 Granted – – – – Exercised ( 11 ) 10.41 – – Forfeited – – – – Outstanding at June 30, 2024 30 $ 10.42 1.72 $ 70 Exercisable at June 30, 2024 30 $ 10.42 1.72 $ 70 Restricted Stock Units A Restricted Stock Unit (“RSU”) represents the right to receive one share of common stock in the future. RSUs have no exercise price. The grant date fair value of the awards is determined by the Company’s closing stock price on the grant date. Lifeway expenses RSUs over the vesting period. The following table summarizes RSU activity during the three months ended June 30, 2024. Schedule of RSUs activity Restricted Stock Units Weighted Average Grant Date Fair Value (In thousands) Outstanding at December 31, 2023 207 $ 6.89 Granted 33 13.73 Shares issued upon vesting ( 7 ) 6.88 Forfeited – – Outstanding at June 30, 2024 233 $ 7.84 Vested and deferred at June 30, 2024 90 $ 6.93 For the six months ended June 30, 2024 and 2023 total pre-tax stock-based compensation expense recognized in the consolidated statements of operations was $ 468 and $ 202 , respectively. For the six months ended June 30, 2024 and 2023 tax-related benefits of $ 131 and $ 57 , respectively, were also recognized. For the three months ended June 30, 2024 and 2023 total pre-tax stock-based compensation expense recognized in the consolidated statements of operations was $ 235 and $ 98 , respectively. For the three months ended June 30, 2024 and 2023 tax-related benefits of $ 66 and $ 29 , respectively, were also recognized. Future compensation expense related to restricted stock units was $ 706 as of June 30, 2024 and will be recognized on a weighted average basis over the next 1.2 years. Long-Term Incentive Plan Compensation Lifeway has established long-term incentive-based compensation programs for certain senior executives and key employees pursuant to the terms of its incentive plans. 13 2020 CEO Incentive Award During the fourth quarter 2020, Lifeway awarded a long-term equity-based incentive of $ 750 to its Chief Executive Officer (the “2020 CEO Award”) depending on Lifeway’s 2020 performance levels compared to the respective targets. The equity-based incentive compensation is payable in restricted stock that vests one-third in April 2022, one-third in April 2023, and one-third in April 2024. The issuance of vested equity awards is subject to approval under the Stock Purchase Agreement dated October 1, 1999. For the six months ended June 30, 2024 and 2023, $ 24 and $ 69 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. For the three months ended June 30, 2024 and 2023, $ 6 and $ 26 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. As of June 30, 2024, all compensation has been recognized. 2021 Equity Award The 2021 long-term equity incentive plan compensation is based on Lifeway’s achievement of adjusted EBITDA performance versus the respective target established by the Board of Directors for 2021. Under the 2021 plan, collectively the participants earned equity-based incentive compensation of $ 1,069 based on Lifeway’s achievement of the respective financial target. The equity-based incentive compensation is payable in restricted stock that vests one-third in April 2022, one-third in April 2023, and one-third in April 2024. For the six months ended June 30, 2024 and 2023, $ 40 and $ 128 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. For the three months ended June 30, 2024 and 2023, $ 7 and $ 44 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. As of June 30, 2024, all compensation has been recognized. 2022 Equity Award Under the 2022 long-term incentive plan, participants can earn a specified number of target level Performance Share Units (“PSUs”) contingent upon the achievement of strategic milestones during the three-year Measurement Period, which is fiscal year 2022 to 2024. The strategic milestones are 1) 3-year cumulative net revenue, and 2) 3-year cumulative adjusted EBITDA. The target number of PSU awards are weighted 50% on net revenue and 50% on adjusted EBITDA. Collectively, the participants can earn 125,066 PSUs at the target level. Participants may earn more or less than the target number of shares based on actual results, however the minimum and maximum number of shares that can be earned are bound by minimum and maximum thresholds of net revenue and adjusted EBITDA. The PSU awards will be earned and will vest, if at all, after the end of the three-year measurement period based on achievement of the milestones. The PSU awards do not vest during the three-year measurement period. The PSUs have a grant date fair value of $6.25 dollars per share. For the six months ended June 30, 2024 and 2023, $ 288 and $ 240 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. For the three months ended June 30, 2024 and 2023, $ 132 and $ 127 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. The 2022 long-term incentive plan also granted restricted stock unit awards that contain only a service condition and vest on the passage of time in three equal installments on each of the first three anniversaries of the August 31, 2022 grant date. The stock-based compensation expense for these awards is included in the Restricted Stock Units section above. 2023 Equity Award Under the 2023 long-term incentive plan, participants can earn a specified number of target level Performance Share Units (“PSUs”) contingent upon the achievement of strategic milestones during the three-year Measurement Period, which is fiscal year 2023 to 2025. The strategic milestones are 1) 3-year cumulative net revenue, and 2) 3-year cumulative adjusted EBITDA. The target number of PSU awards are weighted 50% on net revenue and 50% on adjusted EBITDA. Collectively, the participants can earn 115,622 PSUs at the target level. Participants may earn more or less than the target number of shares based on actual results, however the minimum and maximum number of shares that can be earned are bound by minimum and maximum thresholds of net revenue and adjusted EBITDA. The PSU awards will be earned and will vest, if at all, after the end of the three-year measurement period based on achievement of the milestones. The PSU awards do not vest during the three-year measurement period. The PSUs have a grant date fair value of $6.88 dollars per share. For the six months ended June 30, 2024 and 2023, $ 255 and $ 16 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. For the three months ended June 30, 2024 and 2023, $ 124 and $ 16 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. 14 The 2023 long-term incentive plan also granted restricted stock unit awards that contain only a service condition and vest on the passage of time in three equal installments on each of the first three anniversaries of the June 16, 2023 grant date. The stock-based compensation expense for these awards is included in the Restricted Stock Units section above. 2024 Equity Award Under the 2024 long-term incentive plan, participants can earn a specified number of target level Performance Share Units (“PSUs”) contingent upon the achievement of strategic milestones during the three-year Measurement Period, which is fiscal year 2024 to 2026. The strategic milestones are 1) 3-year cumulative net revenue, and 2) 3-year cumulative adjusted EBITDA. The target number of PSU awards are weighted 50% on net revenue and 50% on adjusted EBITDA. Collectively, the participants can earn 64,986 PSUs at the target level. Participants may earn more or less than the target number of shares based on actual results, however the minimum and maximum number of shares that can be earned are bound by minimum and maximum thresholds of net revenue and adjusted EBITDA. The PSU awards will be earned and will vest, if at all, after the end of the three-year measurement period based on achievement of the milestones. The PSU awards do not vest during the three-year measurement period. The PSUs have a grant date fair value of $13.73 dollars per share. For the six months ended June 30, 2024 and 2023, $ 221 and $ 0 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. For the three months ended June 30, 2024 and 2023, $ 119 and $ 0 was expensed as stock-based compensation expense in the consolidated statements of operations, respectively. The 2024 long-term incentive plan also granted restricted stock unit awards that contain only a service condition and vest on the passage of time in three equal installments on each of the first three anniversaries of the January 10, 2024 grant date. The stock-based compensation expense for these awards is included in the Restricted Stock Units section above. Non-Employee Director Plan On August 31, 2022, Lifeway stockholders approved the 2022 Non-Employee Director Equity and Deferred Compensation Plan, as amended by Amendment No. 1 approved by the Board on June 7, 2024 (the “2022 Director Plan”), which authorizes the grant of restricted stock units (“RSUs”), which will vest on such schedule as the Company, in its sole discretion, shall determine. Each non-employee director of the Company is eligible to be a participant in the 2022 Director Plan until they no longer serve as a non-employee director. As of the date of each annual shareholder meeting, or such other date as the Board shall determine, the Company may grant each director a number of RSUs for such year and set the vesting schedule for the RSUs granted. Whether and how many RSUs the Company will grant to directors in any year is subject to the sole discretion of the Company and shall in any event be subject to the 2022 Director Plan’s overall share limits. The maximum aggregate number of shares of common stock that may be issued under the 2022 Director Plan is 500 thousand shares. As of June 30, 2024, 419 thousand shares remain available to award under the 2022 Director Plan. The aggregate fair market value of shares underlying RSU compensation that may be issued as RSU compensation to a director in any year shall not exceed $170. In addition to the grant of RSUs, the 2022 Director Plan also provides for the deferral by electing participants of all or part of their cash and/or RSU compensation (in 10% increments) into a deferred RSU account as RSUs. Deferred benefits are paid in a lump sum upon the applicable director’s departure from the Board of Directors. Retirement Benefits Lifeway has a defined contribution plan which is available to all full-time employees. Under the terms of the plan, the Company matches employee contributions under a prescribed formula. For the six months ended June 30, 2024 and 2023 total contribution expense recognized in the consolidated statements of operations was $ 362 and $ 258 , respectively. For the three months ended June 30, 2024 and 2023, total contribution expense recognized in the consolidated statements of operations was $ 169 and $ 108 , respectively. 15 Note 12 - Earnings Per Share The following table summarizes the effects of the share-based compensation awards on the weighted average number of shares outstanding used in calculating diluted earnings per share: Schedule of weighted average number of shares outstanding Three Months Ended Six Months Ended June 30, June 30, 2024 2023 2024 2023 (In thousands) Weighted average common shares outstanding 14,727 14,654 14,709 14,649 Assumed exercise/vesting of equity awards 470 430 467 409 Weighted average diluted common shares outstanding 15,197 15,084 15,176 15,058 Note 13 – Disaggregation of Revenue and Significant Customers Lifeway’s primary product is drinkable kefir. 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: · 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. Net sales of products by category were as follows for the six months ended June 30: Schedule of sales of products by category 2024 2023 In thousands $ % $ % Drinkable Kefir other than ProBugs 77,543 83 % 61,139 79 % Cheese 6,892 7 % 6,721 9 % Cream and other 3,987 4 % 3,551 5 % Drinkable Yogurt 2,918 3 % 3,275 4 % ProBugs Kefir 1,750 2 % 1,670 2 % Other dairy 701 1 % 778 1 % Net Sales 93,791 100 % 77,134 100 % Net sales of products by category were as follows for the three months ended June 30: 2024 2023 In thousands $ % $ % Drinkable Kefir other than ProBugs 41,010 83 % 31,339 80 % Cheese 3,377 7 % 3,376 9 % Cream and other 2,171 4 % 1,659 4 % Drinkable Yogurt 1,382 3 % 1,631 4 % ProBugs Kefir 884 2 % 862 2 % Other dairy 333 1 % 363 1 % Net Sales 49,157 100 % 39,230 100 % 16 Significant Customers Sales are predominately to companies in the retail food industry located within the United States. Two major customers accounted for a total of approximately 26 % and 23 % of net sales for the six months ended June 30, 2024 and 2023, respectively. Two major customers accounted for a total of approximately 27 % and 22 % of net sales for the three months ended June 30, 2024 and 2023, respectively. Geographic Information Net sales outside the of the United States represented less than 1% of total consolidated net sales for the six months and three months ended June 30, 2024 and 2023. Net sales are determined based on the destination where the products are shipped by Lifeway. All the Company’s long-lived assets are in the United States. 17 ITEM 2. 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, 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. Cautionary Statement Regarding Forward-Looking Statements In addition to historical information, this quarterly report contains “forward-looking” statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words such as “anticipate,” “from time to time,” “intend,” “plan,” “ongoing,” “realize,” “should,” “may,” “could," "believe," "future," "depend," "expect," "will," "result," "can," "remain," "assurance," "subject to," "require," "limit," "impose," "guarantee," "restrict," "continue," "become," "predict," "likely," "opportunities," "effect," "change," "predict," and "estimate,” and similar terms or terminology, or the negative of such terms or other comparable terminology. 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, if any; · 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 beliefs, assumptions, estimates and observations of future events based on information available to our management at the time the statements are made and include any statements that do not relate to any historical or current fact. These statements are not guarantees of future 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, and assumptions that include: · 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; · Disruptions to our supply chain, or our manufacturing and distribution capabilities, including those due to cybersecurity threats; and · 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, 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 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. The Company intends 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, Lifeway has no duty to update these statements, and it undertakes no obligation to publicly 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, 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. 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. 18 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: · 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. Trends and Uncertainties Current Macroeconomic Environment and Inflation Impact 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 experienced some moderation of inflationary pressures and pricing declines in certain of our input costs, such as milk, during 2023. We expect overall inflationary pressures to be moderate during 2024. 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 produce and package our products, staffing, and transportation of our products to customers. This proactive planning has allowed the Company to meet increased demand. Results of Operations Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023 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, 2024 2023 $ % $ % Net sales 49,157 100.0% 39,230 100.0% Cost of goods sold 35,181 71.6% 27,299 69.6% Depreciation expense 701 1.4% 651 1.7% Total cost of goods sold 35,882 73.0% 27,950 71.3% Gross profit 13,275 27.0% 11,280 28.7% Selling expense 3,577 7.3% 2,571 6.6% General & administrative expense 4,177 8.5% 3,808 9.7% Amortization expense 135 0.3% 135 0.3% Total operating expenses 7,889 16.1% 6,514 16.6% Income from operations 5,386 10.9% 4,766 12.1% Other income (expense): Interest expense (47 ) (0.1% ) (109 ) (0.3% ) Gain on sale of property and equipment – 0.0% 33 0.1% Other income (expense), net 20 0.0% (5 ) 0.0% Total other income (expense) (27 ) (0.1% ) (81 ) (0.2% ) Income before provision for income taxes 5,359 10.8% 4,685 11.9% Provision for income taxes 1,576 3.2% 1,529 3.9% Net income 3,783 7.6% 3,156 8.0% 19 Net Sales Net sales were $49,157 for the three-month period ended June 30, 2024, an increase of $9,927 or 25.3% versus prior year. The net sales increase was primarily driven by higher volumes of our branded drinkable kefir. Gross Profit Gross profit as a percentage of net sales was 27.0% and 28.7% in the three-month period ended June 30, 2024 and 2023, respectively. The decrease versus the prior year was primarily due to unfavorable milk pricing. Selling Expense Selling expenses increased by $1,006 to $3,577 during the three-month period ended June 30, 2024 from $2,571 during the same period in 2023. Selling expenses as a percentage of net sales increased to 7.3% in the three-month period ended June 30, 2024 from 6.6% during the same period in 2023. The increase is primarily driven by our continued investments in marketing activities. General and Administrative Expense General and administrative expenses increased $369 to $4,177 during the three-month period ended June 30, 2024 from $3,808 during the same period in 2023. General and administrative expenses as a percentage of net sales decreased to 8.5% in the three-month period ended June 30, 2024 from 9.7% during the same period in 2023. Provision for Income Taxes The provision for income taxes was $1,576 and $1,529 during the three months ended June 30, 2024 and 2023, respectively. The effective income tax rate for the three months ended June 30, 2024 was 29.4% compared to 32.6% 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. Although similar items were reflected in 2023, the percentage effect is different due to the difference in pre-tax income in 2024 compared to 2023. 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. 20 Six Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023 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, 2024 2023 $ % $ % Net sales 93,791 100.0% 77,134 100.0% Cost of goods sold 67,619 72.1% 56,329 73.0% Depreciation expense 1,362 1.5% 1,299 1.7% Total cost of goods sold 68,981 73.6% 57,628 74.7% Gross profit 24,810 26.4% 19,506 25.3% Selling expense 7,277 7.8% 6,090 7.9% General & administrative expense 8,313 8.9% 6,943 9.0% Amortization expense 270 0.3% 270 0.4% Total operating expenses 15,860 17.0% 13,303 17.3% Income from operations 8,950 9.4% 6,203 8.0% Other income (expense): Interest expense (98 ) (0.1% ) (213 ) (0.3% ) Gain on sale of property and equipment – 33 0.0% Other income (expense), net 15 0.0% – 0.0% Total other income (expense) (83 ) (0.1% ) (180 ) (0.3% ) Income before provision for income taxes 8,867 9.3% 6,023 7.7% Provision for income taxes 2,658 2.8% 2,037 2.6% Net income 6,209 6.5% 3,986 5.1% Net Sales Net sales were at $93,791 for the six-month period ended June 30, 2024, an increase of $16,657 or 21.6% versus prior year. The net sales increase was primarily driven by higher volumes of our branded drinkable kefir. Gross Profit Gross profit as a percentage of net sales was 26.4% and 25.3% during the six-month period ended June 30, 2024 and 2023, respectively. The increase versus the prior year was primarily due to the higher volumes of our branded products, which provided manufacturing efficiencies and favorable fixed cost absorption. Selling Expense Selling expense increased by $1,187 to $7,277 during the six-month period ended June 30, 2024 from $6,090 during the same period in 2023. Selling expenses as a percentage of net sales decreased to 7.8% in the three-month period ended June 30, 2024 from 7.9% during the same period in 2023. General and Administrative Expense General and administrative expense increased $1,370 to $8,313 during the six-month period ended June 30, 2024 from $6,943 during the same period in 2023. The increase is primarily driven by stock-based incentive compensation and non-routine stockholder action expense. 21 Provision for Income Taxes The provision for income taxes was $2,658 and $2,037 during the six months ended June 30, 2024 and 2023, respectively. The effective income tax rate for the six months ended June 30, 2024 was 30.0% compared to 33.8% 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. Although similar items were reflected in 2023, the percentage effect is different due to the difference in pre-tax income in 2024 compared to 2023. 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. 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. 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 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, $5,000 was available under the Revolving Credit Facility as of June 30, 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 deferred income taxes (see Note 10, Income Taxes, in our Annual Report on Form 10-K). Cash Flow The following table is derived from our Consolidated Statement of Cash Flows: Six months Ended June 30, Net Cash Flows Provided By (Used In): 2024 2023 Operating activities $ 8,090 $ 5,455 Investing activities $ (3,905 ) $ (1,950 ) Financing activities $ (2,750 ) $ (500 ) 22 Operating Activities Net cash provided by operating activities was $8,090 during the six-month period ended June 30, 2024 compared to $5,455 in the same period in 2023. The increase is primarily due to higher cash earnings driven by increased product volumes. Investing Activities Net cash used in investing activities was $3,905 during the six-month period ended June 30, 2024 compared to $1,950 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: 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. We continue to make capital expenditures primarily to modernize manufacturing facilities and support productivity initiatives. Financing Activities Net cash used in financing activities was $2,750 and $500 during the six-month period ended June 30, 2024 and 2023, respectively. The cash used represents the quarterly principal payments under the term loan. The Company paid the outstanding term loan balance of $2,250 in full during the second quarter of 2024. Debt Obligations 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 term loan was terminated during the second quarter of 2024 upon payment of the outstanding loan balance in full. The termination date of the revolving credit facility is June 30, 2025, unless earlier terminated. As of June 30, 2024, the Company had $0 outstanding under the Revolving Credit Facility and note payable. The Company had $5,000 available for future borrowings under the Revolving Credit Facility as of June 30, 2024. All outstanding amounts under the loans bear interest at the Secured Overnight Financing Rate (“SOFR”), plus 2.07%. 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 June 30, 2024. See Note 7 to our Consolidated Financial Statements for additional information regarding our indebtedness and related agreements. Recent Accounting Pronouncements Information regarding recent accounting pronouncements is provided in Note 2 – Summary of Significant Accounting Policies. Critical Accounting Policies and Estimates A description of the Company's critical accounting policies and estimates is contained in its Annual Report on Form 10-K for the year ended December 31, 2023. There were no material changes to the Company’s critical accounting policies and estimates in the six months ended June 30, 2024. 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. ITEM 4. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures The Company has established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”), and such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. Management, together with our CEO and CFO, evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2024. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of June 30, 2024. Changes in Internal Control over Financial Reporting There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2024 that has materially affected or are reasonably likely to materially affect, our internal control over financial reporting. 24 PART II – OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Information regarding legal proceedings is available in Note 9, Commitment and Contingencies. ITEM 1A. RISK FACTORS. There have been no material changes from the risk factors disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 5. OTHER INFORMATION. During the quarter ended June 30, 2024, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K. ITEM 6. EXHIBITS. No. Description Form Period Ending Exhibit Filing Date 10.1+ First Amendment to the 2022 Non-Employee Director Plan Filed Herewith 31.1 Rule 13a-14(a)/15d-14(a) Certification of Julie Smolyansky Filed Herewith 31.2 Rule 13a-14(a)/15d-14(a) Certification of Eric Hanson Filed Herewith 32.1 Section 1350 Certification of Julie Smolyansky * Furnished Herewith 32.2 Section 1350 Certification of Eric Hanson * Furnished Herewith 99.1 Press release dated August 13, 2024 reporting Lifeway’s financial results for the three months ended June 30, 2024 * Furnished Herewith 101.INS Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101). + Indicates a management contract or compensatory plan or arrangement. * The exhibits deemed furnished with this Form 10-Q and are not deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall they be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act., whether made before or after the date of the filing of this Form 10-Q and irrespective of any general incorporation language contained in such filing. 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LIFEWAY FOODS, INC. Date: Aug 13, 2024 By: /s/ Julie Smolyansky Julie Smolyansky Chief Executive Officer, President, and Director (Principal Executive Officer) Date: Aug 13, 2024 By: /s/ Eric Hanson Eric Hanson Chief Financial & Accounting Officer (Principal Financial and Accounting Officer) 26