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Item 2. Management’s Discussion and Analysis

2024-08-13 compared with 2024-05-14 · 156 added, 92 removed, 140 unchanged (64% 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 (“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.

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.

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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.

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

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

Recent Developments

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 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.

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

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Management continues

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

our products to customers.

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 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,

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,

Cost of goods sold

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Total cost of goods sold

Selling expenses

Selling expense

General & administrative expense

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Interest expense

Gain on sale of property and equipment

Other income (expense), net

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Provision for income taxes

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.

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 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

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.

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,

Cost of goods sold

Depreciation expense

Total cost of goods sold

Selling expense

General & administrative expense

Amortization expense

Total operating expenses

Income from operations

Other income (expense):

Interest expense

Gain on sale of property and equipment

Other income (expense), net

Total other income (expense)

Income before provision for income taxes

Provision for income taxes

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

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Gross profit as a percentage of net sales was

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 March 31, 2024 from $3,519 during the same period in 2023.

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 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 increased $1,001

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

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 incentive compensation and non-routine stockholder action expense.

by stock-based incentive compensation and non-routine stockholder action expense.

Provision for Income Taxes

The provision for income taxes was $2,658 and

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

The effective income tax rate for the three months

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

$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

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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.

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,

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

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

Long-term cash requirements primarily

relate to funding 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:

Three months Ended

Six months Ended

Net Cash Flows Provided By (Used In):

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Net cash provided by operating activities was

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

$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 $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.

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, cost reduction,

and facility improvements.

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

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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 $250 and

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

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 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

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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 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.

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%.

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.

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

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There were no material changes

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

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