What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-14 compared with 2024-08-13 · 112 added, 83 removed, 213 unchanged (48% of the section changed)

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

and our subsidiaries.

(“Lifeway”) and

our wholly-owned subsidiaries.

Cautionary Statement Regarding Forward-Looking

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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.

In October 2024, we began to roll out our first

products with 100% lactose free labeling.

Our products were already up to 99% lactose free, so we are pleased to further attract consumers

with our new Organic Whole Milk Flavor Fusion items that have this added benefit, along with decreased sugar content.

New on-trend flavors

like Hot Honey, Matcha Latte, and Passionfruit Lychee – just to name a few – are amazing additions to our portfolio.

lineup is loaded with high-quality bioavailable nutrients, and plays to our strengths, as our organic products have been incredibly successful

We expect health and wellness trends to continue

to be a tailwind for our entire premium product portfolio.

We plan to continue to invest behind our key products to capture more and more

of this growing market,

Distribution Strategy

In September 2024, we announced our first expansion

of Kefir distribution in the South African market.

In November 2024, we announced our expansion within Dubai and the UAE.

of 32oz Lifeway Kefir, 8oz Lactose-Free Lifeway Kefir, ProBugs and farmer cheese, exported from the United States, is expected to begin

shipping in the fourth quarter of 2024 and will become available in supermarkets and hypermarkets in Dubai and across the Emirates.

are taking a measured, and thoughtful approach to global expansion, as we seek markets that are primed for success and can be accessed

without a major initial investment.

Unsolicited Offer

On November 5, 2024, we announced that our board

of directors (our “Board”) determined after careful and thorough consideration, in consultation with its independent financial

and legal advisors, that the unsolicited proposal made on September 23, 2024 by Danone North America PBC (“Danone”) to acquire

all of the shares of the Company that it does not already own for $25.00 per share substantially undervalues the Company and is not in

the best interests of the Company and its stockholders or other stakeholders.

In connection with that determination, we entered into a

Shareholder Rights Agreement with Computershare Trust Company, N.A., as rights agent (the “Rights Agreement”).

the Rights Agreement, our Board declared a dividend of one preferred share purchase right (each a “Right”) for each outstanding

share of Company common stock to stockholders of record as of the close of business on November 18, 2024.

Each Right entitles its holder,

subject to the terms of the Rights Agreement, to purchase from the Company one one-thousandth of one share of Series A Junior Participating

Preferred Stock, no par value, of the Company at an exercise price of $130.00 per Right, subject to adjustment.

Rights will attach to

any shares of Company common stock that become outstanding after November 18, 2024 and prior to the earlier of the Distribution Time (as

defined in the Rights Agreement) and the redemption or expiration of the Rights, and in certain other circumstances described in the Rights

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.

Current Macroeconomic Environment

We have not experienced significant supply chain

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Results of Operations

Three Months Ended June 30, 2024 Compared to Three Months Ended

June 30, 2023

Three Months Ended September 30, 2024 Compared to Three Months

Ended September 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,

Three Months Ended September 30,

Cost of goods sold

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Net sales were $46,095 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.

ended September 30, 2024, an increase of $5,199 or 12.7% 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.

25.7% and 27.2% in the three-month period ended September 30, 2024 and 2023, respectively.

The decrease versus the prior year was primarily

due to unfavorable milk pricing.

due to unfavorable milk pricing, partially offset by favorable transportation costs.

Selling Expense

Selling expenses increased by $1,095 to $3,979

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.

during the three-month period ended September 30, 2024 from $2,884 during the same period in 2023.

Selling expenses as a percentage of

net sales increased to 8.6% in the three-month period ended September 30, 2024 from 7.1% during the same period in 2023.

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.

$479 to $3,564 during the three-month period ended September 30, 2024 from $3,085 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

expenses as a percentage of net sales increased to 7.7% in the three-month period ended September 30, 2024 from 7.5% during the same period

Provision for Income Taxes

The provision for income taxes was $1,350 and

$1,529 during the three months ended June 30, 2024 and 2023, respectively.

$1,517 during the three months ended September 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.

ended September 30, 2024 was 31.2% compared to 30.8% 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.

The Company consistently

reflects non-deductible officer compensation expense, non-deductible compensation expense related to equity incentive awards and separate

state tax rates from period to period.

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

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to the Consolidated Financial Statements.

Six Months Ended June 30, 2024 Compared to Three Months Ended

June 30, 2023

Nine months Ended September 30, 2024 Compared to Three Months

Ended September 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,

Nine months Ended September 30,

Cost of goods sold

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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

of our branded drinkable kefir.

Net sales were at $139,886 for the nine-month

period ended September 30, 2024, an increase of $21,856 or 18.5% 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

26.4% and 25.3% during the six-month period ended June 30, 2024 and 2023, respectively.

26.2% and 25.9% during the nine-month period ended September 30, 2024 and 2023, respectively.

The increase versus the prior year was primarily

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Selling expense increased by $2,282 to $11,256

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.

during the nine-month period ended September 30, 2024 from $8,974 during the same period in 2023.

Selling expenses as a percentage of net

sales increased to 8.0% in the three-month period ended September 30, 2024 from 7.6% during the same period in 2023.

General and Administrative Expense

General and administrative expense increased $1,849

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.

to $11,877 during the nine-month period ended September 30, 2024 from $10,028 during the same period in 2023.

The increase is primarily

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

Provision for Income Taxes

The provision for income taxes was $4,008 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.

$3,554 during the nine months ended September 30, 2024 and 2023, respectively.

The effective income tax rate for the nine months

ended September 30, 2024 was 30.4% compared to 32.5% 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 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.

$5,000 was available under the Revolving Credit Facility as of September 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

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Statement of Cash Flows:

Six months Ended

Nine months Ended

September 30,

Net Cash Flows Provided By (Used In):

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Net cash provided by operating activities was

$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.

$15,541 during the nine-month period ended September 30, 2024 compared to $12,144 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 $5,431

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.

during the nine-month period ended September 30, 2024 compared to $3,206 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.

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.

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.

and $750 during the nine-month period ended September 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.

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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

As of September 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.

Facility as of September 30, 2024.

All outstanding amounts under the loans bear interest

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The Company is in compliance with all applicable

financial debt covenants as of June 30, 2024.

financial debt covenants as of September 30, 2024.

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

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There were no material changes

to the Company’s critical accounting policies and estimates in the six months ended June 30, 2024.

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