What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-14 compared with 2024-03-20 · 157 added, 115 removed, 184 unchanged (60% of the section changed)

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the

financial condition and results of operations as of and for the years ended December 31, 2023 and 2022 should be read in conjunction

with the audited consolidated financial statements and the notes to those statements that are included elsewhere in this Annual

Report on Form 10-K.

In addition to historical information, the following discussion contains certain forward-looking statements

within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These statements relate to

our future plans, objectives, expectations and intentions.

These statements may be identified by the use of words such as

“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,” and “estimate,” and

similar terms or terminology, or the negative of such terms or other comparable terminology.

Although we believe the expectations

expressed in these forward-looking statements are based on reasonable assumptions within the bounds of our knowledge of our

business, our actual results could differ materially from those discussed in these statements.

Factors that could contribute to such

differences include, but are not limited to, those discussed in the “Risk Factors” section in Part I, Item 1A.

undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available

or other events occur in the future.

The following discussion and analysis of the financial

condition and results of operations as of and for the years ended December 31, 2024 and 2023 should be read in conjunction with the audited

consolidated financial statements and the notes to those statements that are included elsewhere in this Annual Report on Form 10-K.

addition to historical information, the following discussion contains certain forward-looking statements within the “safe harbor”

provisions of the Private Securities Litigation Reform Act of 1995.

These statements relate to our future plans, objectives, expectations

and intentions.

These statements may be identified by the use of words such as “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,” and “estimate,” and similar terms or terminology, or the negative of such terms

or other comparable terminology.

Although we believe the expectations expressed in these forward-looking statements are based on reasonable

assumptions within the bounds of our knowledge of our business, our actual results could differ materially from those discussed in these

Factors that could contribute to such differences include, but are not limited to, those discussed in the “Risk Factors”

section in Part I, Item 1A.

We undertake no obligation to update publicly any forward-looking statements for any reason even if new information

becomes available or other events occur in the future.

Recent Developments

Current Macroeconomic Environment and Inflation Impact

During 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 have experienced pricing declines in certain of our input costs, such as

conventional milk.

In response to these persistent inflationary and cost pressures, we instituted price increases in 2022 on many of our

These inflation-justified price increases mitigated a portion of our increased costs.

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 chain of materials used to produce and transport our products to customers.

This proactive planning has

allowed the Company to avoid disruption to its manufacturing facilities, transportation, and sales, and to meet the increased demand.

The Company has maintained production at all locations and does not anticipate manufacturing or staffing disruptions in the near term.

Unsolicited Proposal

On November 5, 2024, we announced that our board

of directors (our “Board”) determined, after careful and thorough consideration in consultation with the Company’s 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 did not already own for $25.00 per share, substantially undervalued the Company and

was not in the best interests of the Company or 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”).

to 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 also 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

On November 15, 2024, Danone revised its offer

to acquire all of the shares of the Company that it did not already own from $25.00 per share to $27.00 per share.

On November 20, 2024,

we announced our Board’s determination that, after careful and thorough consideration in consultation with the Company’s independent

financial and legal advisors, the revised unsolicited proposal substantially undervalued the Company and was not in the best interests

of the Company or its stockholders or other stakeholders.

On November 26, we announced additional information regarding the information

the Board used to come to this determination.

Debt Refinancing

On February 5, 2025,

the Company entered into the Fifth Modification to the Amended and Restated Loan and Security Agreement (the “Fifth Modification”)

with its current lender.

The Fifth Modification, among other things, (i) increased the commitment for revolving loans under the Credit

Agreement from $5,000 to $25,000, with interest payable at either the lender Base Rate (the Prime Rate minus 1.00%) or the SOFR plus 1.75%,

(ii) extended the termination date of the Credit Agreement to February 5, 2028 and (iii) replaced the quarterly minimum working capital

financial covenant with a financial covenant to maintain a maximum cash flow leverage ratio of no greater than 2.00 to 1.00 for each fiscal

quarter commencing with the fiscal quarter ending March 31, 2025.

The remaining material terms and conditions of the Credit Agreement

remain substantially unchanged.

The Company had no outstanding borrowings at the time of entry into the Fifth Modification.

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.

In demand flavors

including Hot Honey, Matcha Latte, and Passionfruit Lychee are new additions to our portfolio.

The entire lineup is loaded with high-quality

bioavailable nutrients, and plays to our strengths, as our organic products have been incredibly successful to date.

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 first quarter of 2025 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.

Trends and Uncertainties

Current Macroeconomic Environment

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

Comparison of Year Ended December 31, 2023

to Year Ended December 31, 2022 (in 000’s)

The following table presents certain information

concerning our financial results, including information presented as a percentage of consolidated net sales:

Comparison of Year Ended December 31, 2024 to Year

Ended December 31, 2023 (in thousands)

The following table presents certain information concerning

our financial results, including information presented as a percentage of consolidated net sales:

Year Ended December 31,

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Gain (loss) on sale of property and equipment

Other income (expense)

Total other income (expense)

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The net sales increase was primarily driven by higher volumes of our branded

drinkable kefir, and to a lesser extent the impact of price increases implemented during the fourth quarter of 2022.

Gross profit as a percentage of net sales increased

drinkable kefir.

Gross profit as a percentage of net sales decreased

to 26.0% during the year ended December 31, 2024 from 26.5% during the same period in 2023.

The increase versus the prior year was primarily

due to the higher volumes of our branded products and the favorable impact of milk pricing, and to a lesser extent the price increases

implemented during the fourth quarter of 2022 and decreased transportation costs.

The decrease versus the prior year was driven

by the unfavorable impact of milk pricing, and to a lesser extent the increase in other input costs, partially offset by favorable transportation

Selling Expenses

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during the year ended December 31, 2024 from $11,776 during the same period in 2023.

The increase is primarily due to increased compensation

expense, partially offset by the reduction in royalty expense resulting from the termination of the endorsement agreement in September

Selling expenses as a percentage of net sales increased

to 7.9% during the year ended December 31, 2024 from 7.4% during the same period in 2023.

The increase is primarily a result of our continued

investments in marketing activities to drive brand awareness and sales volumes.

General and Administrative Expenses

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$6,309 to $19,439 during the year ended December 31, 2024 from $13,130 during the same period in 2023.

The increase is primarily a result

of increased incentive compensation expense, partially offset by the termination of the endorsement agreement in September 2022 and reduced

professional fees.

Legal and professional fees associated

with non-routine stockholder action and the Danone unsolicited purchase proposal, and the CEO retention bonus awarded in the fourth quarter

of 2024, account for approximately 75% of the increase.

General and administrative stock-based compensation expense increased $784 compared

to the same period in 2023.

Provision for Income Taxes

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Although similar items were reflected in 2024, the percentage effect is different

due to the difference in pre-tax income in 2023 compared to 2022.

primarily due to the increase in certain non-deductible compensation in 2024 compared to 2023.

The increase is partially offset by the

difference in pre-tax income in 2024 compared to 2023.

The Company’s effective tax rate may change

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The Company remains in a strong financial position, and while it has been impacted by the macroeconomic challenges with commodity inflation

and other input cost increases, the Company believes that its cash flow from operations, revolving credit and term loan facility, and

cash and cash equivalents will continue to provide sufficient liquidity for its working capital needs, capital resource requirements,

and growth initiatives and to ensure the continuation of the Company as a going concern.

and other input cost increases, the Company believes that its cash flow from operations, revolving credit facility, and cash and cash

equivalents will continue to provide sufficient liquidity for its working capital needs, capital resource requirements, and growth initiatives

and to ensure the continuation of the Company as a going concern.

If additional

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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,

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.

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in 2024 compared to $16,941 in 2023.

The increase was primarily due to higher cash earnings driven by increased product volumes

and declines in certain input costs, and the change in working capital.

The decrease was primarily due to lower cash earnings driven by non-routine stockholder action, and

the change in working capital.

Investing Activities

Net cash used in investing activities was $4,410

in 2023 compared to $4,029 in 2022.

Net cash used in investing activities was $6,682 in

2024 compared to $4,410 in 2023.

The increase in cash used reflects our planned capital spending increase during 2024 compared to 2023.

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Growth capital spending supports

new product innovation and enhancements.

Cost reduction and facility improvements support manufacturing efficiency, safety, and productivity.

increased production capacity, 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 $3,777 in 2023 compared to $4,747 in 2022.

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

There were no amounts outstanding under the line of credit after October 6, 2023, through December 31, 2023.

On November 7, 2022, the Company entered into

a Stock Purchase Agreement with Ludmila Smolyansky (“Ms.

Smolyansky”), to purchase 850,340 shares of Lifeway common stock

Smolyansky, Board of Director member.

The shares were repurchased during the fourth quarter of 2022.

Pursuant to the Stock Purchase Agreement, (i)

Smolyansky sold the shares at a purchase price of $4.70 per share, which represents a twenty percent (20.0%) discount to the average

closing price of the common stock on Nasdaq over the five (5) trading day period ended on the trading day immediately preceding the date

of the Stock Purchase Agreement and (ii) Ms.

Smolyansky used a portion of the proceeds to satisfy in full certain obligations of Ms.

which are secured by previously disclosed pledges of common stock, causing all such pledges to be released.

The purchased shares are held

in treasury by the Company.

Net cash used in financing activities was

$2,750 in 2024 compared to $3,777 in 2023.

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

paid the outstanding term loan balance of $2,250 in full during the second quarter of 2024.

Debt Obligations

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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.

The Credit Agreement provides for, among other things, a $5,000 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 $5,000 (the “Revolving Credit

Facility”) and an incremental facility not to exceed $5,000.

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

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 December 31, 2024, the Company had $0 outstanding

under the Revolving Credit Facility and $2,733 outstanding under the note payable, net of $17 of unamortized deferred financing fees.

The Company had $5,000 available for future borrowings under the Revolving Credit Facility as of December 31, 2023.

under the Revolving Credit Facility and note payable.

The Company had $5,000 available for future borrowings under the Revolving Credit

Facility as of December 31, 2024.

All outstanding amounts under the loans bear interest

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

The Company’s interest rate on debt outstanding under

the note payable as of December 31, 2023 was 6.29%.

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%.

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

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Goodwill is not amortized.

The Company has one reporting unit within its

single reportable segment.

We review and evaluate our goodwill for potential impairment at a minimum annually, as of December 31, or more

frequently if circumstances indicate that impairment is possible.

The Company has one reporting unit within its single

reportable segment.

We review and evaluate our goodwill for potential impairment at a minimum annually, as of December 31, or more frequently

if circumstances indicate that impairment is possible.

We completed our annual goodwill impairment analysis as of December 31, 2024.

Our assessment did not result in an impairment.

In testing goodwill for impairment, the Company

has the option to perform a qualitative test (also known as “Step 0”) or a quantitative test (“Step 1”).

the Step 0 test, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of

the reporting unit is less than its carrying value.

assessment did not result in an impairment.

In testing goodwill for impairment, the Company has

the option to perform a qualitative test (also known as “Step 0”) or a quantitative test (“Step 1”).

Step 0 test, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the

reporting unit is less than its carrying value.

Qualitative factors may include, but are not limited to, economic conditions, industry

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amount of the reporting unit exceeds its fair value up to the amount of goodwill allocated to the reporting unit.

Under a Step 1 quantitative test, we estimate

the fair value of our one reporting unit using a combination of the fair values derived from both the income approach and the market approach.

Under a Step 1 quantitative test, we estimate the

fair value of our one reporting unit using a combination of the fair values derived from both the income approach and the market approach.

Under the income approach, the Company uses a discounted cash flow methodology which requires management to make significant estimates

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related to the business’s ability to execute on the projected cash flows.

For the market approach, the Company uses the guideline public

company method.

The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable publicly

traded companies with similar operating and investment characteristics.

The Company also reconciles the fair value of its reporting unit

to its current market capitalization, allowing for a reasonable control premium.

For the market approach, the Company uses the guideline

public company method.

The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable

publicly traded companies with similar operating and investment characteristics.

The Company also reconciles the fair value of its reporting

unit to its current market capitalization, allowing for a reasonable control premium.

Sales discounts & allowance

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Recent Accounting Pronouncements .

See Note 2, Summary of Significant Accounting

Policies, in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for information

regarding recent accounting pronouncements.

QUANTITATIVE AND

QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Note 2, Summary of Significant Accounting Policies,

in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for information regarding

recent accounting pronouncements.

QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

Not applicable.

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-K

Item 7. Management’s Discussion and Analysis