What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-13 compared with 2024-11-14 · 101 added, 196 removed, 129 unchanged (70% of the section changed)

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Disruptions to our supply chain, or our manufacturing and distribution capabilities, including those due to cybersecurity threats;

Adverse economic conditions in the United States, our primary market, or any of the other jurisdictions in which we conduct significant business in the future, and resultant changes in consumer spending;

Such other factors as discussed throughout Part I, Item 1 “Business”;

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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, 2024 , 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

Recent Developments and Trends

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.

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.

We continue to monitor macroeconomic conditions

and global trade developments, including inflation in key input costs, recently implemented tariffs, and the potential for additional

or modified tariffs or export controls.

These evolving global trade policies may contribute to increased supply chain complexity, commodity

cost volatility, and broader economic uncertainty.

We do not currently expect these conditions to have a material adverse impact

on our operations or financial results.

We are primarily a United States based manufacturer sourcing a vast majority of our inputs domestically.

In addition, all our domestically produced products are sold to customers in the United States.

We expect the accelerating consumer focus

on health and wellness to drive increased demand for our products.

Results of Operations

Three Months Ended September 30, 2024 Compared to Three Months

Ended September 30, 2023

Three Months Ended March 31, 2025 Compared to Three Months Ended

March 31, 2024

The following table presents certain information

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

Three Months Ended September 30,

Three Months Ended March 31,

Cost of goods sold

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Total cost of goods sold

Selling expense

Selling expenses

General & administrative expense

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Interest expense

Gain on sale of property and equipment

Gain on sales of investments

Other income (expense), net

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Provision for income taxes

Net sales were $46,095 for the three-month period

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.

Net sales were at $46,091 for the three-month period

ended March 31, 2025, an increase of $1,457 or 3.3% versus prior year.

The net sales increase was primarily driven by higher volumes of

our branded drinkable kefir, partially offset by the planned trade promotion investment to support incremental distribution of farmers

cheese and kefir.

The first quarter 2024 benefited from a customer relationship we strategically exited in the third quarter of 2024,

and a significant distributor shifting from Lifeway delivered to customer pick-up in late 2024, which results in lower net sales and lower

freight out expense.

On a comparable basis adjusting for these two factors, the Company’s net sales increased approximately 11%

in the first quarter of 2025 compared to the same period in 2024.

Gross profit as a percentage of net sales was 24.0%

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, partially offset by favorable transportation costs.

Selling Expense

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

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

and 25.8% in the three-month period ended March 31, 2025 and 2024, respectively.

The decrease versus the prior year was driven by the

unfavorable impact of milk pricing and increased trade promotions.

Selling Expenses

Selling expenses increased by $998 to $4,698 during

the three-month period ended March 31, 2025 from $3,700 during the same period in 2024.

Selling expenses as a percentage of net sales

increased to 10.2% in the three-month period ended March 31, 2025 from 8.3% during the same period in 2024.

The increase is primarily

a result of our continued investments in marketing activities to drive brand awareness and sales volumes.

General and Administrative Expenses

General and administrative expenses increased

$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 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

$1,517 during the three months ended September 30, 2024 and 2023, respectively.

The effective income tax rate for the three months

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.

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.

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:

Nine months Ended September 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 $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

26.2% and 25.9% during the nine-month period ended September 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 $2,282 to $11,256

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

$492 to $4,628 during the three-month period ended March 31, 2025 from $4,136 during the same period in 2024.

The increase is primarily

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

driven by professional fees associated with non-routine stockholder action and the Danone unsolicited purchase proposal.

Provision for Income Taxes

The provision for income taxes was $4,008 and

$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.

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.

Income taxes were recognized at effective rates

of 28.7% and 30.8% for the three months ended March 31, 2025 and 2024, respectively.

The change in the Company’s effective tax rate

is primarily driven by changes in the amount of non-deductible officer compensation and non-deductible stock-based compensation expense.

The Company’s effective tax rate may change

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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

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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 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.

position, and 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 borrowings are needed,

$5,000 was available under the Revolving Credit Facility as of September 30, 2024 (see Note 7, Debt).

$25,000 was available under the Revolving Credit Facility as of March 31, 2025 (see Note 7, Debt).

We are in compliance with the terms

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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.

and distribution, trade and promotions, advertising and marketing, and tax liabilities) as well as expenditures for property, plant and

Long-term cash requirements primarily

relate to funding deferred income taxes (see Note 10, Income Taxes, in our Annual Report on Form 10-K).

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

on Form 10-K).

The following table is derived from our Consolidated

Statement of Cash Flows:

Nine months Ended

September 30,

Three months Ended

Net Cash Flows Provided By (Used In):

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Operating Activities

Net cash provided by operating activities was

$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.

Net cash used in operating activities was $150

during the three-month period ended March 31, 2025 compared to net cash provided by operating activities of $1,546 in the same period

The decrease was primarily due lower cash earnings and the change in working capital.

Investing Activities

Net cash used in investing activities was $5,431

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.

Net cash provided by investing activities was

$2,933 during the three-month period ended March 31, 2025 compared to net cash used in investing activities of $2,469 in the same period

The decrease in cash used reflects cash proceeds of $5,152 received in the first quarter of 2025 from the sale of our Simple

Mills investment.

Our capital spending is focused in three core areas:

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.

growth, cost reduction, and facility improvements.

Growth capital

spending supports capacity expansion and new product innovation and enhancements.

Cost reduction and facility improvements support manufacturing

efficiency, safety, and productivity.

Financing Activities

Net cash used in financing activities was $65

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.

and $250 during the three-month period ended March 31, 2025 and 2024, respectively.

The cash used in 2025 represents credit agreement

amendment expenses incurred during the first quarter.

The cash used in 2024 represented the quarterly principal payments under the term

loan, which was paid 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 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 September 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%.

As of March 31, 2025, the Company had $0 outstanding

under the Revolving Credit Facility.

The Company had $25,000 available for future borrowings under the Revolving Credit Facility as of

March 31, 2025.

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 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 Company is in compliance with all applicable

financial debt covenants as of September 30, 2024.

financial debt covenants as of March 31, 2025.

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 nine months ended September 30, 2024.

to the Company’s critical accounting policies and estimates in the three months ended March 31, 2025.

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