What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-08-12 compared with 2025-05-13 · 154 added, 85 removed, 145 unchanged (62% of the section changed)

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“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:

“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;

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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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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.

Organic Milk Supply

To increase the supply of organic milk available

to the Company for the manufacture of finished goods, the Company is purchasing mature dairy cows (or the “herd”) which will

be managed by a third-party dairy facility (the “Dairy”), and expects to enter into a supply and purchase agreement (“SPA”)

with a COOP (the “COOP”) to purchase the milk produced by the herd.

The Company purchased 224 mature dairy cows during

July 2025 for $694 and will consider further mature dairy cow purchases in the future.

On July 1, 2025, the Company entered into a thirty-nine

month agreement (the “Herd Agreement”) with a third-party Dairy who will manage care of the herd, milk the herd, and sell

the milk to a COOP, with which Lifeway will have a separate supply and purchase agreement.

The Dairy will make monthly payments to Lifeway

over the agreement period in exchange for its right to sell milk produced by the herd to the COOP and has a right to purchase the herd

at the end of the agreement period for a nominal amount.

The Company is currently assessing the appropriate

accounting treatment for the purchase of the herd and agreement with the Dairy.

Current Macroeconomic Environment

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.

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.

expect the accelerating consumer focus on health and wellness to drive increased demand for our products.

Results of Operations

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

March 31, 2024

Three Months Ended June 30, 2025 Compared to Three Months Ended

June 30, 2024

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,

Cost of goods sold

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Interest expense

Fair value loss on investments

Gain on sales of investments

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Provision for income taxes

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

Net sales were at $53,901 for the three-month

period ended June 30, 2025, an increase of $4,744 or 9.7% 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,

The second 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

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On a comparable basis adjusting for these two factors, the Company’s net sales increased approximately 18%

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

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

Gross profit as a percentage of net sales was 28.6%

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.

and 27.0% in the three-month period ended June 30, 2025 and 2024, respectively.

The increase versus the prior year was driven by higher

volumes of our branded products, which provided manufacturing efficiencies and the favorable impact of conventional milk pricing, partially

offset by unfavorable organic milk pricing and planned trade promotion investment.

Selling Expenses

Selling expenses increased by $1,141 to $4,718 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.

the three-month period ended June 30, 2025 from $3,577 during the same period in 2024.

Selling expenses as a percentage of net sales increased

to 8.7% in the three-month period ended June 30, 2025 from 7.3% 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

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

$575 to $4,752 during the three-month period ended June 30, 2025 from $4,177 during the same period in 2024.

The increase is primarily

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Income taxes were recognized at effective rates

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

of 28.1% and 29.4% for the three months ended June 30, 2025 and 2024, respectively.

The change in the Company’s effective tax rate

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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.

Six Months Ended June 30, 2025 Compared to Three Months Ended

June 30, 2025

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

Fair value loss on investments

Gain on investments

Other income (expense), net

Total other income (expense)

Income before provision for income taxes

Provision for income taxes

Net sales were at $99,992 for the six-month period

ended June 30, 2025, an increase of $6,201 or 6.6% 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 six months of 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

14% in the first six months of 2025 compared to the same period in 2024.

Gross profit as a percentage of net sales was

26.5% and 26.4% during the six-month period ended June 30, 2025 and 2024, respectively.

The increase versus the prior year was driven

by higher volumes of our branded products, which provided manufacturing efficiencies, partially offset by organic milk pricing and planned

trade promotion investment.

Selling Expense

Selling expense increased by $2,139 to $9,416 during

the six-month period ended June 30, 2025 from $7,277 during the same period in 2024.

Selling expenses as a percentage of net sales increased

to 9.4% in the six-month period ended June 30, 2025 from 7.8% 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 Expense

General and administrative expense increased $1,067

to $9,380 during the six-month period ended June 30, 2025 from $8,313 during the same period in 2024.

The increase is primarily 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 $3,088 and

$2,658 during the six months ended June 30, 2025 and 2024, respectively.

The effective income tax rate for the six months

ended June 30, 2025 was 28.4% compared to 30.0% in the same period last year.

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 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.

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 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,

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

$25,000 was available under the Revolving Credit Facility as of June 30, 2025 (see Note 7, Debt).

We are in compliance with the terms

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Statement of Cash Flows:

Three months Ended

Six months Ended

Net Cash Flows Provided By (Used In):

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Operating Activities

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.

Net cash provided in operating activities was $3,762

and $8,090 during the six-month period ended June 30, 2025 and 2024, respectively.

The decrease was primarily due lower cash earnings

and the change in working capital.

Investing Activities

Net cash provided by investing activities was $795

$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.

during the six-month period ended June 30, 2025 compared to net cash used in investing activities of $3,905 in the same period in 2024.

The decrease in cash used reflects cash proceeds of $5,152 received in the first quarter and $54 in the second quarter of 2025 from the

sale of our Simple Mills investment.

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.

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 $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.

and $2,750 during the six-month period ended June 30, 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

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

As of June 30, 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.

June 30, 2025.

The Credit Agreement includes customary representations,

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The Company is in compliance with all applicable

financial debt covenants as of March 31, 2025.

financial debt covenants as of June 30, 2025.

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

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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, 2024.

There were no material changes

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

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, 2024.

There were no material

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