Lifeway Foods, Inc. 10-Q

ITEM 2. 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, 2024 (the “Form 10-K”). Unless otherwise specified, any description of “our”, “we”, and “us” in this MD&A refer to Lifeway Foods, Inc. (“Lifeway”) and our wholly-owned subsidiaries. Cautionary Statement Regarding Forward-Looking Statements In addition to historical information, this quarterly report contains “forward-looking” statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words such as “anticipate,” “from time to time,” “intend,” “plan,” “ongoing,” “realize,” “should,” “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,” “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; · Strategy for acquisitions, customer retention, growth, product development, market position, financial results and reserves; · Estimates of the amounts of sales allowances and discounts to our customers and consumers; · Our belief that we will maintain compliance with our loan agreements and have sufficient liquidity to fund our business operations. Forward looking statements are based on management’s beliefs, assumptions, estimates and observations of future events based on information available to our management at the time the statements are made and include any statements that do not relate to any historical or current fact. These statements are not guarantees of future performance and they involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, implied or forecast by our forward-looking statements due in part to the risks, uncertainties, and assumptions that include: · Changes in the pricing of commodities; · The actions and decisions of our competitors and customers, including those related to price competition; · Our ability to successfully implement our business strategy; · The effects of government regulation; · 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; and · Such other factors as discussed throughout Part I, Item 1 “Business”; Part I, Item 1A “Risk Factors”; 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. 19 Business Overview Lifeway was founded in 1986 by Michael Smolyansky, ten years after he and his family emigrated from Eastern Europe to the United States. Lifeway was the first to successfully introduce kefir to the U.S. consumer on a commercial scale, initially catering to ethnic consumers in the Chicago, Illinois metropolitan area. Lifeway has grown to become the largest producer and marketer of kefir in the U.S. and an important player in the broader market spaces of probiotic-based products and natural, “better for you” foods. Our primary product is drinkable kefir, a cultured dairy product. Lifeway Kefir is tart and tangy, high in protein, calcium and vitamin D. The Company manufactures (directly or through a co-manufacturer) and markets products under the Lifeway, Fresh Made, and GlenOaks Farms brand names, as well as under private labels on behalf of certain customers. The Company’s product categories are: · Drinkable Kefir, a cultured dairy product sold in a variety of organic and non-organic sizes, flavors, and types. · European-style soft cheeses, including farmer cheese, white cheese, and Sweet Kiss. · Cream and other, which primarily consists of cream, a byproduct of raw milk processing. · Drinkable Yogurt, sold in a variety of sizes and flavors. · ProBugs, a line of kefir products designed for children. · Other Dairy, which primarily consists of Fresh Made butter and sour cream. Recent Developments and Trends 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. 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. 20 Results of Operations 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 June 30, 2025 2024 $ % $ % Net sales 53,901 100.0% 49,157 100.0% Cost of goods sold 37,669 69,9% 35,181 71.6% Depreciation expense 832 1.5% 701 1.4% Total cost of goods sold 38,501 71.4% 35,882 73.0% Gross profit 15,400 28.6% 13,275 27.0% Selling expenses 4,718 8.8% 3,577 7.3% General & administrative expense 4,752 8.8% 4,177 8.5% Amortization expense 135 0.3% 135 0.3% Total operating expenses 9,605 17.9% 7,889 16.1% Income from operations 5,795 10.7% 5,386 10.9% Other income (expense): Interest expense (21 ) 0.0% (47 ) (0.1% ) Fair value loss on investments – 0.0% – 0.0% Gain on sales of investments 55 0.1% – 0.0% Other income (expense), net 82 0.2% 20 0.0% Total other income (expense) 116 0.3% (27 ) (0.1% ) Income before provision for income taxes 5,911 11.0% 5,359 10.8% Provision for income taxes 1,662 3.1% 1,576 3.2% Net income 4,249 7.9% 3,783 7.6% 21 Net Sales 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 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 freight out expense. On a comparable basis adjusting for these two factors, the Company’s net sales increased approximately 18% in the second quarter of 2025 compared to the same period in 2024. Gross Profit Gross profit as a percentage of net sales was 28.6% 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 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 $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 driven by professional fees associated with non-routine stockholder action and the Danone unsolicited purchase proposal. Provision for Income Taxes Income taxes were recognized at effective rates 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 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 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. 22 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, 2025 2024 $ % $ % Net sales 99,992 100.0% 93,791 100.0% Cost of goods sold 71,923 71.9% 67,619 72.1% Depreciation expense 1,634 1.6% 1,362 1.5% Total cost of goods sold 73,557 73.5% 68,981 73.6% Gross profit 26,435 26.5% 24,810 26.4% Selling expense 9,416 9.4% 7,277 7.8% General & administrative expense 9,380 9.4% 8,313 8.9% Amortization expense 270 0.3% 270 0.3% Total operating expenses 19,066 19.1% 15,860 17.0% Income from operations 7,369 7.4% 8,950 9.4% Other income (expense): Interest expense (35 ) 0.0% (98 ) (0.1% ) Fair value loss on investments (20 ) 0.0% – 0.0% Gain on investments 3,407 3.4% – 0.0% Other income (expense), net 156 0.2% 15 0.0% Total other income (expense) 3,508 3.6% (83 ) (0.1% ) Income before provision for income taxes 10,877 11.0% 8,867 9.3% Provision for income taxes 3,088 3.1% 2,658 2.8% Net income 7,789 7.9% 6,209 6.5% Net Sales 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 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. 23 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. If additional borrowings are needed, $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 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 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 Form 10-K). 24 Cash Flow The following table is derived from our Consolidated Statement of Cash Flows: Six months Ended June 30, Net Cash Flows Provided By (Used In): 2025 2024 Operating activities $ 3,762 $ 8,090 Investing activities $ 795 $ (3,905 ) Financing activities $ (65 ) $ (2,750 ) Operating Activities 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 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. Financing Activities Net cash used in financing activities was $65 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 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 June 30, 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 June 30, 2025. See Note 7 to our Consolidated Financial Statements for additional information regarding our indebtedness and related agreements. 25 Recent Accounting Pronouncements Information regarding recent accounting pronouncements is provided in Note 2 – Summary of Significant Accounting Policies. 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 six months ended June 30, 2025. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable.